Amazon Boxes

Let’s get straight to the point. In this article, my thesis is that we need to think about retail by turning it on its side in today’s economic environment. Many successful retail models have done this already and in my hypothesis, this paradigm forms the basis of Amazon’s relentless success.

First of all, one way to simplify and think about audiences is to observe that they are built around the premise of satisfying a common interest. Audiences will disperse unless they are diligently and relentlessly catered to or if their interests change.

A Captive Audience

In a practical business context, the ideal state is to try and achieve as close to a “captive audience” as possible. One example of such a captive context is via membership clubs especially the ones which require consumer payment to join. For brevity, I oversimplify to suggest that the profit comes from one of two ways. Either the membership fee provides the profit with all content/service benefits being passed to the members or, alternatively, the membership fee covers all audience costs and profit comes from providing access to membership as the audience. We see examples everywhere; AAA, AARP, Wine Clubs, Online Subscriptions, Warehouse Clubs and, Paypal come to mind.

Amazon Prime is an Audience

I see Amazon, especially Amazon Prime, through this paradigm; as an audience building construct. Amazon’s audience is built around the premise of ultimate shopping convenience. Condensing what has been already researched and written about extensively; consumers self select into becoming the Amazon “audience” due to the interest in buying most things they want/need any time they want; at their convenience and at ultra competitive prices. Friction in that promise has been diligently and consistently removed over the years. The more Amazon contributed to the central interest of that audience the more the audience grew and became even more entrenched within its membership.

The core structure of this model is not new.

Warehouse Clubs Memberships are Audiences

Warehouse clubs like Costco work with consumers on the basis of a for-fee membership. They ensure that the member sees value in having spent that money. The retail transactional part of Costco’s business model always generates huge value by optimizing bulk purchases of restricted SKUs with very low overhead. Said differently, the model is built on optimized working capital and low operating expenses in all cost contributing items except; it appears, for labor where we hear warehouse clubs pay pretty well. The appeasement by Costco of their audience is illustrated by merely comparing the Gross Profit Margin for Costco; it is half of Whole Foods. Most members feel that membership is “worth it” in the savings they get on their purchases and they also see additional value in high quality private label merchandise available only via their membership. This merchandise is available because suppliers crave access to that audience represented by Costco’s membership. The membership also gets access to partner deals from local contractors, travel companies etc again using economics similar to the ones obtained through audience monetization models. The membership constantly gets more for the money spent to ensure the fee is justified every year. The fee builds the audience, the experience that audience is provided is always worth continued participation. In fact Costco makes almost no money on sales and all profit comes from memberships. To make a fine point, one key part of the experience at Costco is the super lenient return policies which keep members in the fold by overcoming concerns about buyer’s remorse.

See the parallels to Amazon and especially Prime? The uniqueness here is that warehouse clubs don’t transact with non members versus anyone can use Amazon even if they are not a member. However, Amazon will do their damndest to try and convert non members into Prime. Ever heard of #primeday?

The Audience Paradigm Changes the Profit Drivers in the Retail Income Statement

The advertising community has always thought of audiences due to the relative focus of their work given to the top of the funnel. The audiences we talk about here are built around the interest at the bottom of the funnel. So Amazon Prime is an audience. #PrimeDay is an audience building earned media exercise, its principle is the same as a doorbuster; discount on certain items drive traffic which helps build not just the basket around that transaction but rather to drive more and deeper retrenchment into membership.

This audience is built on the value for money and convenience interest. It’s an audience because they paid to be part of that group in both cases, Costco and Amazon. We know since the dawn of trade that good value and convenience will get you repeat customers and increasing sales. The difference is that unless one sees the consumers as an audience to be given an increasingly valuable experience, one will try to make net profit from the transactions that go through as opposed to other audience monetization techniques.

The bottom of the funnel audience creates a very interesting impact on the income statement. As increasing transactional volume falls through, Amazon essentially monetizes all cost line items on the income statement. Take for example the Gross Profit line, it is secularly influenced by the working capital associated with cost of goods sold. Well with a carefully curated audience that is constantly growing and resilient; allowing paying marketplace sellers to cater to the long tail items needed by the members, the working capital flowing through their commercials is not all Amazon’s, thank you very much.

Here’s a stark difference between Amazon and all other retailers. Amazon monetizes its IT!! Information Technology!! AWS is its underlying technology platform and is by far the largest of its profit contributors, more than even its actual retail Ecommerce business. Technology and content is a big cost in an Ecommerce business but for Amazon it’s a profit center. Lets keep going down, the next cost is supply chain represented by warehouse space, transportation and shipping/fulfillment expenditures. Fulfillment By Amazon (FBA) offered to an incredibly vast array of sellers on its marketplace monetizes this supply chain and logistics cost line to drive it into the black as a profit center. Volume helps Amazon get the best per parcel shipping rate in the industry which it passes on to its marketplace sellers who find it hard to leave the platform supporting assortment and choice to it consumers further solidifying the audience. Marketing, payment/interchange everything is similarly monetized to drive value to the audience and to generate income statement value.

