Monday, July 27, 2015

Amazon drive-through: the why and the what next

As has been widely reported today, Amazon may be soon opening drive-through locations for customers to pick up groceries and other items (first reported by Silicon Valley Business Journal, also CNBC, Telegraph, Fortune, among others). This has not yet been confirmed by Amazon, and we will update as soon as we have confirmation (or denial). In the meantime, I want to spend some time walking through why this makes sense, and what might come next.

I had predicted in April of 2015 that Amazon would do this, and outlined a number of reasons. I'll expand on that logic here. Many of the numbers quoted here are based on my white paper with Paul Weitzel of Willard Bishop, the research for which gave us deep insight into the cost structures of ecommerce distribution logistics as well as shopper preferences. So here goes:

Home delivery is costly: From our estimates, the "last-mile" cost of delivering to the shopper's home a typical grocery order is somewhere between $10 and $15. This is for a "typical" basket of approximately 50 items, valued at approximately $160. There are additional other costs as well, such as picking and packing. The amount the customer pays depends on the specific program, but I'm not aware of any program that charges more than $10. So this is a money-loser. In fact, it has been reported often that Amazon's overall shipping system is also a multi-billion dollar money loser, so this is not a surprise that Amazon wants to try and move away from the home-delivery model.

In contrast, with drive-through, the last mile cost is transferred to the customer. The retailer (Amazon) only needs to bring items in bulk (multiple orders) to the pickup point, which is what supply chains and distribution systems are optimized for. My estimate is that that would cost close to $1 for the same order (though picking and packing costs would still need to be added). This is a huge deal: the last mile is the most expensive, and drive-through transfers the last mile to the shopper.

Home delivery is inconvenient, particularly for groceries: Groceries are perishable, and often need to be kept in temperature-controlled conditions and safe from pests. Leaving a grocery order on the doorstep is typically not an option. With home delivery, this means the shopper needs to be home to receive the order (inconvenient), or the delivery arrives when the shopper is not at home and needs to be rescheduled (costly and inconvenient). With drive-through, the order is ready and waiting in climate-controlled conditions, and the shopper can pick up at their convenience. This is why my family has been using grocery drive-through for approximately 5 years now, through our local grocer Busch's.

Market exists: In our survey in the same white paper, we found that 65% of shoppers would be willing to pay $3 or more for drive-through pickup. Also, 65% or so would be willing to purchase from a drive-through service that had their order ready within 3 hours. This is from a nationwide survey of all US adults, suggesting that there is a huge market potential for such as service. Americans love their cars. Big urban centers notwithstanding, most spending power in America is in the suburbs. Drive-throughs already exist for many other services that we've all used: fast food, banks, pharmacies, etc. In Western Europe and East Asia, drive-through systems for groceries and other omnichannel/ecommerce systems are already in place.

Competition: Continuing on the theme above, similar systems are popping up in the US also. Among the major retailers, NordstromWalmart, Kroger, and Meijer are all testing drive-through pickup services on their own. Perhaps even more interestingly, many others are partnering with third-parties to set these things up. The most interesting appears to be Curbside, which claims select locations of Target and Best Buy among their retail partners.

Much has been made of brick-and-mortar retailers' ability to compete with Amazon using their store network. This has usually focused on ship-from-store capability, but with click-and-collect models (drive-through or walk-in pickup from stores), these retailers have the potential ability to satisfy customer orders very quickly and cheaply, much quicker and cheaper than Amazon's fast-increasing warehouse network would on its own. I'm sure Amazon is fully aware of this, and this is part of their response.

So what's next? First, let's remind ourselves that Amazon has not yet confirmed this. But even if it turns out to be a red herring right now, the reasoning above still stands and I still expect to be on the right side with my prediction in the next 20 months. But if it's true, here's what's going to happen.

There is going to be a rush by other retailers towards implementing curbside pickup systems. Some, such as Walmart, will expand their own networks. Others will partner with third-parties such as Curbside, because that provides an easy way to offer this capability without investing in fixed costs themselves. Perhaps the third-party delivery systems like Deliv and Instacart will also enter this space.

If I could, I'd invest a big chunk of money in Curbside right now.

Amazon drive-through

On April 13 of this year, I'd predicted that within 2 years Amazon would have drive-through channels. Well, here's a news story suggesting it might be happening soon:

Amazon is planning to open a drive-through grocery store in Silicon Valley, allowing customers to order items online and then collect them from a designated pick-up point at a pre-arranged time.
More as soon as more information is available. Fun!

Friday, July 24, 2015

Macy's, same day delivery, third parties, Amazon

The race to get products faster to shoppers continues, with Macy's announcing that it is partnering with Deliv to offer same-day delivery in many more locations. Couple of thoughts here. First, third-party delivery companies like Deliv, Instacart, Curbside, and UberFresh offer a relatively easy way for companies that are not yet big on ecommerce to engage with it (something we briefly reported earlier here). The physical operations of ecommerce (at least delivery, if not also picking and packing) get outsourced to a third-party; the retailer is able to effectively claim that they offer same-day delivery; and the costs are shared. To the best of my knowledge these operations still make large losses, but with third-parties the losses get transferred to the delivery companies. The stock market is much more patient with Deliv making losses while it scales up, than with Macy's making losses. Of course, the usual risks of outsourcing continue to hold here: losing internal capability, misaligned incentives, increasing costs, etc., and in a few years many of these companies will start in-housing their delivery services.

