It is only a matter of time before Amazon starts to build that last mile delivery facility close to my home market. I live in Ottawa, and as one of 59 Canadian or US cities with a metropolitan population exceeding 1,000,000, you have to figure Ottawa is a target for Amazon Prime Now delivery.
The 6 Canadian cities with a population exceeding 1 million have a total 16,093,400 residents which represents about 47% of the population of Canada. In the US, the metropolitan area populations of the 53 cities exceeding 1 million residents adds up to 177,425,737 (as of July 2016 according to the US Census Bureau), and that makes up about 54% of all US residents.
Until now, most warehousing and distribution for Eastern Canada was centralized in either Montreal or Toronto. Ottawa as a smaller city receives deliveries as opposed to originating deliveries. My buddies in the logistics business say that Canada can be serviced by two cities, Calgary and Toronto.
As Montreal is a two hour drive, and most of Toronto is at least a five hour drive from Ottawa, locating in either city can at best service Amazon Prime delivery promises (within 2 days). What changes for Ottawa is that these facilities are too far away to deal with Amazon Prime Now (2-hour delivery). Hence, an Amazon last mile centre should be landing here sometime soon.
Another hint that Ottawa may be in their sights is because of the size of this market. If Amazon wants to focus on 59 US and Canadian cities with a metropolitan population of at least 1,000,000 people, this means Amazon will be building Amazon Prime Now facilities for 194 million people.
Just what is an Amazon “last mile delivery” facility?
I confess I am confused by the terminology used to describe the facilities in the Amazon distribution system. It is not clear to me the distinction between a “distribution center” versus a “fulfillment center” or “last mile delivery depot”.
The CBRE Last Mile Logistics\City Logistics publication from October 2017 has a helpful infographic:
The process on the left is the one that got refined prior to e-commerce, while the one on the right represents a model for how by-pass the store or mass distribution centre to get goods directly to customers.
The UCLA Anderson Global Supply Chain Blog has an article describing the challenges of last mile delivery for Amazon. In it they had the following illustration of the supply chain that Amazon uses. It expands upon the distinctions in the types of facilities Amazon uses depending on the stage of delivery from manufacturer through to delivery to the customer:
MWPVL International Inc. breaks out the Amazon global fulfillment center network differently. It distinguishes between: fulfillment centers; supplemental centers; return centers; Prime Now hubs; inbound sortation centers; outbound sortation centers; and, delivery stations (ignoring the food-oriented facilities). The following excerpt focuses on their US inventory of facilities:
I do not know which of these facilities Amazon is planning for Ottawa, however I suspect it is working to ensure it can deliver within 2 hours to extend the reach of Amazon Prime Now delivery.
The Amazon virtuous circles
CB Insights has this great teardown of the Amazon strategy. I found the following illustrations helpful in encapsulating the Amazon effect.
The first virtuous circle is this illustration of Amazon’s strategy, as drawn on a napkin by its founder Jeff Bezos (so the story goes):
For the local retail ecosystem of local, regional, national and international retailers, this invasion by a (very) large firm(s) has been experienced before in two waves:
- one was Walmart (everyday low prices) relying on its low-cost advantage driven by scale and strengths in logistics (sound familiar) to capture market share here; and,
- a second was the proliferation of category killers and big box retailers whose specialization and ability to stock more diverse products would make it very difficult for every other smaller retailer while they captured market share here.
Walmart successfully hollowed out the central areas of smaller towns that featured local retailers who eventually closed. The category killers did the same in larger centers where local retailers could not compete on price, selection and availability. Will Amazon Prime Now accentuate and accelerate this effect?
The Walmart strategy focused on smaller cities and dominated those markets before it began to secure locations in the biggest cities. I suspect that Amazon Prime Now will do things the other way around: focus on the biggest cities and maybe eventually get to smaller cities.
The second virtuous circle is in the data it collects, and its commitment to making use of this data. Amazon has a distinct and very big advantage is with its data networks effects. As it adds more goods to its store and tracks all those orders from all those people, it collects reviews, and sees what else others bought. This produces a treasure trove of data about every customer. That collective view of all those individual transactions provides far more intelligence about clients and customers than local retailers can capture (or imagine capturing).
I keep forgetting that when I buy items with a credit card or a debit card or cash, the retailer collects little to no information about me. They prefer you use a loyalty card to collect loyalty rewards, or use a store-issued credit card, as that way they can track that purchase with me and subsequently build up a profile of me as a shopper. I do not know if the Visas or the Mastercards of the world aggregate data about my purchases and then mine data or uncover trends to predict spending, or if they sell that data metaset for others to analyze.