The score according to this model is; we value the audience so much that we won’t make any money on the transactions with them. We will earn their annual fee by making it worth their while to pay that fee. We will use the weight of that audience to drive value out of every cost line by executing on the cost items better than anyone. By being the best at those items we can make it open to others who need it and reap the consequent economic value. So, give Prime members ridiculously fast shipping (by the way which they most times don’t even need), give them free entertainment/video content, storage via drive, photos, deals. Delight! The Prime audience stays and grows.

Talking about Whole Foods, what happens when Amazon takes over?

The second biggest retailer in America is Costco. They sell many consumable grocery categories and cater to consumers represented by similar median household income. So from the top in an Amazon world, prices (and promotions) in Whole Foods will fall to be ultra competitive. There is too much gross profit disparity for it to be left alone. The AWS line of business will provide the profitability that will cover the reduction of prices in Whole Food categories with preference to Prime Members to further drive audienceship. All the savings end up shaving gross profit down to where the net line for the actual Whole Foods line of business is break even. The audience gets further locked in and more members join. With this lucrative, resilient and, growing audience representing an ever growing unit consuming population; brands and suppliers will divert funding to the Amazon version of the online-offline model via Whole Foods at the expense of everyone else who enjoys that spend as part of their economic model. Meanwhile the rest of retail is still showing up trying to make money at the gross line and focussed on “optimizing” operating expense to show growth on the net/EBITDA line hoping for some sort of a solution.

Below the Gross Profit line, Whole Foods provides a whole new set of monetizable costs to Amazon. IT, Warehouses, transportation, payment fees, consumer marketing all get a massive leg up through Amazon’s infrastructure at a fraction of the current Whole Foods cost making it possible to drive the costs down even more for Amazon/WFM shoppers, especially Prime Members.

With first time exposure to actual brick and mortar retail Amazon will now see new cost lines they did not contemplate till now. These are retail occupancy cost and retail labor cost which are unique to physical retail. How does Amazon monetize that?

Here’s how. Warehouse space comes only at a slow and measured 8-9% a year. Ecommerce and certainly Amazon is growing faster than that. Amazon must use the Whole Foods store based physical real estate which is roughly 1.8MM Sq Ft to augment their formidable supply chain (and logistics) operation to create better more efficient delivery to the consumers. For example, to drive further utilization of Amazon Pantry it would be trivial for them to send a pre picked Pantry box to Whole Foods stores. The staff there would “top up” the box with fresh items locally to then offer the consumer a choice. Customers can have a driver drop it off to the Prime Members location of choice or have the customer come pick it up using an Amazon Go style quick checkout. Click and Collect no longer need be offered only via the clunky Amazon Locker metaphor. Its offered through the ubiquitous drive through metaphor and each hand off can have shipped from warehouse and locally picked items combined for very high order completion rate, with super fast order availability and, at super optimized delivery cost. The audience now has even more options and even more items at better prices. Especially if you include marketplace sellers which will now include fresh and organic sellers that have become part of the Whole Foods ecosystem. Then there are the brands. CPG companies now get data rich, execution machine with a resilient audience that they can directly innovate and move units into. Game, set and I believe, match.

The four walls of the supply chain closest to the customer were being relentlessly deployed via warehouses owned or leased by the likes of Amazon. With this acquisition, the edge of the supply chain moves into the four walls of Whole Foods. This helps reduce losses in package theft and similar shrink, customer dis-satisfaction brought about by shipping fragmentation and friction at the last mile (through the package “tsunami”) and, returns become super easy. Just drop them off at the Whole Foods and go about your lives. No annoying waiting around for the UPS or Fedex truck.

The battlelines are drawn and we are taking sides

Amazon’s battle with Walmart is already on, I predict Costco gets attacked next through this acquisition. To be quickly followed by the health supplements and nutrition industry. I also predict that Amazon buys a distressed small format store chain next. Like maybe a small drugstore chain, a struggling small format shoe retailer or maybe a nutritional supplement chain.

Packyge is an open Ecommerce ship to store network. It is free for {r}etaliers to participate and we pay cash to consumers for shipping their packages through this network.

Our play is data and analytics. The phone is the new cookie in the mobile enabled real world. Retail and Ecommerce actors can participate for free and create symbiotic synapses in this network. Value is triggered by consumer choice in response to cash rewards or to alleviate last mile package friction. No one decides but the consumer, as it should be.

Symptoms and solutions for this problem are being demonstrated every day in closed ecosystems. Amazon has and is spending capital on developing and deploying lockers, on campus pick up points, on trucks, planes, drivers and now on a store chain. Walmart/ is doing the same with investment in installing the Latch solution in NYC, their investment on the store pick up platform, even associated shipping discounts on SKUs for pick ups in store.

We are asking businesses who have already spent capital on stores, on labor and, on logistics to join our open network platform for free. There is strength in numbers and we know Amazon and Walmart will be doing it no matter what. Our platform provides stores with foot traffic to further monetize their existing investments and to try and combat declining foot traffic, for free.

Packyge is taking the user’s side on behalf of physical retail. We are now signing up retail locations in Chicagoland to become pick up locations for pre-fixed small quantity (as low as 10 shoe box size packages) of package pickups, for free – now and forever. Reach out to us [email protected]

We will heading out from Chicago in concentric circles to be countrywide as we evolve our model and get firm numbers around unit economics.