November 18, 2017


















Exhibit 65

“AMZ’s Extending Platform Potential; What-If AmazonSupply (AS) Scenarios”

Overview:

1.     Don’t underestimate AMZ’ ability to change your channel’s product-flow and business model rules. What we see currently with AS is not the final story. It’s only the end of the beginning: top of the second inning.

2.     AMZ has created a selling platform that has internal, reinforcing components. It’s a snowball rolling down a hill with you in its path. How can – you and (new) under-distributed manufacturers – all sell through a Marketplace dummy store at AS?

3.     How will AMZ/AS extend their supply-chain solutions into your customers’ store rooms? How will the Dash Wand (in more detail below) and the forthcoming AMZ smartphone series help?

4.     More Open Ended Questions for Further Thought

 

I.            DON’T UNDERESTIMATE JEFF BEZOS TO “DISRUPT” YOUR CHANNEL’S RULES

Jeff Bezos, AMZ founder and CEO, astounds me with his unparalleled innovation over the past 19 years.  He has studied and successfully executed – with synergy – the best objectives and principles of:

·        Steve Jobs’ customer-centric, total-experience design record. For example,

o    AMZ is the consistently #1-rated, on-line shopping service experience. The world – including Apple – pays AMZ royalties to use the “one-click, buy-it-now” button. 

o    The Kindle and Kindle store created an e-publishing channel that others had failed at and did not foresee.

o    AMZ is now testing how we can extend their customer-centric, supply-chain capability into our kitchen pantry with their “pantry items” list and the Dash Wand. Watch the YouTube (Link: https://www.youtube.com/watch?v=8ASGRzpHigk). Then, think how easy it might be for some commercial customers to do their own store room replenishment with such a wand.

·        Sam Walton’s obsession with constantly re-engineering supply-channel’s old practices and waste to pass on all savings to the customer in everyday low prices. The biggest brand suppliers with traditional channel power hate AMZ for:

o    Creating lower, equal marketing and distribution costs for niche competitor producers and items.

o    Eroding high-profit pricing that AMZ’s undercuts.

o    Driving traditional distributors/dealers and even big chain stores out of business. (As though they are entitled to fine-tune, obsolete, product-push business models.)

o    Turning asset and channel barriers of entry into liabilities.

§  Grainger, MSC Industrial and Fastenal may now have, for example, too many stores in which their most popular and profitable replenishment-items will be too high priced. What happens to their fixed-retail-overhead model if they lose 5% of their sales on their most profitable items to AS?

§  Any chain with master-stocking warehouses that double handles goods to branches will get squeezed on both service quality and price by the AS model.

·        Henry Ford’s operational genius to create the lowest-cost, (and unlike Ford), the most dynamically flexible and automated factories called Distribution Centers.

o    AMZ, at first, stole Walmart logistics people. Then, fired them to invent their own dynamically flexible DC capabilities.

o    Now that AMZ is collecting sales taxes for 20+ states and climbing, they are rolling out a national footprint of different types of DCs to provide same-day delivery service to 95% of the population. And, what other grand supply-chain design capabilities?

·        Thomas Edison’s laboratory to invent all of the elements needed to make both physical and digital products flow through the respective pipelines AMZ has invented: e.g., Kindle Line, AMZ digital products, AMZ Web Services. The Smartphone line will be unveiled on June 18th. How will their smartphone and Dash Wand make (replenishment) shopping even better for the end-user?

·        And, Brin and Page (Google founders) who also fearlessly plunge into “moonshot” invention vectors off of core competencies.

o    AMZ decided to get into the Web Services (AWS) and now dominates the Infrastructure-as-a-Service (IaaS) market. 90%+ of all start-ups worldwide are using AWS. At the big-contract end, AWS beat out IBM for a $600MM CIA contract last fall. I wonder if the startups that do turn into high-growth companies will (as “digital natives”) use AS for commercial product needs? What might happen to distributor sales as “loyal” buyers retire to be replaced by millennials?    

Because of Bezos’ ambition and talent, every distribution channel player of both digital and physical (consumer) products is feeling the competitive heat. Besieged industry leaders and social collectivists have tried to vilify Bezos (seek government protection; and, fix prices with Apple for e-books). Have you heard the critics? AMZ is:

 “…ruining main street.

