Amazon and the Big Boxes

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Amazon’s Anguish

The “defining” pure-play ecommerce behemoth Amazon flourished over its first two decades, despite lacking storefronts and retail real estate. But that was then. The tailwinds that recently propelled Amazon through the pandemic have become headwinds with the cooling of ecommerce along with a distribution and fulfillment migraine that will not quit.

According to recent reports, Amazon’s online retail sales, which include store-based grocery delivery and pickup, dropped for the second straight quarter, falling 4.3 percent in Q2 to $50.9 billion. At the same time, the ecommerce giant’s operating expenses rose 11.9 percent to $117.9 billion, according to a company press release. Amazon made up for its ecommerce decline through fees from Prime customers and marketplace sellers which accounted for 57 percent of all units sold on Amazon in the quarter, the highest percentage ever. This was on top of their reporting a $3.8 billion net loss in the first quarter of Q1 of 2022, the majority coming from investments in more warehouses and staff.

Amazon and Kohl’s have been “distance dancing” for years, with Amazon leading. This began with nearly 90 Amazon pop-up-shops at Kohl’s, Amazon’s purchase of 1.7 million Kohl’s shares and Kohl’s decision to accept Amazon returns chain-wide.

To put Amazon’s distribution dilemma in focus, in 2021 Amazon’s shipping and fulfillment costs added up to $151.8 billion. Shipping, which includes sortation, delivery centers, and transportation costs amounted to $76.7 billion. According to Statista, since 2009 Amazon’s logistics cost, including both shipping and fulfillment, as a percentage of net sales have more than doubled, from 15.6 percent in 2009 to 32.3 percent in 2021. Ouch!

Putting On the Brakes

In recent years, Amazon has been overly aggressive in its attempt to fortify its infrastructure, investing $34 billion in 2020 alone, but it is now slowing that expansion dramatically. As was recently reported in USA Today, 18 additional Amazon warehouses in 12 states have been “paused.” This brings the total number of canceled, closed, delayed, or subleased Amazon warehouses to 40 this year. And while that may temporarily control the bleeding, it does little to address the underlying problem. Amazon has a huge logistics dilemma.

It is undeniable that even with ecommerce tapering a bit, it will continue to grow, and is expected to surpass $1 trillion in 2022, for the first time. That said, a 2021 Forrester report estimated that nearly three-fourths of retail sales in the U.S. will still occur in physical stores in 2024. The critical interplay between online and offline, along the customer’s path to purchase has been firmly established in the world of “new retail.” And while the store will be continuing to morph and evolve, it will remain essential in the customer experience equation.

Advantage Target

Despite the cost of maintaining physical retail real estate, profit margins in physical retailing continue to be superior to that of pure ecommerce, due to the exorbitant cost of moving products from the warehouse, distribution center, or store to our front door.

Amazon’s monster warehouses are strategically located to serve millions of households often hundreds of miles away. Meanwhile, the 4,700+ Walmart’s, 1,900+ Target stores, and the 800+ Costco’s where we shop in person, online, and/or both are located in our very neighborhoods.

Target, whose ecommerce accounts for 18 percent of sales, has been utilizing its 1,900+ stores as mini fulfillment warehouses since 2017. They service more than 95 percent of its online orders from store inventory, which has dramatically saved time and cut fulfillment costs. But in October 2020, during the height of pandemic lockdowns, with digital orders skyrocketing the company opened its first sortation center to evaluate a new way to operate creating more efficiency and further shaving fulfillment costs.

“Rather than team members managing packing and sorting packages in a store’s backroom, sortation centers take on the sorting process, saving our store teams time and space so they can fulfill more orders and reach guests faster at a lower delivery cost for us,” the company said in a blog post.

Target currently has six sortation centers across the country and has just announced plans to add three new centers, two in Chicago area and a new facility in Denver. According to executive vice president & COO John Mulligan Target’s existing six sortation centers handled “4.5 million packages in Q1, a number that’s expected to grow significantly throughout the year.”

