Tale of Two E-grocers: AmazonFresh and Why grocery delivery service is greener than driving to the store

In our Operations Strategy MBA class, Gad and I teach and discuss the operations and economics of Internet grocer pioneer Peapod.  Two interesting e-grocer articles appeared this week:

The first, written in Forbes by Tom Ryan, is about AmazonFresh, the grocery overnight delivery service founded by Amazon in 2007, but still only serving the greater Seattle area.  Why?  In class we show the difficulty of this business and I praise the operational focus of Amazon.  If Amazon is using this as a testbed for future expansion, it confirms our findings that this is a slow business where one must build density household by household.  It simply takes a long time to arrive at profitable density: even for Amazon, it’s taking more than 6 years.

In his article, Tom proposes a second raison d’etre of AmazonFresh:

AmazonFresh isn’t about “competing with a small market with razor-thin margins and a checkered history.” It’s all about helping Amazon.com attain the scale to support its ambition to build a national same-day delivery shipping model.

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Would you deliver packages for Wal-Mart?

Right now, same day delivery is one of the hottest topics in e-commerce with multiple firms experimenting with different ways of fulfilling on-line orders tout suite. See this Wired graphic-fest for a summary of what different firms are trying.

Then there is this.

Wal-Mart Stores Inc is considering a radical plan to have store customers deliver packages to online buyers, a new twist on speedier delivery services that the company hopes will enable it to better compete with Amazon.com Inc. …

“I see a path to where this is crowd-sourced,” Joel Anderson, chief executive of Walmart.com in the United States, said in a recent interview with Reuters.

Wal-Mart has millions of customers visiting its stores each week. Some of these shoppers could tell the retailer where they live and sign up to drop off packages for online customers who live on their route back home, Anderson explained.

Wal-Mart would offer a discount on the customers’ shopping bill, effectively covering the cost of their gas in return for the delivery of packages, he added.

(Wal-Mart may get customers to deliver packages to online buyers, Reuters, Mar 28)

The article describes this as being at the “brain-storming stage” and I must admit that I don’t know where that lands on Woody Allen’s notion-concept-idea spectrum. Indeed, it strikes me as being something of an elaborate April Fools’ joke.

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What’s it like to work in an Amazon fulfillment center?

If a major firm opened a new facility in an otherwise depressed area, that would be good news, right? An article in the Financial Times suggests that there may be some caveats on that conclusion in the modern economy (Amazon unpacked, Feb 8). The firm in question is Amazon and the location is Rugeley, Staffordshire, in the West Midlands region of England. As the article tells it, the town was once a booming coal mining center but has steadily been on the skids since the mine closed in 1990. Hence, there was much excitement when Amazon announced it was opening a fulfillment center in 2011. Amazon also brought modern management techniques to Rugeley with kaizen events and gemba walks.

How has all that played out for the workforce?

What did the people of Rugeley make of all this? For many, it has been a culture shock. “The feedback we’re getting is it’s like being in a slave camp,” said Brian Garner, the dapper chairman of the Lea Hall Miners Welfare Centre and Social Club, still a popular drinking spot. …

Others found the pressure intense. Several former workers said the handheld computers, which look like clunky scientific calculators with handles and big screens, gave them a real-time indication of whether they were running behind or ahead of their target and by how much. Managers could also send text messages to these devices to tell workers to speed up, they said. “People were constantly warned about talking to one another by the management, who were keen to eliminate any form of time-wasting,” one former worker added.

The former shop-floor manager and another worker described a strict “three strikes and release” discipline system – “release” being a euphemism for getting sacked. In the early days, people were “released” frequently and with little warning or explanation, workers said. A very large number were laid off after the first busy Christmas period, some of whom had assumed their jobs would be permanent. Chris Martin says his job lasted less than a week after he took a day off for blisters and returned to find the night shift he was on had been abruptly cancelled.

It is this job insecurity that has most disappointed Glenn Watson at the district council. “Our definition of a good employer is someone who takes on people and provides them with sustainable employment week in week out, not somebody who takes on workers one week and gets rid of them the next,” he said. The council had understood Amazon would use the first 12 months to gradually build up its own workforce, transferring agency staff on to its payroll, but by last autumn Watson thought there were still only about 200 Amazon employees, with the rest of the workers supplied by Randstad and two smaller agencies. One young man strolling out of the warehouse last September said he was still an agency worker, even though he had been there since the site opened.