…avoiding paying state sales taxes while local merchants still do.

…under-paying and over-working employees. They aren’t family friendly.  

…bullying the (biggest) publishers” (into being more efficient and sharing the savings with the consumer of e-books with more choice at lower prices. Meanwhile, the niche publishers love the equal playing field they have for taking their books to market. And, niche producers can’t get their niche products on AMZ Marketplace fast enough.)

What’s the other side of these complaints?

·        AMZ isn’t breaking any tax laws. (They are now collecting sales taxes in 20 states and climbing, SO they are putting new, ever-improving, state-of-the-art, warehouses next to all of the biggest cities in states for which they do collect taxes. Look for AMZ to solve the last few mile delivery problem and provide same day delivery in top 50+ US cities in the near future.) 

·        People don’t have to work at AMZ if they don’t want to.

·        Why should long-established, consolidated and inefficient distribution channels be entitled to not change at the expense of the consumer?

·        Why should trees be killed to print literature to be distributed through more costly, inefficient, physical channels? Email has eclipsed snail mail; why not e-books v printed ones?

·        Why do AMZ Prime customers continue to grow in – numbers, purchase volumes across more product categories -- even after the annual fee was recently raised from $79 to $99?

Is Bezos an unreasonable, ruthless, megalomaniacal CEO? Everyone can have their opinion! But, as George Bernard Shaw stated: “...all progress depends on the unreasonable man.” If Bezos doesn’t economically blow-up AMZ with over-reaching ambition or personally burn out (neither of which I predict), he’s got my vote (before his epic management run is complete) for being the most unreasonable and valuable capitalist for global consumers in history (so far!).  

 

AMZ’s mission statement is: “we seek to be Earth’s most customer-centric company for four primary groups of customer sets: consumers, sellers, enterprises and content creators.”

AS’s mission statement is: “to sell everything needed to rebuild civilization”.  

Based on AMZ’s 19-year-old, track record, I don’t think that these mission statements are wishful thinking. Distribution channels with century-old footprints and practices have never confronted an innovative-ambition like AMZ/AS.  

II.           AMAZON HAS CREATED A SELLING PLATFORM THAT IS A REINFORCING-GROWTH-CYCLE MACHINE: A SNOWBALL ROLLING BIGGER AND FASTER DOWNHILL.

               What’s a “platform”? Microsoft’s Windows operating software is “a platform” on which many software programs have been written to be compatible. As more players pile on a platform, the more valuable the platform and the increasing, network benefits become for all who are in the ecosystem and for all they serve. Other platform examples:  

            Apple’s iTunes to all iGadgets that have attracted the universe of tunes

            Apple’s iPhone that has attracted zillions of App providers

AMZ’s platform for selling/distributing physical products includes the following components:

1.     An ever-increasing, critical-mass of stocked items (to “everything”) that attracts increasing numbers of regular users (244MM on 5-24-14 up 30MM in 12 months). More products and more shoppers reinforce each other and now all digital content SKUs (e-books, literature, movies, music) are becoming available. For digital products, the incremental costs of production and global distribution are zero via the net. But, with physical products, freight-weight costs and the time-to-receive value are usually constraints. But, now AMZ is rolling out a national network of same-day-delivery warehouses!

2.     A “Prime” membership deal which gives a heavy-user an annual break on freight and the ability to order whatever they want when they want with two day delivery. (20+MM members as of 1-6-14)

3.     250MM credit cards on file and climbing that are connected to the fastest, most seamless, one-click-and-ship #1 on-line shopping site experience. (BTW, do you suspect that AMZ gets an excellent, global rate from the credit card companies which provides two economic advantages:

a.     Their total cost for “trade credit” is much lower than traditional distributors.

b.     They get paid in hours from the CC companies while paying suppliers in 73 days. They can sell items at cost or even a loss, but have positive cash flow from payables growing faster than receivables.

