Moving In With Manufacturers, Amazon Delivers A New Approach

Oct 28, 2013
Originally published on October 28, 2013 11:58 am

Amazon's business is built on three basic concepts: faster delivery, greater selection, and cheaper prices.

In service of that, it has built enormous warehouses staffed largely by robots that shuttle around, pulling goods out of bins at remarkable speed. It can take just a matter of minutes to go from order to shipment.

And lately it's pursuing a program where Amazon goes directly into manufacturers and manages their logistics and online retailing.

"It fits right into world domination for Amazon, because what this is doing is now allowing them to even broaden wider the scope of products that they're going to offer," says Marshal Cohen, chief retail analyst for NPD Group.

He says Amazon's Vendor Flex program benefits manufacturers, because they can sell more of their products directly to consumers. And it gives Amazon a bigger warehouse footprint, enabling it to ship more goods faster and cheaper.

"It's kind of like a win-win-win. There are three wins," he says, for the manufacturer, Amazon and the consumer.

"The only ones that's not going to win are traditional brick-and-mortar retailers, which now have just gotten an additional competitor in categories that they've traditionally not had online competition in," he says.

Amazon declined to discuss the program, but it has shopped Vendor Flex to various manufacturers, including Procter & Gamble.

It allows Amazon to set up shop and hire its own workers within a manufacturer's warehouse or facility. Amazon essentially runs the e-commerce and logistics for the manufacturer, which can sell direct to the consumer.

John Replogle is CEO of Seventh Generation, a cleaning products company that has worked with Amazon since the online retailer's early days. Although he declined to comment about Vendor Flex, he says the company is thinking about new sales channels.

"I think the notion of what it means to be a big box is being redefined," Replogle says.

He says for his company, direct online sales make up a low, single-digit percentage of sales. But he expects it to double in the next few years, because fewer people want the traditional suburban experience of hauling bulky consumer products in their cars.

"If you look at the consumer today, it tends to be young and well-educated," he says. "And increasingly, what they're doing is living in urban centers. Their shopping behavior is shifting increasingly to online and in urban centers. So, as we think about strategically how we position ourselves, we've got to move with that consumer."

Wal-Mart and others also realize that, and are responding by beefing up their online presence and delivery speeds. But retailers like Wal-Mart also have a big advantage over purely online retailers. Namely, they have physical locations close to their consumers.

"Wal-Mart has a huge, much larger logistical footprint than Amazon," says Tom Forte, an Internet analyst with the Telsey Advisory Group.

And by partnering with manufacturers, Amazon is essentially trying to expand its geographic footprint quickly, to get closer to the customer.

Forte calls faster delivery the new frontier of Internet competition. EBay's eBay Now service is experimenting with delivery of goods in an hour, and Google's Shopping Express promises same-day delivery.

"Amazon's adding fulfillment centers outside of major metropolitan areas, and eBay and Google are leveraging the retail stores within the major metros," Forte says. "So they should, at least in theory, be able to get the merchandise faster to the consumer than Amazon, which I think's a risk for Amazon."

But Amazon, too, is running its own same-day delivery experiments in Seattle and Los Angeles.

"The average consumer visits a grocery store 2.2 times a week, so one of the reasons that Amazon is rolling out grocery is they want that frequency of purchase," Forte says.

And, he says, that's only skimming the surface of what's to come.

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