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Hardtack

26 October 2016 By Robert Cyran

Amazon seems to be trying to deliver everything to everyone. The efforts of the internet-retailing giant to manufacture gadgets, produce and stream video, do its own shipping and even build bricks-and-mortar convenience stores may smack of hubris. But there’s a method to the ambition.

The nearly $400 billion company tries hard to cross-sell. Users of the Echo voice-controlled speaker can listen to Amazon’s new music service at a discounted rate, for example. Founder Jeff Bezos once said: “When we win a Golden Globe, it helps us sell more shoes, and it does that in a very direct way.”

Consider a more obvious feedback loop, between selling groceries and making delivery logistics more efficient. Amazon’s customers overall currently cover only about half of shipping costs. The company subsidized deliveries to the tune of some $5 billion in 2015, and the total cost of shipping as a proportion of sales has been rising.

Bezos runs Amazon’s retailing business with a thin operating margin – about 2.5 percent last year. For all the company’s scale, it still needs to be competitive, so the chief executive wouldn’t want to pass more costs to customers or slow down deliveries.

Instead, he is spending heavily on trucks, warehouses and even planes. Aside from giving him greater control, there’s an opportunity. Amazon’s $11.5 billion shipping outlay last year pales beside the possible market. UPS, for example, should have around $60 billion of revenue this year.

However, unlike UPS with its multitude of customers and huge network, Amazon can’t necessarily count on filling its trucks. Adding groceries to the goods on sale – for all the extra headaches, like the need to keep produce fresh – could change that. Customers usually shop for food and household items relatively frequently.

Americans also happen to spend about $800 billion every year on groceries, according to Cowen. Food has remained resistant to online shopping, but if anyone can make inroads it could be Bezos.

Amazon may struggle with some of its ventures. In logistics, for example, the likes of UPS and FedEx have not been standing still, and upstarts like Uber want a piece of the action, too. Yet feedback loops may mean it is sometimes easier for Amazon to crack multiple markets at once.

 

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