Posts Tagged ‘amazon’

Remember when supermarkets started doing online deliveries? And it turned out that they just had people going around their own stores picking out items to send to people?

Oh, how we laughed. “What a silly way to do it” we jeered. “Why don’t they have one central warehouse where they can do everything efficiently?”

I don’t think supermarkets did it this way because they thought it was the best way. I think they did it because of path dependency: they already all of these stores and it was the easiest way to do it. However, here we are a decade later, and it turns out that their approach is the best.

In fairness, I’m being overly provocative with my headline. I’m a fan of Ocado. You can read my review of Ocado here. But my guess is that if they want to build on their success in the long-term, they have some fundamental business challenges to overcome.

This is why…

Why is Amazon looking for retail space?

The story starts as many do, with some fascinating insight from Scott Galloway. He said that Amazon would eventually buy a large department store.

Why? Because such a company would have stores in every major city. This is important because it allows Amazon to deliver products quicker. One of their big problems is time: I can drive to the shop and buy something instantly. And customers love instant gratification. Amazon cannot deliver that, which is why they are spending time messing around with drones.

Jeff Bezos has always wanted to find a better way to do this. In Bezos’s biography, The Everything Store, Brad Stone talks about how Bezos wanted to hire college kids to keep a stock of Amazon products in their bedrooms and cycle them round to customers the minute they ordered.

Short of that, Amazon needs a distribution facility in each area to allow them to get products to customers quickly. That is tough when you operate a huge monolithic centre. But way easier when you have loads of local stores.

What does this mean for Ocado?

Ocado has the same problem that Amazon does. They operate out of a giant warehouse down south. This means that you have to pick the orders there and drive them to every corner of the country. Doing this is expensive for Ocado and slow for consumers.

Compare that to the major supermarkets: Sainsbury’s have their warehouse located literally only a few miles from my house. And everybody’s house. And running this warehouse costs them practically nothing because the stores are profitable in themselves.

Therefore, even when you add the cost of an inefficient system in which employees go around the shop picking out items like an in-store customer would, it still produces a business model that works and works well.

What can they do about?

Ocado needs to find other ways to compete. Amazon was successful in competing against existing high street stores. It did this in two ways. 1) it offered cheaper prices and 2) it offered a way bigger selection. Their tagline is, after all, “Earth’s biggest selection”.

Ocado doesn’t do this. Their prices are more expensive. Their selection is good, but not amazing. Take fish, for example. The selection at most supermarkets is rubbish: cod, salmon, seabass, maybe some tuna or another white fish if you are lucky. Morrison’s is a bit better. Ocado better still: their selection is maybe twice as big.

But, as Peter Thiel points out in Zero to One, if you want to do the same thing as everyone else, you can’t be 2x better: you need to be 10x better. Leeds Fish Market is 10x better. I can get maybe 100 different specifies of fish and seafood there. So I go. Just like Amazon offered way more books than my bookstore.

Summary

Traditional supermarkets have a huge advantage over online ones because they have a far better distribution network. This is important because that is all a supermarket essentially is: they buy other people’s food and distribute it to people before it goes off. If the online world wants to compete, it needs to offer an experience that is so much better you cannot possibly not switch. Ocado and Amazon Fresh do not yet do that, in my opinion.

I have previously written about why review sites, such as Trip Advisor, are nowhere near as good as books like the Leeds Restaurant Guide. The problem is that the reviews are inconsistent, lack quality and depth, and may be written by someone who works for the restaurant.

It occurs to be that Amazon reviews might be similarly useless.

Recently, I was searching Amazon for some cake tins. There was plenty of options. However, working out which was the correct choice was a tricky business. Some of them had plenty of five-star reviews with short comments such as “amazing cake tin”. But they would also be accompanied by the odd one-star review saying “it leaks”. The same pattern was repeated over and over.

Then other products had no reviews, so you either had to take a chance or exclude these as options.

This results in me having a huge array of options, but no quick way of deciding which was best. I had to spend time looking through the quality of the reviews to try and discern which ones could be trusted and which could not be. I had to weigh up what the required numbers of reviews were before I could assume the star rating could be trusted.