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Redefining last-minute shopping on the web

How late can you delay Christmas shopping? If you are content to shop in physical stores, you can push things right to the bitter end. There is nothing but self-esteem keeping you from stopping at the Wal-Mart on the way to midnight mass.

Of course, if you like the selection and convenience of shopping on-line, things are a little tougher. Delivery takes time. Sure you can order a present right up till Christmas eve but there is no way it will be there for Christmas morning. On-line retailers, consequently, need to announce deadlines before which they can commit to getting you the goods before the big day.

If you stop for a moment, you will realize that this implies two things. First, whatever cutoff is announced is going to affect the demand the retailer sees. In particular, this is going to cause a spike in the last hour or so as procrastinators rush to get their shopping done. Second, hours are going to count, so if one retailer can stretch out the window for ordering — even a little bit — it will have a competitive advantage.

These observations are the central point in a Wall Street Journal article about GSI Commerce (Web Retailers Scrap for Last-Hour Sales, Dec 19). GSI is a division of eBay that provides fulfillment services for the likes of Aéropostale and Estée Lauder. They have set out to squeeze as much time as possible out of their operations so customers can order as late as possible. This year they are letting customers order as late as 11:00 PM Eastern time on December 22nd. It’s not exactly Christmas eve ordering, but it is eight hours later than Amazon.

So how have they done this?

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Toys R Us and the logistics of Christmas when you don’t have flying reindeer

If you sell toys, this is a big time of year. If you are the world’s largest toy store chain, this is a REALLY BIG time of the year. For Toys R Us, this is a critical time to sell and that put a serious burden on their supply chain. They need to both keep their store supplied and fill individual customer orders that come in from their website. And everything has to come together right on time so that there is the right thing under the Christmas tree.

Today’s Wall Street Journal has an interesting article about how Toys R Us is tackling the holidays and trying to stay competitive with Amazon (The New Logistics of Christmas, Dec 13). There is also a video showing their New Jersey fulfillment center in action. One of the interesting points in the article is that like Wal-Mart and Macy’s they are filling some orders directly from stores.

The world’s largest toy chain earlier this year began turning stores into online order-fulfillment centers where workers pluck toys from shelves and ship them to customers, part of an ambitious but complicated plan to use its inventory more efficiently and gain an edge over online-only competition. …

But the current systems need fine-tuning. If a store does too much packing and shipping it could disrupt in-store shoppers. If it doesn’t do enough, it can be more expensive than shipping from a distribution center where workers are doing it all day. “It can be three to five times more costly,” Mr. Sambar said.

Filling orders from stores also adds new layers of complexity. At Toys “R” Us, analysts have to determine whether it is ultimately more economical to ship from a company distribution center or a store, depending on how much inventory is in each and how fast it is moving.

For example, it might be more profitable to ship from a store farther away from a customer, if it has slower-selling inventory that might otherwise be marked down. …

For the stores, the biggest challenge is not knowing how many daily Internet orders they have to fill, said Troy Rice, executive vice president of stores at Toys “R” Us. Still, the stores managers like the program, because “it helps meet their overall sales objective,” he said.

Mr. Storch said the undertaking will ultimately pay off because it will increase the amount of inventory the company can offer online, and increase its overall profit.

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What’s the biggest thing Amazon will ship for free?

A brief follow up to Tuesday’s post on Amazon’s Add-on Items. Recall that was the program that keeps Amazon’s Prime customers from ordering pesky small items without compiling them into bigger orders. If Amazon is willing to limit what they will do at the low end, are they also limiting what one can do at the high end? Is there something so big and so bulky that they won’t ship it for free? According to MarketWatch, apparently the answer is “no” (The elephant in Amazon’s mail room, Nov 28).

I give you the Cannon Safe CO54 Commander Series Premium 90 Minute Fire Safe in Gloss Champagne.

 

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Shipping web orders from stores at Wal-Mart

It is shaping up to be an interesting holiday season in retailing. It is not even Halloween and retailers are starting to roll out various programs to attract customers. Toys R Us is allowing parents to reserve toys and now Wal-Mart is testing same-day delivery for web orders with fulfillment being done from its many stores (Wal-Mart Delivery Service Says to Amazon: ‘Bring It’, Wall Street Journal, Oct 9).

Called Wal-Mart To Go, the service costs $10 regardless of the size of the order. The products will be shipped from the company’s stores, not from a warehouse or distribution center. Wal-Mart began testing the same-day service last week in Philadelphia and northern Virginia.