4.     Search for the oddest items and finding many choices (see #1).

a.     Google with “Froogle” started to be the first go-to shopping search, but AMZ’s  everything offering + Search + filters (for prime eligible) +  Best Customer Reviews + one-click integration – has smoked Froogle.

b.     AMZ’s smartphone will attempt to keep any other phone player from trying to skim any shopping dollars from being redirected elsewhere.

5.     A robust customer review system that gives me more, immediate information about potential products that I might buy than any other combination of internet solutions.

a.     What might AS add for product info for every SKU?

                                               i.    Links to all-about video clips (often provided by the producer)?

                                              ii.    With contact numbers to talk to a factory rep? Why should new suppliers beg distributors to take on lines and slow-moving items when they can sell direct through AS Fulfillment?

b.     Why listen to a sales rep tout what they stock, when better 24/7/365 info is available on whatever item I might be interested in?    

6.     Service Excellence Execution: fast, perfect: picking, shipping and tracking of every order.

a.     Fulfillment by Amazon (FBA) is a brand with huge value!

b.     Track AMZ’s roll-out of new DC’s across the US to provide more same-day delivery coverage potential.

7.     AMZ Marketplace.

a.     2 MM sellers as of 1-9-14

b.     Offering “everything”

c.     Sellers shipped to 480K cities in 185 countries during Christmas ’13 season.

d.     What happens to a new seller’s sales when they join the marketplace and elect to do: FBA and Prime eligible?  They take off.

e.     Niche products have the same visibility, etc. as the biggest branded items.

f.     Will distributors and new manufacturers set up Dummy stores on Marketplace to sell: Dead inventory at a discount; Super profitable A+ excess stock at a discount; Grey market goods at a discount? What can manufacturers do?

8.     Prime eligible Digital Content: e-books, music, videos, TV, etc. This will convert more customers to Prime. Prime members then buy more items from more categories until they buy everything. Then, why not do the same at the office for replenishment supplies?

9.     Algorithm suggested items. AMZ/AS tracks all that you buy and then suggests other similar items you might be interested in via email. You can then research all information about the item and perhaps buy it/try it.

a.     AMZ fired their book review staff in ’99, because the algorithms were doing a much better job at selling more books to regular customers. I know I’ve bought many more books from AMZ suggestions than I would ever have found at a Barnes and Noble.

b.     What’s the future of training all of your reps to go out and sell some new product, just in case the customer might want to hear about it? Human, push, product selling can’t compete with customer-pull, e-personalized, 24/7/365 learning about products that are statistically interesting to them.

 

SNOWBALL EFFECTS?

            As more things to buy are  ̶  searchable, reviewed, Prime eligible, FBA’d, one-click integrated, the more – people, credit cards and prime members – sign up and buy across more categories. As volume out of warehouses grows, the more AMZ:

·        Invents higher levels of DC processing productivity (“The Everything store” has some startling productivity stats)

o    Quadrupling the SKU count in a given DC

o    Reducing packaging material costs dramatically

o    Making custom boxes to fit the goods on site

o    Combining more disparate items per shipping box

o    Going from 1300 Kiva System robots in Jan. ’14 to 10,000 by 12/31/14!!!

·        The more dense the shipments are into a given city to support a new DC on the outskirts

·        Then, from an area DC, AMZ will start taking the most lucrative, delivery routes for UPS, et.al, in-house. They will also pioneer new ways to deliver goods: Post Office on Sundays; Uber independent delivery people; drones; driverless vehicles. Their ambition knows no bounds!

·        The more feasible same-day delivery becomes for more items from an area DC.

   SIDE-BAR ON ROBOT AUTOMATION

AMZ paid a whopping $775MM in cash in ’12 to buy Kiva Systems, a warehouse-robot manufacturer, and then announced that they would be using all of Kiva’s production capacity in their new warehouses. In 2012, the robots were selling to outside customers for about $20K. The bots then deliver the equivalent of $2MM in human labor over their useful life. But, the quality of the work is: perfect; lights out; no overtime; no accidents; no lawsuits; etc. The robots do everything between the humans that still do pure receiving dock and picking work. At this link, read the short article and watch “the day in a life of a robot” video and get concerned: http://www.businessinsider.com/amazon-robotics-kiva-systems-2014-5.

