Amazon's Efficient Distribution Key to Winning Consumers

When I think of Amazon, I tend to think of a company that's training the next generation of consumers to come to it... 85 million Prime customers spending an average $1,300 each. Impressive, but such an assessment still understates how Amazon is restacking the deck when it comes to the retail industry.

It is not only capturing the customers interested in using online systems, it's building a supply chain and delivery system that can fundamentally change how consumers expect to receive their goods. In Amazon's view, as use of online systems grows, an Amazon bricks-and-mortar retail outlet becomes a necessary part of the delivery chain.

If it's retailing groceries, that distribution end point might look something like a supermarket. But in Amazon's view, there's no need for an enormous store stocked with hundreds of copies of the same item. With online systems, buyer preference can be anticipated on a day-by-day basis; sales can be analyzed and shelves stocked with minimum inventory instead of maximum. Amazon's rule is: as online ordering systems grow, bricks and mortar facilities can shrink and still serve as the distribution end point.

Right now its 13 book stores in as many cities and 450 grocery outlets gained in its Whole Foods acquisition are modified versions of conventional retail outlets.

Amazon's small but growing chain of book stores are not just meant to display books for sale. On the contrary, they're meant to give Amazon tablets and home speaker devices a higher profile in the consumer market via a demonstration point, something like the Apple store. In an Amazon book store, the space devoted to the Amazon Echo voice activated speaker is greater than the space devoted to fiction, according to this New Yorker account of the Columbus Circle store.

Not sure that Amazon has any intention of getting into the retail drug store business? See Can Amazon Disrupt More Markets? Let Me Count the Ways.

In a similar vein, an Amazon bricks and mortar store may be more about using an app on a smart phone to locate nearby goods, to comparison shop, to use instant checkout -- Just Walk Out – technology than about maximum display of goods. What works in the experimental book store or limited inventory grocery store can be translated into a future drug and pharmaceuticals store and many other types of retail.

If the consumer gets used to ordering a wide variety of good online, Amazon's physical retail locations may become more important as pick up points than goods-on-display locations. Instead of running delivery vans to every household in the city, Amazon's regional distribution center can drop packages off at a satellite distribution center in a neighborhood, say one about the size of a Whole Foods store.

Amazon doesn't necessarily need to deliver milk, lettuce and steak direct to the consumer's homes. It can analyze consumption, anticipate demand, and keep Whole Foods stocked with the just right amount of fresh goods for that day's sales. In some cases, customers may pick goods out of the case and off the shelf at the store and walk out the door, getting an electronic receipt of what's been charged to their account (Just Walk Out technology in trial with employees in Seattle). In other cases, they may opt to save time and pick up pre-packaged groceries at a distribution point that's still a neighborhood Whole Foods store.

The revolution is no longer in the ecommerce system that allows the online ordering. It's in the coordinated, just in time delivery system that swings into action after the order is placed.

John Mackey, the creator of Whole Foods, has been successful in introducing an organic, health-oriented food store into the supermarket mainstream. As the Whole Foods has grown, it's run into expansion problems that kept it from reaching Mackey's goal of 1,000 stores. Now that it's part of Amazon, Whole Foods may reach that number of outlets and keep growing.

And Whole Foods clientele, the willing to spend a little more shoppers, are exactly the clientele that Amazon seeks to cultivate.

J.G. Collins, managing director of The Stuyvesant Square Consultancy, a business development firm, believes Amazon will disrupt much of the grocery business with its new capabilities. Does that mean consumers will walk into a store, pick the foods they want and just walk out? Or will they place orders online and go to the store to pick up a box of goods? The answer is both.

"Think about it: when you go to your regular grocery store, do you really need 50 cans of Campbell's Cream of Broccoli soup…? The logistics of the grocery business haven't really changed much since supermarkets… first came about," Collins wrote July 8 on the investors web site, Seeking Alpha.

Amazon is already delivering retail items to thousands of residences in urban areas the same day they're ordered. "Imagine then, that instead of delivering groceries to thousands of individual homes and apartments over vast areas, Amazon concentrated on delivering small quantities of replacement inventory 6 or 8… times a day to maybe 30 or 40 small footprint neighborhood grocery stores using instantaneous inventory ordering," he wrote.

What works for groceries would work just as well for drugs and pharmaceuticals. What works for them would also work for any other retail goods that consumers are eager to lay their hands on quickly. Indeed, the key to sales in the future may not be whether the goods are desired. That will be merely retailer table stakes. The key will be who can deliver them the quickest to the consumer's satisfaction. And that's a hint where the digital economy is headed, not only in retail, but in a host of other areas.