Nick Shanagher considers the threat to wholesale from Amazon
Amazon scares Walmart and Tesco, but may be off the radar for most wholesalers. But a flick through The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone might make them rethink. Stone’s book is a must-read for anyone involved in distribution.
Despite being famously frugal with company funds, Amazon’s attitude to burning up money buying companies that failed during the dot-com boom of the late 1990s will dazzle you.
Even more impressive is Bezos’ pursuit of the best brains from Walmart. He started his career in Desco, a New York hedge fund run by David E Shaw, whose mastery of maths and computing made him a billion dollars exploiting inefficiencies in the way Wall Street worked. The fund had a policy of hiring the best brains and Bezos was a prodigy.
He left this well-paid job to set up an internet business that had a 70% chance of failing and managed to get his parents to invest heavily in his idea.
Impressing smart people and winning cheap capital helped the fixated Bezos to expand Amazon quickly and he realised that scale was the only thing that mattered. He was terrified that Walmart would see what he was doing and price him out of business.
Distribution problems nearly killed the business in early Christmas seasons and Bezos invested heavily betting that established bricks-and-mortar businesses would not be nimble enough to respond. He recruited Jimmy Wright, a former Walmart vice president, and told him to build a system that could handle anything.
Wright spent $300m building warehouses with ‘blinking lights on shelves to guide human workers to the right products and conveyor belts that ran into and out of massive machines, called Crisplants, that took products from the conveyor belts and sorted them into customer orders’.
These warehouses were to be called ‘distribution centres’, Wright decreed.
In the period after 2000, Bezos met Lee Scott, who ran Walmart, and Jim Sinegal, who founded Costco. Scott explained how Walmart invested in everyday low pricing rather than advertising.
Sinegal showed Bezos how membership clubs worked. “The membership is a one-time pain but it’s reinforced every time customers walk in and see 47″ televisions that are $200 less than any place else,” he said.
Bezos changed how Amazon worked but by 2002, he realised its distribution was not working. He hired Jeff Wilke to sort it out. Wright was the best in the world at building large-scale retail distribution, which is great if you have to send out 5,000 rolls of toilet paper. But it could not work for small orders.
Problems with distribution
Wilke hired programmers to write algorithms that would tell his teams where and when to stock particular products and how to most-efficiently combine various items in a single box. He ‘realised Amazon had a unique problem in its distribution arm: it was extremely difficult for the company to plan ahead from one shipment to the next. It didn’t store or ship a predictable number or type of orders. A customer might order one book, a DVD, some tools – perhaps gift-wrapped, perhaps not – and that exact combination might never be repeated again.’ So he renamed the warehouses ‘fulfilment centres’.
After a year, Wilke and Bezos asked a fundamental question: was distribution a commodity or a core competence? If it is a commodity, why invest in it? And when we grow, do we do it on our own or do we outsource it?
Wilke’s success in developing tightly controlled distribution ‘allowed the company to make promises to customers on when they could expect purchases to arrive’ that would offer ‘Amazon innumerable advantages in the years ahead’.
By 2007, Bezos was telling colleagues: “To be a $200bn company, we’ve got to learn to how to sell clothes and food.” Will this happen? Brad Stone, who has covered Amazon for US news outlets for most of its 20 years, says it will.
So should wholesalers be afraid? Perhaps. Reading this book will help you make up your mind. There is a lot of fantastic detail relevant to how you do business today…and how you may have to do business tomorrow.