   

III.         HOW MIGHT AMZ EXTEND THEIR ON-LINE SELLING PROPOSITION INTO YOUR CUSTOMER’S BUSINESS?

A.    Think of this Supply-Chain-Into-Your-Business Chronological Scenario:

1.     First, you are a retail-consumer at AMZ. You still shop at retail stores to decide what you want to buy. But, often you can use AMZ’s Showrooming app take a photo of the barcode to instantly compare the price at AMZ. If it’s lower, you one-click buy it with free Prime/Free-shipping.

a.     The Brick Stores now have to meet AMZ’s prices with the overhead cost of having a local store and inventory to check out. Their most profitable selling items are now losers.

b.     Every retail chain’s year over year profits are currently dropping. Do you think they will make it up on profitless volume? J.

2.     AMZ starts adding all kinds of small, replenishment items to their site, but they bundle them into 2, 3, 4, 6 packs and/or make them “add on items”. Because you are into the Prime Shopping habit (along with 20MM others currently), you start to have a pantry full of bundled SKUs like 18 AA “amazon” private label batteries for $7.

3.     AMZ pushes the “pantry” (commercial storeroom) habit further. They offer a mini-catalog of top 100 consumables that are available at pantry buy-and-shipping economics.     

4.     Why not next scan the barcodes of what you need to replenish at home? AMZ has gotten into groceries in a few markets and has rolled out the Amazon Dash Wand to read barcodes and take voice orders for generic goods with easy order-entry into the site. Check out this YouTube on the Dash Wand: https://www.youtube.com/watch?v=8ASGRzpHigk.

a.     Note that the reporter criticizes the expense of AMZ Fresh’s economics and points out how barcode apps on your phone work just fine. She doesn’t imagine how this scanner might fit into a B2B, store-room, re-buy scenario.

b.     Moral: don’t analyze just what you see. Ask what are we not seeing? Where might current AMZ trajectories go? What other scenarios might be possible?

5.     Because you are a Prime customer, you wish you could have the convenience of buying everything at AMZ at your office too. In spite of IT department “security concerns”, employees at big companies use their cell phones for: email, texting, contact references, etc. because the in-house tools are “secure”, but unwieldy and slow to adapt. What are wedge ways AS will get into your customer’s businesses?

a.     A person at a customer’s needs an immediate fill-in item. AS is easier than re-ordering it in-house. Grainger has feasted on this type of “maverick purchase” for years much to the “total cost” disapproval of corporate purchasing.

b.     Someone reads about some new thing (or gets an AS algorithm-driven email) which piques their interest. They then search, read reviews, buy a sample. They like it and want to rebuy it, and keep doing it from AS. They add a business credit card to their Prime account to buy random items they need at work.

c.     Some nice sales rep sets up a replenishment closet for your company with barcodes. You are new, don’t know or care much about the rep and find that you can buy all of the same items faster and cheaper from AS than you can from the local distributor. When corner gas stations started giving customers a choice between full-service and pump your own gas, how many wanted to pay more and wait longer for the gas jock? AS’s costs for every step of the replenishment service are less and the speed of every step is faster than the distributor’s 100 year old service model.

                                        i.    No inside sales rep, no outside sales rep.

                                       ii.    Trade credit is outsourced to the credit card company from which AMZ does not pay the normal transaction fee.

                                      iii.    The automated warehouses do it better than the local distributor’s technology.

                                      iv.    And, the customer gets to choose from a number of delivery/cost options.

B.    HOW MIGHT AMZ/AS RE-ENGINEER YOUR CHANNEL TO BETTER SELL CERTAIN NICHES OF YOUR CUSTOMERS OR CERTAIN CATEGORIES OF YOUR SKU’s?

Your 100-year-old channel assets and service models to push products to market are ripe for re-engineering to be truly customer-centric. The customer buys cheaper, faster, with perfect service execution and gets all of the personal e-education they want.  

If you had the technology, innovative fearlessness and clout of AMZ/AS, how would you rethink supply-chain scenarios from the end-customer backwards? Assume that you can:

a.     Break all of the rules and tell the manufactures how they will resell you to give the end-customer exactly what they wanted: cheaper, faster and more service perfectly?

b.     Have no fear of sales reps leaving for competitors and taking business with them because you had everyone make more solutions for your best reps thanks to Line Item, Net Profit Analytics.

