Amazon.com is the biggest thing to hit retailing since Wal-Mart went national. Like Wal-Mart, Amazon is leveraging its size and scale to overwhelm weaker competitors. And perhaps even more than Wal-Mart, Amazon is challenging survivors to overhaul their supply chains. The online sales specialist is extending its impact deep into distribution channels and causing competitors and service providers to respond.
“E-tailing is the fastest-growing segment of retail,” said Rich Thompson, executive vice president, Americas supply chain and logistics, at real estate company Jones Lang LaSalle. “Companies like Amazon that grew up as e-tailers have an advantage in terms of learning curve, but more traditional brick-and-mortar retailers are quickly recognizing they need to figure this out.”
If the traditional retailers didn’t recognize the impact of e-commerce before the just-ended holiday season, they do now. While store sales overall rose 4.1 percent during November and December, online sales jumped 15 percent.
Related: E-commerce Taxes Retail Competitors.
Online sales now represent more than 8 percent of total retail sales, up from 2 percent a decade ago. Forrester Research forecasts online sales will grow more than 10 percent annually during the next five years.
Supply chains are emerging as a key part of the fight between traditional retailers and online competitors. Amazon is at the forefront of that battle in part because of its scale, but also because of its business strategy: Much of Amazon’s growth has come from managing supply chains for other online or brick-and-mortar retailers. The company reported third quarter revenue growth of 44 percent to $10.9 billion, although operating income slipped 71 percent to $79 million, largely because of heavy investment in new distribution centers.
Amazon is scheduled to report full-year results on Jan. 31.
Amazon started as an online distributor of books and music — book retailer Borders, liquidated last year, was a casualty of e-commerce competition. Now that Amazon has expanded its offerings to encompass everything from socks to kayaks and industrial lathes, other traditional retailers are feeling the heat. Much of that heat is coming in the distribution channels and transportation networks that carry the goods.
Retail supply chains used to be organized in a straight line from supplier to distribution center to stores. Then came the Internet and the proliferation of gadgets that allow shoppers to buy from home, office or even a competitor’s store. Amazon raised competitors’ hackles in December by inviting shoppers to use smartphones or tablet computers to check prices at brick-and-mortar stores and then get a $5 discount for buying the merchandise from Amazon without paying sales tax.
Amazon said the effort was just an exercise, but it also marked a new skirmish in a broader battle Amazon is waging at distribution centers and in shopping carts — the real and the virtual kind.
Target, which reported holiday sales up just 1.7 percent at stores open a year or more, this month asked suppliers for special products and pricing to help keep online-only retailers from using its stores “as a showroom for their products.” Target recently announced it was taking over its e-commerce business from Amazon and would build an online distribution center of up to 1.2 million feet in the southeastern U.S.
When retailers first dipped their toes into online sales, many outsourced their e-commerce supply chains to Amazon or other third parties. “It wasn’t something the traditional companies understood. It wasn’t something that fit their existing models or core competencies,” Thompson said. “Now more are taking this in-house. Everyone recognizes this is not a fad.”
Although some retailers are bringing online supply chains in-house, Amazon is parlaying its size and scope into a dominant position in retail logistics. It also is leveraging its distribution center and linehaul networks to provide other online retailers with door-to-door parcel delivery.
“There is an opportunity for Amazon to do something in the parcel space that people have been hoping the trucking companies would do,” said Satish Jindel, president of SJ Consulting Group.
He said Amazon could operate as an “asset-light parcel carrier” that relies on the U.S. Postal Service and regional carriers to pick up parcel shipments from small shippers and deliver them to online retailers and their customers.
“Many people are used to Amazon using the USPS for last-mile delivery,” Jindel said. “There’s no reason why they can’t use the post office for the first mile, too.”
Amazon’s expansion has injected life into an industrial real estate market still recovering from the recession. The company added 17 large distribution centers last year, bringing its total to 69 in the U.S. and abroad. Its expansion has attracted complaints from other retailers that Amazon enjoys a cost edge by not charging sales taxes.
