Content Guy's Note: The goal of "The Innovation Conversation" is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.

This week, we talk about Amazon’s new one-hour shipping promise … the infrastructure it has developed to support that promise … and the occasional symptoms of scale.

And now, the Conversation continues…


KC: So, I have a few Amazon-related questions for you this week. First, were you surprised by the announcement that they’re improving the default delivery guarantee for Prime members from two days to one day? I have to admit, I wondered if Amazon sort of had this one in its hip pocket for months, maybe years … and that it was waiting for the right moment to announce it. If I’m right about that, it makes me think that it has a bunch of other stuff that is ready to go, but that it is just waiting for the timing to be right.

Tom Furphy:
I wasn’t surprised by the announcement. Amazon has been investing in faster shipping speeds and lower costs since their founding. The service level that they promise externally is always one they feel they can hit with a high degree of consistency. Something a little slower than what they are capable of. They will look at internal metrics and to meet the service level as close to 100% of the time as they can. Once they get to the point where they can deliver on the promise at scale, they announce the promise. So they may not have been sitting on this, but it’s likely been coming for some time.

Amazon invests well into the future. Jeff Bezos encourages the team to think five to seven years out. With innovation starting that early, most projects are pretty well baked by the time they hit the public. That’s not to say that they’re all guaranteed to succeed and that customers will take to all of them. But most projects have been designed, built and iterated upon several times privately before they hit the public view. Amazon expects that most of their innovations will require further iterations once they are in the market and being used by customers. Many of their innovations are ripe for further development as soon as they hit the market and Amazon measures customer impact. They build internally, test, measure and iterate. Then they launch, measure and iterate externally. It’s pretty straightforward.

KC: One thing that grabbed my attention was the comment from RBC Capital Markets, saying that the ability to go to one-day delivery was because of “the vast delivery network (that) is the result of significant investments over the past four years, a period during which Amazon built out fulfillment centers across the country, nearly tripling its U.S. logistics infrastructure.” Which in my mind translates to this: “While the rest of you were criticizing Amazon for spending as much money as we were spending, we actually were creating a system that potentially offers a hard-to-compete-with differential advantage. We win.” Fair?

TF:
Fair statement, yes. Fair fight, not really.

KC: Well, someone once said that “if you find yourself in a fair fight, your tactics suck.” I don’t think anyone would ever say that about Jeff Bezos.

TF:
Exactly.

The number of billions of dollars that Amazon has invested in hundreds of millions of square feet in their fulfillment network is astounding. They have inventory locations in most every town in the US, or at least within a few-hour drive of every town in the US. This is a level of investment that no other company can make. So, when it comes to competing based on the ability of an ecommerce supply chain to be responsive to customer needs, nobody will be able to match now or likely even in the foreseeable future.

The best way for existing retailers to compete with Amazon’s fulfillment networks is to use their existing distribution network and, most importantly, their stores. Stores put a good amount of inventory in markets close to shoppers. Whether existing stores, newly formed “dark store” nodes or other local facilities, retailers need to figure out how to use these effectively to serve their customers’ ecommerce needs.

It shouldn’t be lost that these networks of stores are valuable assets in serving the totality of customer needs. Not only do they put inventory close to shoppers to serve their needs quickly, but they also enable retailers to share information and experiences with shoppers. This is an important differentiator to online only experiences.

KC: Finally, what are we to make of some of the criticisms that Amazon is getting lately, like not knowing enough about the products being sold on its site (which created both safety and counterfeiting issues) and not being attuned enough to its members’ privacy concerns? Are these examples of Amazon being so caught up in day to day business that it is missing the point on some of these issues? I’d be surprised if that were the case … but what am I not seeing?

TF:
I think these slips are the symptoms of scale. Amazon sends over $350 billion of products through its platform and warehouses. They do have authenticity, safety and legality standards that products are supposed to meet. And they do their best to put in controls and machine learning to police for non-compliant products. But they simply cannot catch everything.

It’s one thing to sell 100,000 SKUs through a store. It’s a completely different animal to sell tens of millions (or more) items through a platform business model. It’s impossible for humans to assess every single item. It requires systems, machine learning and AI to police this at scale.

I think it’s reasonable that Amazon has these growing pains. But I think it’s imperative that they build in controls to police for issues at scale. To maintain trust, their customers will require them to provide a good level of oversight and verification of the authenticity and efficacy the products they sell. Scale is not an excuse. I think Amazon agrees with this and is committed to building in better controls.

The Conversation will continue…