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
