Why Amazon's "Under Tent" strategy poses serious threats to retailers
Amazon continues to quietly evolve in ways which enable it to be extremely competitive on price and efficiency. Without fanfare, Amazon has been quietly setting up dedicated space inside the warehouses of key suppliers. They are already gearing up for the next big frontier in e-commerce: CPG (Consumer Packaged Goods). Walmart, Target, Peapod and others recognize the size and value of being able to deliver consumables like toilet paper, diapers and toothpaste to busy moms at home. By setting up an "under-their-tent" strategy with major suppliers, Amazon gains a tremendous economic advantage over traditional retailers. Will traditional retailers evolve, or simply fade away one consumer online click at a time?
Amazon's killer "under-the-tent" strategy for CPG products
This morning's Wall Street Journal had a very interesting article on a major new competitive strategy being rolled out by Amazon for CPG "Consumer Packaged Goods" products. Many retailers may have in fact missed the article, but they won't be missing the painful effects as Amazon continues to rollout their strategy to more cost effectively compete in the lucrative race to provide consumables direct to homes in the US.
Essentially, what Amazon is doing is negotiating for space inside of supplier's existing warehouses. In Pennsylvania, Amazon has a small fenced off area within P&G's warehouse. P&G loads products onto pallets and simply moves them over to the Amazon area "under the same tent". Amazon then packages, labels and ship products directly to consumers who ordered them. What is especially significant about the Pennsylvania location is that it is 5 miles from P&G's largest manufacturing plants, and within a day's drive of the major cities in the US Northeast and Canada. Amazon can reach the critical 24 hour delivery window on everything from diapers, to razors and shampoo supplied by P&G.
Under-the-Tent creates major JIT competitive advantages for Amazon
Those from a supply chain background might recognize this new Amazon approach as a flavor of JIT. "Just in Time" was a technique pioneered by the automotive industry in order to have a supply of critical parts "just at the right time" when car was being assembled. This strategy enabled car manufacturers to cut parts inventory and engage suppliers in helping to manage critical inventory supply just when it was needed in the manufacturing process.
The Amazon "under-their-tent" strategy goes beyond parts inventory. It is more like JIFG … "Just in Time Finished Goods" inventory. As Amazon literally ships out P&G diapers and toothpaste, the P&G forklift driver can literally back fill the small stock staging area dedicated to Amazon within their own warehouse.
Major strategic and competitive advantages for both partners!
Amazon Competitive and Cost Advantages:
- Wider SKU assortment with immediate availability
- Lower inventory costs overall, especially for CPG items
- Reduce warehousing and inventory for bulky items like diapers
- Just in time supply, which matches sell through dynamics
- Reducing the overhead of building new warehousing space
- Prime locations to service consumers directly with CPG goods
- Price competitive advantage & shipping vs. traditional retailers
P&G Competitive and Cost Advantages:
- Major savings on transportation costs to Amazon's distribution centers
- Visibility to key sell through trends from the top e-commerce leader
- Amazon's help in boosting online sales of P&G CPG products
- Preferential treatment and promotion of P&G due to "always in stock"
- Potential to execute brand loyalty and add on sales through Amazon
Amazon and P&G's co-location strategy is the tip of the iceberg
The WSJ reports that Amazon's competitors are not happy with what they term as "preferential treatment" for one of their foremost competitors. Well ...Duh! The next huge frontier in online sales will be for everyday household products. Kudos to Amazon and P&G for experimenting on developing the supply chain model that drives out cost and improves reliability of supply for direct shipments of packaged goods products.
It is a safe bet that Amazon will exploit and expand this strategy with other CPG companies and vendors. Amazon is reported to be in talks already with a number of companies including Seventh Generation, Kimberly Clark and Georgia Pacific. Nor will P&G stand still. The WSJ reports that "Yannis Skoufalos, P&G's global product supply officer, said that the company values it's relationships with all of its consumers and works closely with many retailers to help reduce costs in their supply chain and meet their unique needs." That would seem to be code words for: if you have the volume, we can customize an Amazon like deal for you.
Differentiate or Die – Traditional retailers have no choice but to evolve
There is an old saying "death by a thousand paper cuts". In the emerging days of e-commerce that may have been true. Traditional retailers could slowly adapt to online retailers, because they still had the lion's share of consumer's attention and traffic. But, the latest co-location strategy of Amazon and P&G is hardly a paper cut! It is a major tipping point giving Amazon tremendous competitive advantages in terms of lower costs, wider assortment and availability, and ultimately even greater price advantages. In the battle for consumers' household products, this new Amazon strategy could create a hemorrhage for grocery stores and even Walmart.
Perhaps, the large traditional retailers like Walmart, Carrefour or even a Target might be able to mimic Amazon's under-their-tent warehouse strategies … but only if they have enough volume and if it creates a profitable business case for suppliers like P&G. They must also have the infrastructure and systems capabilities, which are not cheap or insignificant.
Bottom Line: Traditional retailers are in deep trouble … if they continue to try and compete on historical schemes of product and price!
Charles Darwin: Survival depends on the ability to adapt to change
Charles Darwin did not say that it was the survival of the largest, fittest or most intelligent. His research indicated that the key to survival was the ability to adapt to change. In an omnichannel world, the traditional retail rules and business models are being re-written almost real time. The innovators are making up the rules. IF a retailers' survival strategy is only focused on assortment availability, price and convenience … Amazon is winning hands down.
Traditional retailers must evolve in areas where Amazon can't compete … consumer engagement and experience. And, to repeat a great line from our last post: Compete is a verb. Traditional retailers must be as passionate and proactive about differentiating consumer experience as Amazon is about customer service and cutting costs.
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Sources:
- Wall Street Journal: Soap Opera: Amazon Moves In With P&G, Serena Ng; October, 14, 2013
- MorningNewsBeat: Amazon Forges CPG Competitive Advantages, Kevin Coupe; October 15, 2013
- Amazon Logo: www.wikipedia.com
- Amazon Warehouse Image: David Cruz; Seattle Times
- Supplies/Customers Image: Stuart Miles; Freedigitalphotos.net
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