EX­PAND­ING ITS REACH

Ama­zon will also get a vast net­work of phys­i­cal shops

Los Angeles Times - - FRONT PAGE - By David Pier­son and Makeda Easter

Ama­zon is also get­ting a vast net­work of ware­houses and phys­i­cal stores. Chief Ex­ec­u­tive Jeff Be­zos says it’s adding a lo­gis­tics net­work be­cause it sim­ply can’t have enough ca­pac­ity.

Ama­zon can ship books, fur­ni­ture and cloth­ing across the Pa­cific Ocean in what feels like a blink of an eye. But when it comes to de­liv­er­ing fresh gro­ceries to your doorstep, the e-com­merce gi­ant’s lo­gis­ti­cal prow­ess wilts like a bag of salad left out in the sun.

That’s be­cause the long jour­ney of, say, an av­o­cado from Mex­ico gets pro­gres­sively harder the closer it gets to the fi­nal con­sumer. It’s more costly and time con­sum­ing to de­liver in­di­vid­ual pieces of fruit to many cus­tomers. The hur­dle, which has long vexed on­line re­tail­ers and is one of the chief rea­sons the gro­cery busi­ness is no­to­ri­ous for its low profit mar­gins, is known in the lo­gis­tics in­dus­try as the “last mile.”

By ac­quir­ing Whole Foods, Ama­zon is buy­ing not just an es­tab­lished, up­scale su­per­mar­ket brand, but also a vast dis­tri­bu­tion net­work of ware­houses and more than 460 stores world­wide — re­plete with back rooms and cold stor­age — in some of the most af­flu­ent ZIP codes in Amer­ica. That’s a sig­nif­i­cant boost in num­bers for the Seat­tle com­pany, which cur­rently op­er­ates fewer than 100 dis­tri­bu­tion cen­ters in the U.S., a hand­ful of them in the In­land Em­pire.

More hubs means quicker and fresher de­liv­ery, which will bol­ster Ama­zon’s ex­ist­ing gro­cery de­liv­ery ser­vice, Ama­zonFresh. The ser­vice, which is of­fered to the com­pany’s sub­scrip­tion Prime mem­bers for a monthly fee of $14.99, is avail­able only in about 20 U.S. cities. While the bid for Whole Foods may not bridge Ama­zon’s “last mile,” it cer­tainly brings it closer, ex­perts say.

In the U.S. “this adds 440 re­frig­er­ated ware­houses within 10 miles of prob­a­bly 80% of the pop­ula-

tion,” said Michael Pachter, an an­a­lyst for Wed­bush Se­cu­ri­ties. “More im­por­tantly, it puts re­frig­er­ated dis­tri­bu­tion within 10 miles of prob­a­bly 95% of Prime mem­bers. That means we can rely upon Whole Foods’ con­sis­tently high qual­ity meat and pro­duce, and can rely upon prompt de­liv­ery from the store as a dis­tri­bu­tion point.”

The mar­riage of the two com­pa­nies means Ama­zon can ver­ti­cally in­te­grate a busi­ness it has dab­bled in since 2007, when it first of­fered gro­cery de­liv­ery in Mercer Is­land, Wash. That’s a blow to ri­vals like Tar­get and Wal-Mart, which boasted brick-and-mor­tar stores as the one thing they had over Ama­zon. The phys­i­cal stores al­low peo­ple to try on cloth­ing be­fore buy­ing, still one of the big­gest hangups about on­line fash­ion, and they al­low shop­pers to choose the gro­ceries they want, lest there be a bruised ap­ple in their or­der.

Those big-box com­peti­tors were al­ready dis­ad­van­taged by Ama­zon’s cap­tive au­di­ence, an es­ti­mated 80 mil­lion Prime mem­bers, who could the­o­ret­i­cally or­der gro­ceries on­line or task Alexa, Ama­zon’s vir­tual as­sis­tant, to pre­pare a de­liv­ery or ar­range for a pick-up at the near­est Whole Foods.

The deal could also make com­pet­ing de­liv­ery ser­vices such as In­stacart — which Whole Foods in­vested in last year — su­perf lu­ous. Why pay for food de­liv­ery else­where if Ama­zon is cheaper and eas­ier?