Best customer-centric supply-chain processes is AMZ’s core competency and ambition. They have no fears or constraints. How will you both defend and out-innovate AS where you can?       

IV.          MORE OPEN-ENDED QUESTIONS FOR FURTHER THOUGHT

 

1.     If a distributor focuses on the 20% of the customers that buy 80% of the volume and sells them, semi-customized, supply-chain solutions, how can AS penetrate this business? My guess: they can’t. The odds of AS dislodging an integrated-supply-contract type of distributor relationship are, I think, close to zero. AS may well pick up a bit of “maverick purchases” from everyone similarly to Grainger.

2.     What type of products will AS do well with?

a.     They will feast on top 100 most net-profitable consumables when they start to get aggressive with their Every-Day-Low-Prices (EDLP) which I predict they will, one channel at a time. They will sell these top 100 items best to smaller and more rural customers (traditional catalog and telemarketing distributor accounts).

b.     They will excel at long-tail, C and D items (perhaps in some cases even “used” items) that distributors don’t stock locally. They will first have to bootstrap their way to breadth-depth of their own inventory. But, if and when their universal Prime/FBA platform effects kick in, then Marketplace players will flock and finance the stock with ordering and fulfillment being done by AS. Marketplace vendors will include dummy stores for distributors to: dump excess items for less and dust-collectors.  

3.     More on long-tail, small-dollar items. In many channels, a distributor will have bulky commodity products along with small bits-pieces-parts in the same warehouse. They will make 300% of their operating profit on about 5-10% of their active items, but then lose close to 200% of those peak internal profits on 100 highly popular, but small dollar items. These losers may have high turns and high GM%, but the GM dollars per pick is much less than the processing cost of the pick. The channel needs a new model for these items. What’s the solution? I have one with the colinx.com model in the Bearings/Power Transmission channel being exhibit A. In my plan, end-customers would order direct, and distributors would be “RE-INTERMEDIATED”. I could go on, but I’m afraid in most cases AS will effectively do it for the channel and cut the distributors out.

4.     What type of commercial accounts will AS do better with? Answer: smaller ones that can’t support outsourcing Supply-Chain systems – audits, design, implementation and maintenance – to knowledgeable distributors. But, not dumb old ones. They will keep giving distributors retail sized orders to get wholesale prices and services on which the distributor will lose money unknowingly. Distributors who have net-profit analytics will take care of the growing-nowhere, unprofitable, minnow customer problem. And, perhaps those smart distributors will drive some of the old, dumb customers to AS, but I think most will go to some other distributor enamored with “more” accounts and GM$ at “high GM%”. They just don’t get:  GM$s less Cost to Serve = Profit.

5.     If AS wants to sell everything to rebuild civilization, couldn’t that affect a lot of contract supply distributors? We’ll see. AMZ has basically created the best, easiest, most economical platform-way to buy anything on the planet. I think they will get a profitable piece of almost every commercial business’ spend in time.

6.     How vulnerable will hub-and-spoke chains and the sales from Master Wholesalers to distributors be to AS? These are old-order locations with two steps involving too many people and paper along with a blindness to underlying cross-subsidies between super profitable and unprofitable items? Without net profit analytics, these big investments in a product-push, rep-centric paradigm will be harmed.

7.     How well will 2nd – or-later – generation managers do against AMZ/AS band of innovators? They won’t. They will see what they want to see and keep fine-tuning the past. How did the book-store and record-store chains do against AMZ? When AMZ lost 75% of their CD and DVD business to digital content, they – by huge contrast – invented the Kindle, the e-book format, etc. and have now married to their Prime platform and next their forthcoming smartphone. Apple’s smartphone is now a commodity. How are they going to compete on selling anything through it in comparison to AMZ’s Prime Platform?  AMZ will invent their way to their vision of being the best customer-centric seller of everything. Second generation or later management are not generally innovators.

8.     I’ll keep adding to this list. And put your questions in too!

 

Exhibit 65 is related to Strategic Insights # 34 at this link:  http://www.merrifield.com/insights/SI_34.asp