It was a surprise to me in doing site selection for big retailers in the past just how reliant they were on the credit cards they issued as the only means to collect data on their customers. As well, each retailer may collect intelligence about me from my shopping in their store, however they are blind to my spending elsewhere. Amazon can amass a much better customer profile for all my spending given its diverse variety of selection. Why shop anywhere else?
This is where a focus on larger markets may make is easier for Amazon to provide 2-hour delivery. As the cities get larger, it is easier to predict which items will have the most demand, and then stock those facilities with the correct items. While it is next to impossible to predict what any one individual might purchase tomorrow, Amazon will have a large enough data set and sufficient analytics to reasonably predict what daily orders will be made in bigger markets. And maybe that is the magic to focusing on larger markets: there is sufficient aggregate demand for most items to result in overall accuracy in just what must be available to deliver in that 2-hour promise.
The push for faster delivery
The McKinsey & Company report on “How customer demands are reshaping last-mile delivery” identified that nearly 25% of the 4,200 customers in China, Germany and the USA would pay a significant premiums for same-day delivery or instant delivery. Tellingly, that willingness to pay a premium increased to 30% for younger customers.
Jeff Bezos said much the same thing about this customer sentiment:
“…our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection.”
What is left after price, selection and speed of satisfaction
Experience I guess. Make the shopping experience memorable and enjoyable. No big surprise that as people struggle to be identified as an individual, having someone treat them as a person with particular needs, wants, goals and aspirations. They prefer going to a place that knows them, knows their favourites, and treats them well. This is why the rise of carefully curated experiences with craft goods don’t treat us as one of the ordinary, everyday buyers. They have learned that embracing a customer as valued can be as simple as knowing their name. Like what happened with Norm in the bar.
What helps corroborate that “experience” may be an opening to exploit. This is explored in the Bain “The Elements of Value Pyramid” in an article I found in the Harvard Business Review:
This hierarchy of the elements of value reminds me of Maslow’s hierarchy of needs. What is striking for me is how low down in this pyramid that price, selection and speed appear. Amazon with Prime Now delivery will at a number of these elements, most of them functional. Maybe other retailers can aim higher in the pyramid to offer a different experience to their clients.
Is it a destination or convenience retailer?
I have assisted Home Depot and Canadian Tire in sourcing locations for stores. At the time, both retailers needed a site of about 10 acres, and the land had to allow them to place their standard store (both about the same size) on the site so that the parking was convenient and plentiful, and the loading worked. What fascinated me was how they positioned themselves as a retailer – destination or convenience – dramatically affected their site selection criteria.
For The Home Depot, they said they are a destination retailer. That means that people go to find them to shop, they are the purpose of the trip, and that these shoppers will drive by other retailers offering the same or similar merchandize to get to their stores. Canadian Tire, on the other hand, figured they were a convenience retailer, and they made every effort to ensure that when those shoppers needing something they were the most convenient retailer to go to fulfill that demand.
This way of looking at the positioning choices retailers make – destination or convenience – helps to better appreciate the steps that Amazon is taking. Amazon with Prime Now seems to be competing to dominate the convenience space, as many of their initiatives are designed to make shopping more convenient.
This retail revolution that Amazon is instigating aims to satisfy those immediate needs, something you want or need in less than 2 hours, and you can now satisfy without moving. No need to leave the house, no need to drive there, find a parking spot, find the item, pay for it and lug it back to the car, and then drive home. If Amazon dominates convenience, that means that for most other firms they are now competing as a destination retailer.
Upsetting the anchor, shadow anchor CRU gravity feed for consumer spending
This revolution is upsetting to the entire retailer ecosystem. Usually the anchor for a shopping center development is the destination retailer, and all those other smaller retailers rely on the traffic generated by the anchor to gain the opportunity to solicit sales from all those heading to the anchor.
The destination retailer effectively increases the trade area for all the other retailers located there, and that increased effective trade area means the smaller retailers have more aggregate consumer disposable income to sell into. Now that the shoppers are at the destination retailer in this mall or plaza, let’s sell them our complementary goods that have been specially curated by use clauses at the plaza. The destination retailer gets the parking lots filled with more cars, and then all those ancillary retailers hope to capture some of that spending potential within the retail niche they occupy.
Amazon now accesses potential consumer spending on convenience items before they leave their home, as well as taking away the “convenience pricing premium” some retailers could charge.
I suspect that Amazon is targeting every city in the US and Canada with a population exceeding 1 million people to provide 2-hour delivery with Amazon Prime Now service. That means Amazon will be adding last mile distribution centres to these markets. It will lever its data network effects with a focus on price, selection and speed to serve an ever-increasing number of customers. It will dominate the convenience spectrum in the convenience-destination axis.
What it does not address as well are all those human touches that define experience in order to gain higher-level satisfaction of the elements of value people crave.
How about you, will Amazon Prime Now change everything for you or your favourite store or your market?