Last month I made an online order for additional SoftTiles foam play mats. I ordered light gray to match those already in the room. But I received dark gray mats in error. I called customer service and explained the discrepancy. The rep quickly apologized and submitted an order for the correct color. That’s it. There was no request for me to return the wrong items shipped. There was no additional effort or cost on my part. I received the correct order and kept the incorrect one. This experience quickly reminded me of recent stories about Amazon taking this same approach (returnless refunds). Of course, returnless refunds is only one of many ways in which Amazon is taking e-commerce fulfillment and customer service to the next level.
Given my recent buying experience, I thought I would use this post to provide my perspective on the competitive dynamics in today’s e-commerce world and the important role of fulfillment services in this domain.
Growth Opportunities – Not Margin Expansion
The retail environment is undergoing a massive shift from stores to online that presents great opportunity for revenue growth. For example, e-commerce sales are growing at about 15 percent per year in the US. That represents an attractive opportunity to capture share of a growing market. Furthermore, these opportunities are occurring independent of broader macroeconomic growth.
Global GDP growth has decelerated in recent years, and the IMF is forecasting only 3 percent global GDP growth for 2019. At the same time (and possibly as a result), interest rates and investment yields are at historic lows. Investors are especially hungry for returns and e-commerce is one of the fastest growing market segments today. As a result, there is an excess of investment dollars chasing a limited number of business opportunities across the economy. E-Commerce is a clear draw for growth investors. At the same time, brick and mortar retail has its own set of overhead that must be covered and is a volume sensitive business.
Many traditional brick and mortar retailers are currently suffering from shrinking same store sales. This has lead to a record number of store closings – over 9,000 in 2019, according to USA Today. Many of these companies are going out of business and others are simply reducing their store footprint and shifting focus to their e-commerce business. But e-commerce requires a different set of capabilities – namely fulfillment capabilities. And not just any fulfillment capabilities will do in today’s market.
Amazon had (and has) massive amounts of investment capital to deploy. It intelligently deployed its capital toward growth measures that are providing the company with sustainable competitive advantages. Elon Musk may believe that “moats are lame”, but they are working pretty well for Amazon (if fulfillment capabilities fit the moat concept). Regardless, responsive fulfillment capabilities are a clear requirement to compete in today’s retail environment. So, Amazon is once again simply leading the way – one step ahead of the competition at investing in a capability that is essential to competition in the current and future market environment. Simply put, Amazon isn’t causing the competitive pressures – they’re simply operationalizing them at scale.
A Shift to Margin Expansion?
Massive investments in warehouse automation are enabling e-commerce companies to reduce their variable costs of fulfillment – and ultimately providing opportunity for increased profit margins. But these investments require high volumes and time to cover the fixed costs of investment. So growth (unit sales volumes) also assist in covering the fixed costs of these investments. As an example, Amazon partially offsets some of its investment costs with Fulfillment by Amazon (FBA). I have been told that large e-commerce providers in China are planning to utilize their fulfillment capabilities in a similar manner. However, in this case Amazon controls the costs and capabilities of its fulfillment services and is unlikely to provide services that would endanger the company’s competitive position.
Ultimately, I believe an industry-wide shift to greater profit margins will be driven by market consolidation (reduction in the number of retailers), a stabilization in the make up of retail between in-store and e-commerce channels, and a shift in the broader economy that increases credit risk and reduces investment capital available to retail companies. When will this happen? I don’t believe it will be anytime soon.
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