Bulk orders are still taken from stores and arrive at sortation centers on pallets. They are then placed on conveyer belts where staffers oversee the delivery logistics. Packages going a short distance are routed overnight and delivered by drivers from Target-owned delivery service Shipt. Those going farther are delivered by a third-party carrier, such as the U.S. Postal Service.

Currently, the prototype Minneapolis sortation center handles orders and goods from all 43-metro area stores and has the capacity to deliver 50,000 packages a day. This is all part of Target’s “stores as hubs” thesis, which Amazon had better pay attention to.

This brings me to the subject that Robin Lewis has extensively covered an Amazon/Kohl’s mashup. As have I!

Amazon Needs Doors, Stores, and Floors

Amazon and Kohl’s have been “distance dancing” for years, with Amazon leading. This began with nearly 90 Amazon pop-up-shops at Kohl’s, which ended in March 2019. Then the Kohl’s chain granted Amazon the right to buy 1.7 million Kohl’s shares — about 1 percent of the outstanding shares in April 2019. That was shortly before the announcement of Kohl’s decision to accept Amazon returns chain-wide in July 2019.

As my Forbes.com colleague Steven Dennis recently reported, “Amazon’s future growth will be increasingly tied to brick-and-mortar retail.” And despite their recent closing all 68 of their U.S. and U.K. non-food Amazon Books and Amazon Four Star locations, they need a physical store presence for three compelling reasons. And both could be facilitated by a Kohl’s alliance.

Back-of-House Needs

Kohl’s would like to reduce its store footprints and has plans for up to 100 smaller, 35,000- square-foot stores, over the next four years. This amounts to about half of the chain’s 80,000- square-foot average unit size. For Amazon to be able to capture and reimagine 40,000-square-feet, neatly sprinkled across 1,100 Prime neighborhoods could solve several painful problems that have contributed to their red ink flow.

Satellite Micro-Distribution Centers

Cutting last-mile costs is essential for Amazon to lift profitability. Additionally, Amazon needs to better segment and localize last-mile distribution. It seems that many smaller, highly mechanized sortation and micro distribution centers located within dense Prime neighborhoods could be just the ticket to cut last-mile costs, while decreasing Amazons’ carbon footprint. Additionally, the move would enable more practical use of both autonomous vehicle and drone delivery.

Showrooms to Boost Fashion Apparel Sales

Complementing the back-of-the-house “pick and pull” centers would be the introduction of new showroom and sales centers to lift Amazon out of the basic blues. Where better than from 1,100 Kohl’s stores?

Amazon has now surpassed Walmart as the nation’s largest seller of clothing. However, the dominant factor for Amazon’s fashion success comes from their third-party sellers. Amazon has been unable to “crack the code” on the more fashionable, and profitable side of private label fashion, as Target’s “Tarjay” alter ego has. Only about nine percent of Amazon sales are private label, and basics at that. AmazonBasics to be more specific. For Amazon to build a private label treasure trove of the likes of Target, they need physical engagement touchpoints, doors, stores, and floors.

This is not lost on Amazon as it is their primary driver behind their AmazonStyle prototype store introduced in Glendale California in late Spring. However, to scale such a concept in a meaningful way would take many years and much money. Doing it at and with Kohl’s would streamline the process.

Heavy Lifting Needed

I recognize the machinations and complexities involved in both streamlining and merging Kohl’s products and their brands with that of Amazon’s private label fashion brands. I also recognize that fact that Amazon’s track record in store-based retail has been less than stellar. But both Kohl’s and Amazon are dealing with major pain points that will continue to hamper their growth and profitability.

I believe combining Amazon’s bankroll and their technology prowess with Kohl’s CEO Michelle Gass’s retail chops, has the makings of brand transformation on multiple fronts. As I’ve stated going back to January 2020, for Amazon to truly build the kind of traction they want and need in fashion, they need to get those products into stores and 1,100 Kohl’s locations would be an ideal place to begin.

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