Retail Executive

JAN-FEB 2018

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The Fulfillment Center Next Door Without leveraging stores as fulfillment centers, retailers will lose to Amazon every time. N I C H O L A S H O D S O N Partner with Strategy&, PwC A L E X A N D R A H A L L A S B U T T O N Director at Strategy&, PwC Uber/Lyft model. Amazon itself is leading the way and is already making extensive use of crowd-sourced Ama- zon Flex drivers in around 50 U.S. markets. But Amazon's scale is starting to create its own deliv- ery density. In a typical large metro area — Dallas-Fort Worth for example — there are already around 20 to 24 Amazon deliveries per square mile per day 3 . At that sort of density, crowd-sourced delivery drivers are more than competitive with the rates offered by large package delivery companies. Now imagine that one of those DFW neighborhoods is within say 10 to 20 miles of an Amazon FC. The in- habitants get up in the morning, brush their teeth, and start shopping. By around lunchtime, a good backlog of orders has built up on Amazon's servers. Some of those items will be for obscure "long tail" items probably sold and shipped by third-party sellers on Amazon's Market Place. But a good portion of these orders will be for "A" SKUs – the relatively small proportion of the assort- t the same time, Amazon has built an ex- tensive "same-day" business. Prime Now is focused on major metros and allows con- sumers to buy from a "limited" selection and receive their order in a couple of hours. As consum- ers have come to demand this convenience, other retail- ers have been forced to compete with their own same- day offerings – often outsourced to turnkey providers like Deliv and Shipt. For retailers, these solutions are relatively simple to implement, but are costly (around $15 to $20 per order, at say, 10 miles 2 ), and our research with consumers indicates that the market for such "pre- mium express" services is relatively small unless the re- tailer is willing to absorb most/all of the cost. However, we believe most retailers are missing a much bigger threat, one which we call "The Fulfillment Center Next Door." On current course, by about 2020, about 65 percent of the U.S. population will live within 50 miles of a full-scale Amazon FC (not just a Prime Now hub), 40 percent will live within 25 miles, and 15 percent within 10 miles. This proximity matters because it puts these consumers within range of low-cost, same-day delivery. The traditional delivery networks operated by UPS, Fe- dex, USPS, and the like are designed to efficiently move packages over long distances. Sophisticated networks aggregate and sort packages to increase package deliv- ery density and reduce cost. But over the shorter ship- ping distances the market is demanding, a new model of delivery service is emerging based on the crowd-sourced A Amazon is big. Really big. By the end of 2017, Amazon will have picked, packed, and shipped approximately 5 billion items to U.S. consumers 1 . That's north of 150 items every second. To support that volume, Amazon has built out an awe-inspiring network of fulfillment centers (FCs), sortation centers, cross-dock facilities — not to mention a nascent airline and growing fleet of vehicles — all designed to speed the efficient flow of merchandise around their system. On current course, by about 2020, about 65% of the U.S. population will live within 50 miles of a full- scale Amazon FC (not just a Prime Now hub), 40% will live within 25 miles, and 15% within 10 miles. FULFILLMENT customer engagement By N. Hodson & A. Hallas Button THE FULFILLMENT CENTER NEXT DOOR RETAILEXECUTIVE.COM JANUARY/FEBRUARY 2018 36

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