It added Minneapolis on Tuesday and will add San Jose and San Francisco later this month. The trial will last through the holidays. …

Wal-Mart is betting that its network of thousands of stores, combined with an improved online presence and strong financials, can help it compete head to head with Amazon, which has increasingly stressed fast, free or low-cost deliveries. Amazon launched same-day shipping in 10 cities in 2009.

But shipping from stores, rather than from warehouses as Amazon does, is expensive, analysts said.

“It can be three to four times the cost for the retailer to pick items and pack them from a store versus having a really efficient, automated process back in a distribution center,” said Al Sambar, a retail strategist at consulting firm Kurt Salmon.

So is this a good idea or just a crazy Hail Mary to grab some attention as we head into the holidays?

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Local Food Online Grocer Relay Foods is Expanding

Online retail is exploding with Amazon leading the charge in the long tail, items consumers buy irregularly.  Online shopping and delivery of fast movers like groceries, however, is available to few areas in the US: FreshDirect in NYC and Peapod in Chicago and some east coast cities are the big exception.

An Operations Audit gives the explanation: the costs of covering the last mile are strongly influenced by delivery density which makes large sprawl areas prohibitively costly to serve (as dotcom busts like Webvan quickly learned).   In our operations strategy class, we study Peapod by linking its financial performance to its operational structure and execution.  Such analysis highlights the importance of operational metrics such as stops per hour and pick&pack per hour and revenue metrics such as basket size ($ per order).  Students always suggest to replace the expensive delivery process by a pick-up model.  For companies with a large investment in delivery assets and processes such as FreshDirect and Peapod, however, embracing pickup (which Peapod is experimenting with) then necessitates a hybrid model.  In contrast, pure-play pick-up models such as the French ChronoDrive never invested in delivery assets.

This brings us to Relay Foods which seems to differentiate itself on 3 dimensions:

1. Emphasize local suppliers, and hence satisfy the “local food movement”.
2. Local supply allows daily deliveries which minimizes inventory risk.
3. Focus on pickup approach. (They also offer home delivery at a premium of $10/order.)

Relay foods is based in Charlottesville, Virginia, and also serves Richmond.  It can show nice growth trajectories (see video below) in those two markets and earlier this month announced it raised $1.2 million to expand in to the greater Washington, Baltimore, and Philadelphia areas.

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Revenue management and dust pans — Yes, I said DUST PANS!

Check out this graphic from a Wall Street Journal blog (Real-time Price Changes: The Story of a Dust Pan, Sep 5):

That is the price of a dustpan (specifically, Rubbermaid’s Duster-Dustpan set) on Amazon from 5:10 pm on Aug. 24th and 8:50 pm on Aug. 25. Why does it move so much? Software! A different Journal article reports that sellers on Amazon are using pricing software to relentlessly tweak their price as they jockey to be the lowest price on the web (Coming Soon: Toilet Paper Priced Like Airline Tickets, Sep 5). Here is the eye candy that goes with that article:

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The latest in the last mile

One of the challenges in e-commerce has always been the last mile – that last bit of transportation required to get those new shoes or electronic gadget to the customer. Expensive packages need to be signed for and, indeed, in some neighborhoods it is best not to leave any box on the front stoop. Those are all inconveniences for the customer. From the firm’s perspective, the last mile is also where the costs get higher. The marginal cost of cramming one more box into a semi to get from a fulfillment center to a metro area is next to nothing but the marginal cost of one more stop on a delivery route  in that metro area is not.

That’s why delivery lockers make for an appealing idea. Amazon has gotten some press for developing a network of unattended delivery locations. Here is how The Economist describes it (Delivering the goods, Aug 25).

Customers and sellers should welcome the growth of a new way to ensure that goods are delivered quickly and safely. Parcels are increasingly shipped not to home addresses but to local businesses, where they are held for pick-up. This summer Amazon, an American online-retail giant, is expanding a network of delivery lockers in local shops in some of America’s biggest cities as well as in London. A locker pops open when a customer enters an access code received by e-mail or text message. Other companies are building even bigger locker networks, especially in Europe.

Some shoppers are willing to pay to avoid home deliveries. ByBox, a British firm, charges shoppers about £2 ($3.15) to retrieve a parcel from one of its 1,350 locations around the country. Other locker networks are free. Delivery firms can save lots of money by sending a batch of parcels to a single place, where delivery is guaranteed, so they are naturally keen to provide the service. Nine out of ten Germans live or work within about ten minutes of free lockers operated by Deutsche Post DHL. The French and Turkish post offices also provide free locker services.

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