Amazon is changing retail: you need to understand how it works

I don’t fear Amazon, it’s One Stop, a senior wholesale executive told me recently. But a flick through The Everything Store: Jeff Bezos and the Age ofAmazon by Brad Stone might make him rethink.

I am sure that Jeff Bezos will write a better book about his business ideas 20 years from now and while Stone’s book has been slated by some insiders, it is a great read. For anyone involved in distribution it is a must read.

Famously frugal with company funds, the Amazon attitude to burning up money buying companies that failed during the dot-com boom of the late 1990s will dazzle you.

Even more impressive is Bezos pursuit of the best brains from Walmart. He started his career in a New York hedge fund run by David E Shaw, whose mastery of maths and computing made him a billion dollars exploiting inefficiencies in the way Wall Street worked. DESCO had a policy of hiring the best brains and Bezos was a prodigy. He left this well paid job to set up an internet business that had a 70 per cent chance of failing and managed to get his parents to invest heavily in his idea.

Impressing smart people and winning cheap capital helped the fixated Bezos to scale Amazon quickly and he realised that scale was the only thing that mattered. He was terrified that Walmart would see what he was doing and price him out of the retail market.

Distribution problems nearly killed the business in its early Christmas seasons and Bezos invested heavily betting that established bricks-and-mortar businesses would not be nimble enough to respond. Bezos recruited Jimmy Wright, a former Walmart vice president, and told him to build a system that could handle anything. He spent $300 million building warehouses with “blinking lights on shelves to guide human workers to the right products and conveyor belts that ran into and out of massive machines, called Crisplants, that took products from the conveyor belts and sorted them into customer orders.” These warehouses were to be called distribution centres, Wright decreed.

In the period after 2000 Bezos met Lee Scott, who ran Walmart, and Jim Sinegal, who founded Costco. Scott explained how it invested in everyday low pricing (EDLP) rather than advertising.

When he met Sinegal he learned about how membership clubs worked. “The membership is a onetime pain but it’s reinforced every time customers walk in and see 47in televisions that are $200 less than anyplace else,” Sinegal said.

Bezos changed how Amazon worked. But by 2002 the company realised its distribution was not working. Amazon hired Jeff Wilke to sort it out. Wright was the best in the world at building large scale retail distribution, which was great if you had to send out 5,000 rolls of toilet paper. But it could not work for small orders.

Wilke hired programmers to write algorithms that would tell his teams where and when to stock particular products and how to most efficiently combine various items in a single box. He “realised Amazon had a unique problem in its distribution arm: it was extremely difficult for the company to plan ahead from one shipment to the next. It didn’t store or ship a predictable number or type of orders. A customer might order one book, a DVD, some tools – perhaps gift-wrapped, perhaps not – and that exact combination might never be repeated again.” So he renamed the warehouses as fulfilment centres.

A year into his role, Wilke and Bezos asked a fundamental question: was distribution a commodity or a core competence? If it is a commodity, why invest in it? And when we grow, do we continue to do it on our own or do we outsource it?

Wilke’s success in developing tightly controlled distribution “allowed the company to make specific promises to customers on when they could expect purchases to arrive” that would offer “Amazon innumerable advantages in the years ahead.”

By 2007 Bezos was telling colleagues: “In order to be a $200 billion company, we’ve got to learn to how to sell clothes and food.” Will this happen? Brad Stone, who has covered Amazon for US news outlets for most of its 20 years, says the answer is yes.

So should wholesalers be afraid? Perhaps. Reading this book will help you make your mind up. There is a lot of fantastic detail relevant to how you do business today…and how you may have to do business tomorrow.

For more see, www.betterretailing.com.