Amazon’s digital empire spreads offline
Published on Saturday September 15, 2012 Amy Martinez The Seattle Times
Amazon.com built its business for the digital age, but it’s crossing over to the bricks-and-mortar world. From self-serve pickup stations in 7-Eleven stores in the U.S. to grocery-delivery trucks rolling through Seattle neighbourhoods, Amazon is expanding its physical footprint to make shopping online quicker and easier—if no longer tax-free.
Much of this expansion in the U.S., in fact, appears driven by the diminishing tax advantages of keeping that footprint small. For years, Amazon carefully managed its physical presence to avoid triggering U.S. state requirements that it charge customers sales taxes.
Now, as Congress considers legislation that could bring an end to tax-free sales on the Internet, Amazon is going offline for ways to hook customers.
Amazon plans new distribution centers in California, Texas, New Jersey and elsewhere to be closer to major markets and deliver items the same day they’re ordered.
It also is trying out new services that bridge the gap between e-commerce and bricks-and-mortar retailing, such as in-store lockers so that customers have another place besides work or home to pick up packages.
The world’s largest Internet retailer even is rumored to be considering opening a first-ever Amazon store to sell e-readers and tablet computers.
“They’re not quite a brick-and-click, but they’re moving quickly in that direction,” said Jonathan Johnson, president of Internet-only retailer Overstock.com, using a term to describe store chains that sell online.
Amazon’s “business model has changed so that they have a physical presence in many more states than they used to.”
Amazon has announced plans to open at least eight new U.S. distribution centers this year, adding to the 34 it operated at the end of 2011.
Analysts say it is laying the groundwork for a broad rollout of same-day delivery, a service it already offers in 10 major metro areas.
Amazon Chief Financial Officer Tom Szkutak told analysts in a July earnings call that the company had not figured out how to do same-day delivery “on a broad scale economically.” But he suggested the build-out of Amazon’s distribution network had contributed to lower shipping costs and faster deliveries.
“We’re getting closer to customers,” Szkutak said. “We have a lot of opportunity to improve that over time.”
Analysts say an expansion of same-day delivery would take away one of the few remaining advantages traditional stores enjoy over Amazon: instant gratification.
“People now expect instant gratification, as opposed to waiting several days for their item to arrive in the mail, and they don’t want to pay Federal Express prices for it to come overnight,” said Suresh Kotha, a business professor at the University of Washington.
Moving toward faster delivery also would offset the popularity of competing services that let customers buy online and pick up their purchases in stores, said Michael Harvey, chief operating officer for New York-based e-commerce solutions company CorraTech.
“If I’m working away in my office and I want something later that night, I could place my order on Amazon and have it waiting for me when I get home,” Harvey said. “I don’t need a retail store.”
Same-day delivery raises the possibility that Amazon will become an even more formidable threat to traditional retailers. At the same time, though, its new locker pickup service suggests it sees a benefit in working with some bricks-and-mortar businesses.
The service, being tested in London, New York, Seattle, Silicon Valley and Washington, D.C., lets customers pick up orders at self-serve stations in 7-Eleven stores and other locations. Amazon pays a small monthly fee to cover utilities costs.
“It opens up some interesting collaboration possibilities between Amazon and physical retailers,” Harvey said. “Certainly, 7-Eleven loves it because everyone who walks into one of its stores to pick up a package from Amazon is going to buy gum and a Slurpee.”
But the main reason Amazon may be trying out in-store delivery is to solve the “last-mile problem,” a reference to the final, costly leg of getting online orders into people’s hands.
Amazon could entice customers to use the service by offering discounts or freebies, such as same-day delivery at no extra charge, Harvey said.
“It’s much easier for Amazon to pull off same-day delivery if they’re stuffing things into lockers rather than going up people’s porches,” he said.
Amazon’s physical expansion comes as more states try to levy sales taxes on online purchases.