This also places a huge amount of cognitive processing time on my brain. This kind of decision making is frustrating and tiresome.

Amazon reviews certainly can be helpful in validating our purchasing decisions, or, given a sufficient number of them, helping us make the decisions in the first place. However, I think do not believe they are a perfect replacement for reviews from trusted sources and can often cause more problems than they solve.

This is a super-interesting speech if you are interested in technology, business, and the short-term future of our society. In it, Galloway discusses how the “big four”: Google, Amazon, Apple and Facebook, are basically claiming all of the growth and all of the talent that the world is producing; redefining industries while at the same time concentrating wealth into even smaller pools.

The Everything Store is a biography of Amazon and Jeff Bezos. It is written by Brad Stone.

It discusses Walter Isaacson’s Steve Jobs biography and it is easy to make comparisons between the two. Both seem demanding people to work out. IN fact, Bezos more so. Life at Amazon is painted as relentless. Bezos speaks out against work-life balance and seems to work every employee into the ground. I think I have come away being put off by the idea of working for Amazon.

This is an interesting contrast to Netflix. They claim they don’t care how long employees are in he office for as long as they do good work. How true that is in practice I am not sure though it is true that they do not track the amount of holiday staff take (you can take as much as you want), which suggests they do have a relaxed policy. Netflix have of course been hugely successful as well.

It also makes me wonder whether you have to be a bad guy to succeed in business. Though successes such as Richard Branson would suggest there are alternatives.

Bezos is a man driven to build The Everything Store. He wants every product to be available immediately for customers. This is why Amazon sometimes drifts away from selling directly (Amazon auctions, Amazon marketplace) but often comes back to fulfilled by Amazon. They want to be able to control the whole customer experience, just like Apple.

Amazon itself appears in a mixed light. It is an innovative company. It did a great job of bringing together online retail. Look inside the book, search inside the book, super-saver delivery, prime, affiliates and recommendations were all developed or popularised by Amazon. It was the first to get e-books correct with the Kindle, and its purchase of Audible has helped audiobooks as well. KDP and CreateSpace allow you to publish directly onto Amazon. Not to mention Amazon Fire, Amazon Web Services (AWS), A9 and the many technology fronts Amazon has. In terms of market share, AWS is huge and probably under-appreciated on that list.

Amazon’s core retail business has always been about books. Bezos has a passion for books, which probably partly explains why they have been so successful. Compare this to music where Apple dominated. Stone correctly points out that Steve Jobs loved music, whereas Bezos had no interest in it. Even when you have a giant corporation behind you, it would seem you still need to do things with passion to succeed.

Bezos does embrace the same view as Jobs in disrupting your own company. I love the Jobs quote, if you don’t cannibalise your own company, somebody else will. This is exactly what Bezos wanted with the Kindle: he told his team to destroy Amazon’s core market of paper book sales. This had worked out as one of Amazon’s biggest successes.

They are also a relentless competitor. Like Walmart they are willing to stomach major loses to drive competitors out of business. They don’t treat their suppliers well either. Something I experienced first hand when publishing the Leeds Restaurant Guide. Amazon give me only around 30% of the sales price, whereas Apple give me 70%.

Getting an insight into Amazon’s logistics was fascinating. For example, super-saver delivery. I had lazily assumed it was that they used some kind of cheaper, slower delivery. Not necessarily so. The idea behind it is that they don’t even get it out of the warehouse until they have spare capacity. You might get lucky and they will have capacity straight away. Or you might not.

There is also the complexity of delivery. How often have you bought a USB stick and it turned up in box the size of a microwave? It’s amusing for the customer (ignoring the environmental effect, which we should not). However, for the business, putting the right products into the smallest possible packaging is actually an important part of cost-saving efficiency.

In some ways, Amazon could be seen as a bit of a mess. In the conclusion, Stone talks about how Amazon often has poor communication between departments and effort is also often duplicated. However, the company uses these things to their advantage. Different projects compete with each other on their own internal market, like their search routines did, with the best one surviving. Often companies are desperate to avoid duplication, but maybe it is not always that bad.

Looks pretty cool. I’m still expecting to find the bit where they say “only joking of course”.