The second thought is that this race to faster delivery at higher costs is mystifying indeed. From the article above:
Even as Macy's rushes to extend fast delivery, many other traditional retailers are far more cautious. The costs of same-day delivery and ambivalence from many customers remain concerns, analysts say.
Nordstrom has offered same-day delivery for $15 since 2011, but the service is still only available in three markets:Seattle and Bellevue in Washington state, and La Jolla in California.
A January survey of 5,118 online shoppers by UPS and Comscore found that 85 percent of people surveyed were willing to wait five days or more for their delivery.
The thing that's so perplexing about this last mile and same day is that the consumers overwhelmingly prefer free shipping over speed," said Satish Jindel, a logistics consultant and president of SJ Consulting Group.
That could change, said David Bell, a professor of marketing at the University of Pennsylvania's Wharton School, and if consumers became accustomed to same-day service, the result would be an expensive "race to the bottom for retailers" who would not be able to compete with Amazon on the delivery cost.
This is also something we've found, from our 2015 survey for example.

I'll close this post with the following quote from the reporting on Amazon's latest financial results, from WSJ.
Mr. Olsavsky [Amazon CFO, in a call to reporters] also touted Amazon’s use of robotics in its warehouses as a way to lower costs. “We’re using software and algorithms to make decisions rather than people, which we think is more efficient and scales better,” he said. 
I could write a long post unpacking this statement and also commenting on how it relates to our research and educational mission at UM. I probably will, later.

Friday, July 17, 2015

Amazon Prime Day

By now everyone has heard about Amazon's Prime Day, and in terms of numbers it certainly appears to be a success. There's another story about its impact, because the items offered were apparently not all that attractive and this led to a bunch of social media backlash.

Why did Amazon do this, and that too with very limited notice, and in the middle of July? Ostensibly the reason was to celebrate the 20th anniversary of its founding, but most certainly there was more thought to not just the day but also the product selection. Here's some speculation from me. First, their product selection suggests that this was in the spirit of a traditional retail "clearance"---get rid of slow movers to make space for their big buildup in their warehouses for the real sales season in November and December. Second, try and lock in more members into Prime early on, so that when November hits, more people treat Amazon as their default place for holiday shopping. Third, build a new sales peak at a somewhat slow time---the highly seasonal nature of Amazon's business is costly, and anything that can help smooth it out, even with more frequent peaks, can help.

Of course, we've all also heard that Walmart responded with its own online sales rollbacks, and at least some media publications are calling this a win for Walmart (see here and here). Walmart hasn't mentioned any numbers, so the evidence is not fully there yet. But I think Walmart certainly did benefit from this, because among all those disappointed customers who looked at Amazon and did not find a price cut for items they were looking for, a large chunk probably checked Walmart next.

Going forward, it would be interesting to see what happens next year. This could turn into a new shopping day, sort of like the Singles Day in China, with many retailers jumping on. Or, Amazon could decide to quietly let it fade. My bet is on the former, and I think it's a safe bet that Amazon will be more careful with its product selection next time.

Thursday, July 2, 2015

Tauber Institute for Global Operations

Generally this blog stays focused on ecommerce/omnichannel issues, but every now and then there are exceptions. Here's one of those. I am now one of the co-directors of the Tauber Institute for Global Operations. If you don't know about it, go check it out---it's a fantastic program that works closely with industry to train students as well as disseminate knowledge in the field of global operations, broadly defined (and of course that broad definition includes ecommerce). Partner companies this year include (in no particular order) Amazon, Microsoft, Ford, General Motors, Boeing, Cisco, ConAgra, Pepsi, Pfizer, Raytheon, BorgWarner and several more. If you have the slightest interest in engaging with the Tauber Institute in any way, email me!

Monday, June 29, 2015

Meijer expanding Curbside

We'd reported earlier on Meijer coming back online with a curbside pickup option in Grand Rapids. That must be going well, because apparently they're expanding it to Ann Arbor too. As a proponent of the click-and-collect model with curbside/drive-through pickup, this is not a surprise. I expect retailers to add this, including perhaps Amazon. In the meantime, it's worth mentioning that Busch's has had this service for several years now (and I'm a big user of it); also that Meijer is apparently adding only their grocery section to this service, not their entire catalog.

Monday, June 22, 2015

Instacart converts some temps to paid employees

Instacart has been one of the faster-growing companies in the crowdsourcing or 1099 economy, other members of which include Uber and TaskRabbit. Personally, I've been skeptical of the long-term sustainability of companies relying on temps acting as contractors, but that's an opinion that I don't have any research to back up with.

Anyway, Slate reports today that Instacart is converting a few hundred of its contractors in Boston and Chicago into part-time employees. Instacart does grocery shopping; as we've found in our study, the biggest cost driver in in-store grocery ecommerce models is the labor cost of picking items off the shelves. The Slate article also mentions this:
“As Instacart grows, and we continue to learn what makes the best experience for our customers, we are constantly looking for ways to improve our service,” Apoorva Mehta, Instacart’s founder and CEO, said in a statement. “When you look at the difficulty of shopping, picking and delivering items such as fruit or eggs that need to be carefully selected, you realize that grocery shopping can be complicated. For this reason, we want to provide supervision and training, which can only be done with employees.”
So there's that: making them employees can help improve the efficiency of the pick process. Another issue here is efficiency over multiple jobs. Suppose Instacart gets 5 orders, all at roughly the same time, that need to be picked at the same store. In a pure contractor-based system like Uber, it would offer each job up to the contractors, and different contractors would pick different jobs. With employees, Instacart could assign all 5 to the same employee, who would shop all 5 orders simultaneously---which is much faster and more efficient than having 5 contractors shop 1 order each. Having employees gives Instacart the ability to do this, and significantly reduce the single biggest cost driver in ecommerce grocery models. This "combining orders" logic of course does not apply to taxi services like Uber---but it does apply partly to the delivery of groceries, which as of now Instacart is leaving in the hands of contractors.