Amazon’s business model is to “serve consumers through [its] retail websites and focus on selection, price, and convenience.” (Amazon’s 2014 10-K). Amazon solely interacts with customers through its website so it can avoid store occupancy cost. Its websites list millions of unique products sold by Amazon or third-party sellers and very easy to navigate. Amazon is not merely an online store, it is a market place. It leverages third-party sellers in order to create the indirect network effects (more sellers => more supply => lower price). Wide selection, low price, and convenience make Amazon the default online shop for most people. Having top-of-mind awareness gives Amazon necessary volume to execute its operating model efficiently, resulting in low cost. Amazon’s top-of-mind awareness also keeps online competitors from gaining enough volume to operate efficiently.
Amazon’s operating model is all about gaining high enough volume per fulfillment center and automating processes. The introduction of Prime membership reduces hurdle to purchase resulting in more purchases per customer and generate even more volume for Amazon. High local volume justifies investment in fulfillment center in each local area. Putting warehouses closer customers allow for same-day delivery in many areas, thus reinforcing its “convenience” proposition. Its system is specifically designed to ship small orders to consumers. Amazon already has more than 90 warehouses across the country. Meanwhile, its biggest competitor Walmart is spending $1 billion a year to bolster its e-commerce infrastructure but still only has 5 warehouses.
Amazon centralizes inventory management and order fulfillment at its warehouses. Thanks to huge volume, it can invest to automate processes at its warehouse and reduce labor costs. Walmart’s business activities are spread over thousands of stores so each store doesn’t have as high volume as a giant warehouse and therefore can’t be automated. So, order fulfillment activity at Walmart store network can’t be as efficient as that at Amazon’s warehouse network. Amazon invests about $100 million in a fulfillment center. In Amazon warehouses, machines help employees to package orders as quickly as possible. Labeling of each package is done automatically. In the old days, employees walked around the center to collect items for each order and Amazon used radio frequency technology to help employees locate items quickly. Amazon built proprietary algorithm to organize items so that items that were often purchased together were put near to each other in the shelves. Today, robots walk around to collect items and employees just need to stand at one place to put items collected by robots into boxes. Automated processes allow for quick order fulfillment with low defect rate to satisfy its promises of bringing convenience o customers. In this case, since capital cost and depreciation cost of the system is lower than employees cost savings, it is justifiable for Amazon to invest in the automation of the fulfillment center, which eventually results in low cost for Amazon and low price for customers.
It would be incomplete to not mention the last mile delivery logistics that Amazon is trying to develop in order to fulfill the promises to its prime customers. Amazon has largely been dependent on traditional logistics providers like Postal Services, UPS and Fedex to deliver its packages. Recently, there are many on-demand delivery startups like Postmates and Instacart that can poke customers away from Amazon. As Amazon does not want to peg its growth to others’ delivery capabilities, give up the cost control, and lose customers to emerging startups, Amazon is quietly building its own fleet of trucks to deliver same day grocery service and to take the pressure off the delivery providers during busy season.
The company goes a step further by developing commercial drones to deliver packages. Amazon has named the new service Amazon Prime Air and said its drones are ready as soon as they get regulatory support.
The ecommerce landscape is definitely crowed and vast but no one can deny Amazon’s competitive moat thanks to its visionary and revolutionary business and operating model and its relentless obsession with delivering the best customer experiences.
Inside one of Amazon’s busiest days: https://www.youtube.com/watch?v=Z2Bs0nqVyqs
A Day in the Life of an Amazon Package: https://www.youtube.com/watch?v=8-DgmfMa5Zk
Meet the robots making Amazon even faster: https://www.youtube.com/watch?v=UtBa9yVZBJM
Amazon’s New High-Tech Distribution Center: https://www.youtube.com/watch?v=Y55HJE9RRg0
Amazon Ramps Up $13.9 Billion Warehouse Building Spree: http://www.bloomberg.com/news/articles/2013-08-20/amazon-ramps-up-13-9-billion-warehouse-building-spree
Amazon plans to employ 1,000 at new distribution center in Shakopee, seeks tax breaks: http://www.startribune.com/amazon-plans-to-employ-1-000-at-new-distribution-center-in-shakopee/300852681/
Amazon Is Still King of the Online Retail Jungle: http://www.reuters.com/article/2015/11/19/us-usa-holidayshopping-online-idUSKCN0T81JV20151119#XiiGISp6EZ2k1iiF.97
Amazon, in Threat to UPS, Tries Its Own Deliveries: http://www.wsj.com/articles/SB10001424052702304788404579521522792859890