The Supreme Court ruled in 1992 that retailers don’t have to collect sales taxes where they lack a presence. Amazon and other online-only retailers have interpreted the law to mean a physical “selling” presence, and have located their distribution centers in states that don’t require them to collect sales tax.
Sales taxes remain a top consideration in site selection for online DCs, but Thompson said Amazon and others also are influenced by work force quality and availability, proximity to air and ground parcel shipping hubs, and facility design. In many cases, that requires new construction.
Amazon and other online retailers often require distribution centers of 500,000 square feet or larger. “In today’s industrial real estate market, they are virtually impossible to find, so you find yourself in a build-to-suit situation,” Thompson said. “Developers in the last few years have been shying away from ‘build it and they will come.’ ”
Online distribution centers have different design requirements than traditional retail distribution centers. “You’re doing quick turns and a high volume of orders,” Thompson said. “You want a building with depth, so you can have wider column spacing for sorters and robots and automation. On the other hand, with robotics, you don’t need as much ceiling height.”
Traditional retailers have said they can have the best of the online and physical store worlds, but mixing store and online distribution channels is difficult. “Online distribution and brick-and-mortar distribution are two different animals,” said Dan Avila, managing partner at supply chain consulting firm Tompkins Associates in Raleigh, N.C. “The order profiles are completely different. In e-commerce, an order or a basket may be only one item. You’re handling units as opposed to cases.” He said many companies find it better to handle store and e-commerce distribution separately.
Traditional retailers must balance e-commerce investments against sunk costs of existing stores and distribution networks that feed them. “The store-based supply chain is a huge investment that currently yields diminishing returns, particularly in mature retail markets,” Nikki Baird and Brian Kilcourse of Retail Systems Research wrote in a recent report.
This month’s National Retail Federation convention in New York was abuzz with talk of “omnichannel” retailing, or selling through multiple channels including stores, personal computers, mobile phones and other technology. It’s a big step beyond multichannel supply chains, which date to at least 1884, when Sears, Roebuck issued its first mail-order catalog alongside its department stores.
“The retail industry is clearly in a state of flux as it tries to adjust to the omnichannel challenge. Consumers don’t care about channels, but they do care about finding solutions to their lifestyle needs, and a retailer either satisfies a need or it doesn’t,” Baird and Kilcourse wrote.
“An omnichannel ‘buy anywhere, get anywhere’ strategy requires a rethink of virtually every aspect of the operational channel, from planning and demand forecasting, supply chain, customer order management, fulfillment, and of course, the store itself.”
Most retailers still handle purchasing from a central point but are experimenting with various fulfillment strategies. Some use separate DCs for online and store deliveries. Others have hybrid systems — for example, supplying customers from store inventories as well as DCs, and allowing customers to order online for home delivery or store pickup.
Integrating online and brick-and-mortar supply chains raises tricky questions, such as how to manage transportation between various origins and destinations, how to handle store returns for online-only merchandise, and how to supply online orders from store inventories without turning salespeople into order pickers and packers.
As retailers grapple with those questions, they’re spending heavily on technology to gain insights into consumer buying decisions and to mesh that information with point-of-sale and distribution data.
Nordstrom began integrating its online and in-store inventory systems in 2005. Its online and in-store operations now share the same inventory platform, enabling them to fill each other’s orders. The company says 15 percent of the company’s planned $2.5 billion capital budget in the next five years will be spent on technology upgrades.
Citigroup analyst Deborah Weinswig said other brick-and-mortar retailers have gotten the message. She said Macy’s now considers its main competitor to be Amazon, not department stores such as Kohl’s and J.C. Penney. She predicts Wal-Mart’s online sales, now about 1 percent of its revenue, will jump 12 percent this year.
“They’re thinking completely differently; all these guys are,” Weinswig said. “I think they have gotten the wakeup call of a lifetime.”