OPERATIONS

Report: Amazon will cement its position as major retail price setter

BY Marianne Wilson

New York — Amazon will cement its position as major retail price setter for years to come by exploiting its logistics opportunity, according to a new ResearchFarm report.

The report predicts that that Amazon will focus on logistics in the future and become a major 3PL provider by increasing the fulfillment center footprint, linking up the various international marketplaces and adding front-end capacity such as the locker roll-out. Once Amazon has a handle on delivery costs and has completed the transition towards making shipping a fixed cost by leveraging its FBA service for its marketplace sellers, the pureplay will reinforce its outsized influence on pricing levels going forward.

According to ResearchFarm, Amazon always invests first in its own operations and then, once the infrastructure has been established, it charges others rents for using the platform. The marketplace was the first manifestation of its business strategy in action, and it is still the main profit contributor and growing faster than Amazon itself. Other examples of providing infrastructure to 3P include the Kindle platform and Amazon publishing, the server business AWS and the advertising platform, Adzinia.

“Looking ahead, we believe the next stage of this process will be on the logistic side,” the ResearchFarm report stated. “Again Amazon will build the infrastructure up for its own purposes first. At the moment the opportunity clearly lies at the back end, in building of a lot more fulfillment centers and warehouses across the globe to be nearer to customers (which drives down delivery costs) and to be able to extend ranges even more, even though Amazon has to watch inventory costs, when doing so.”

Ramping up logistics will enable the company to offer more same day delivery and to link up the various fulfillment centers, even across borders. If the link up between fulfillment centers is efficient, this could lead to Amazon having to stock less inventory as a percentage of sales in total. As soon as the infrastructure is up and running, it will be opened up to 3P, through Amazon’s fulfillment service FBA. Indeed it is Amazon’s strategy to push as many of its 3P sellers into FBA as possible, so it can charge higher fees. We think that FBA will become a profit driver in its own right in future, as Amazon can bundle orders from both 3P and 1P and achieve much better load utilization factors — this will lead to huge synergies and cost savings by in effect subsidizing 1P shipping through 3P fees.

ResearchFarm believes that lockers will also play an integral part in the logistics strategy. The report notes that Amazon has installed the lockers for four reasons:

1. Convenience — so customers don’t have to wait at home for delivery, but can pick their orders up at a time and place convenient to them;

2. To cut costs — multiple deliveries can be bundled into one trip;

3. Security and loss prevention reasons; and

4. To be able to offer more targeted time slots, which is easier for Amazon to do itself, rather than having to rely on a logistics provider such as DHL or UPS.

“We believe that Amazon is basically all about logistics going forward because, to slightly exaggerate the point, in the past price was ‘cost of product (and tax, insurance, salaries and rents etc)’ + ‘margin’; whereas in future price will be the same ‘cost of product’ (- all store based costs) + ‘margin’ + ‘delivery cost,’” said Daniel Lucht, research director of ResearchFarm, London.

If Amazon manages to control delivery costs cost through its logistics operation by leveraging marketplace and FBA, the widening fulfillment center footprint and the locker roll out, then the company’s effect on pricing level overall, will become much greater than it is today, when the main threats are Amazon price matching and the showrooming app, advised ResearchFarm.

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News

Fairway goes public

BY CSA STAFF

Fairway, a popular New York metro area supermarket, announced in a regulatory filing that it is going public. The company said it expects its stock to price in the range of $10 to $12 per share as it looked to raise as much as $164 million.

Fairway operates 12 locations in the greater New York City metro area and in on track to open a store this summer in Manhattan’s Chelsea neighborhood and one in Nanuet, N.Y, in the fall.

Fairway said it plans to use the proceeds from the IPO to open new stores and for other general business purposes. The company had originally filed to go public in September 2012, but its plans were disrupted by Hurricane Sandy.

Fairway plans to list its stock on the Nasdaq under the symbol "FWM."

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FINANCE

IBM forecast: Jewelry sales to shine this year

BY Marianne Wilson

New York — Jewelry sales are expected to grow more than 11% in the second quarter and 9% overall this year, according to a new IBM Big Data-based forecast.

According to the analysis, improved consumer confidence, lower unemployment and enhanced stock dividends from fourth quarter 2012 have combined to leave people ready to start spending on luxury items again, like jewelry.

In addition, key retailers are buttressing the economic landscape and driving sales by leveraging Big Data analytics to better understand and respond to customers and trends. Sterling Jewelers, for example, which owns the popular Jared and Kay brands, overhauled its digital channels to better respond to changing consumer preferences. The move led to an increase in online sales of 49% this past holiday season, according to the IBM report.

In addition to the projected spike in jewelry sales, the latest forecast also predicts a boost to in-store consumer electronics sales, which are projected to grow 2.33% in the second quarter and 1.58% overall for 2013, after five years of decline. Children’s clothing is projected to increase 5.67% in the quarter.

Sterling commissioned IBM for research that included a customer segmentation analysis, voice of the customer surveys, and in-store observations. With deeper insights into customer needs and distinct shopping scenarios – as well as the capabilities required to support them online – they were able to extend the Kay and Jared in-store shopping experience online and into the mobile channel.

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