Amazon stumbles… or is it all part of the plan?

Slowing growth in the final quarter of 2013 was cause for investor angst last week, as Amazon’s share price initially dropped about 10% on revenue growth of “only” 20%. The fact that this growth rate was 10 times Walmart’s and at least a bit faster than the 18% overall growth rate for e-commerce didn’t make up for an underlying reality, which is that consumer appetite for everything Amazon may finally be close to satiated.

Was I right with last year’s prediction of an Amazon hiccup? Not so fast.

No such thing as a free lunch

Investor reaction to the deceleration in growth was quickly and significantly assuaged with Amazon’s announcement that it plans to raise the price of its famous “free” shipping deal, known as Prime. The New York Times quoted one Piper Jaffray analyst saying: “This is the first time we’ve ever seen Amazon flex its muscles in terms of pricing. It’s hugely significant.”

Yes it is, not only because Jeff Bezos might finally start returning some profits, but also because it means true cost-to-serve logistics is on the horizon.

One of the big topics we’ve discussed with SCM World members over the past two years is the challenge of free shipping. Both manufacturers’ and retailers’ legacy distribution networks are bulk orientated, with consumer price points reflecting this lower cost but with shelf rather than home-doorstep service levels.

Shipping charges deter the shopper, so many supply chain people are being asked to figure out a way to tackle free shipping while still accommodating the needs of traditional store-based retail. Add the threat of same-day delivery and many see an insoluble cost-to-serve problem.

Amazon, of course, knows such a service is not free. Perhaps more importantly, it probably also knows what consumers are willing to pay. E-commerce and omnichannel have driven a wave of innovation around distribution networks that includes various configurations of moving product from factory to home (and often back again). Much of this experimentation is happening with inadequate cost accounting systems and minimal analysis of consumers’ price elasticity.

My guess is that Amazon has both of these things well under control and that the game we’re entering now is less about crazy low margins and more about pricing along the demand curve.

Service differentiation is the end game

SCM World research on the topic points to a “move to the middle” in which consumer brands (both retail and manufacturing) are mixing e-commerce and bricks and mortar distribution network elements to enable the omnichannel experience. We also know that most strategists see a decisive preference among consumers for variety in service offering rather than just lowest possible price.

The real supply chain challenge of the digital demand era is to design and deliver a spectrum of profitable service offerings, not just cheaper delivery.

In fact, when we cut our CSCO survey data according to those respondents who believe in competitive advantage through service differentiation, we see a 2:1 preference for building direct-to-customer fulfilment capabilities. The big advantage leaders get from tackling this has much less to do with getting stuff to consumers faster than it does with getting it to them right.

Some consumers want their stuff hand delivered in 30 minutes; some want it left in a locker at the store; others want to see it in a classic shelf assortment. Most consumers want each of these formats at different times and for different items. What will they pay? So far no one really knows – except maybe Amazon.

Learn from the airlines

The “customer is king” mentality in supply chain has been oversimplified for too long, resulting in a race to the bottom in terms of margins that Amazon has spearheaded. Retail today is walking a path that airlines trod a generation ago. The story arc goes from an internally focused, capital spending era, through a self-destructive price cutting phase, ultimately to fine-grained customer service.

People may complain about baggage fees and the sense of inferiority that goes with coach class travel, but everyone has the option to pay for better service. It is saving the airlines from destruction now and it’s all based on understanding our individual demand curves.

I believe Amazon gets this.

If you have a view on where distribution networks are headed, please contribute to our live field survey on the topic.