It’s a nat­u­ral pro­gres­sion for Ama­zon, said Bren­dan Witcher, a re­tail an­a­lyst at For­rester. The e-com­merce be­he­moth first dis­rupted re­tail by of­fer­ing lower prices. Now it’s fo­cus­ing on “lo­gis­tics and ful­fill­ment and the abil­ity to get what you want when you want it,” Witcher said.

To that end, Ama­zon is en­croach­ing on ter­ri­tory long dom­i­nated by the likes of UPS, FedEx and the U.S. Postal Ser­vice. In the last two years, the tech gi­ant has leased 20 Boe­ing 767 air cargo jets from At­las Air World­wide Hold­ings, won ship­ping licenses that al­lows it to pay for con­tain­ers at whole­sale rates and rent them out for more ex­pen­sive re­tail rates, and added thou­sands of long haul trucks em­bla­zoned with the Ama­zon logo.

Jeff Be­zos, Ama­zon’s founder and chief ex­ec­u­tive, said his com­pany wasn’t look­ing to re­place legacy sup­ply chain com­pa­nies. In­stead, Ama­zon is adding its own lo­gis­tics net­work be­cause it sim­ply can’t have enough — not sur­pris­ing con­sid­er­ing the com­pany was re­spon­si­ble for 43% of all on­line sales in the U.S. last year.

“We will take all the ca­pac­ity that the U.S. Postal Ser­vice can give us and that UPS can give us and we still need to sup­ple­ment it. So we’re not cut­ting back. We’re grow­ing our busi­ness with UPS. We’re grow­ing our busi­ness with the U.S. Postal Ser­vice,” Be­zos said at Re­code’s 2016 Code Con­fer­ence in Ran­cho Pa­los Verdes, ac­cord­ing to Bloomberg.

An­a­lysts say there’s no rea­son to think Ama­zon’s deal with Whole Foods will be limited to gro­ceries. The com­pany could one day use Whole Foods lo­ca­tions as a place for cus­tomers to dropoff e-com­merce re­turns and make ex­changes for items bought on­line. The stores could also serve as a hub to pick up non-gro­cery items, a move that would pare de­liv­ery costs and pro­vide an al­ter­na­tive for shop­pers who don’t want their pack­ages ly­ing unat­tended on their porch.

“Ul­ti­mately, we see the deal al­low­ing Ama­zon to take fur­ther share of its cus­tomer’s wal­let and see a large op­por­tu­nity to lever­age many of its tech­nolo­gies to grow and op­ti­mize the Whole Foods busi­ness. We are also highly con­fi­dent that Ama­zon will lever­age the new store foot­print for much more than just sell­ing gro­ceries,” said Daniel Salmon, an an­a­lyst for BMO Cap­i­tal Mar­kets.

The $13.7-bil­lion deal for the high-end su­per­mar­ket chain could pay off quickly, but it still runs counter to trends in the tech world, where fixed as­sets like real es­tate and heavy equip­ment are shunned, said Amit Sharma, a for­mer sup­ply chain ex­ec­u­tive at Wal­mart and now chief ex­ec­u­tive of Nar­var, a re­tail app.

“Look at com­pa­nies in the shar­ing econ­omy. You don’t need to own as­sets long term,” Sharma said.

But other ex­perts see ad­van­tages to buy­ing Whole Foods be­yond just its ar­ray of gourmet and or­ganic food, and ac­cess to the af­flu­ent cus­tomers who fa­vor it.

Gro­ceries can serve as a lure — one that con­sumers can’t live with­out — which could re­sult in more sales of Kin­dle e-books and other high-mar­gin goods that could find their way onto Whole Foods’ shelves.

“You don’t shop for ap­pli­ances mul­ti­ple times a week. You don’t shop for any durable good mul­ti­ple times a week. But you need to put fresh food on the ta­ble,” said Lloyd Greif, a Los Angeles in­vest­ment banker and pres­i­dent and chief ex­ec­u­tive of Greif & Co. “That’s what drives cus­tomer traf­fic. The more touch points you have with a con­sumer, the more you’ll be able to sell them ev­ery­thing else. From Ama­zon’s stand­point, they don’t have to fo­cus so much on mak­ing money on gro­ceries if they make money ev­ery­where else.”

TED S. WAR­REN As­so­ci­ated Press

Ted S. War­ren As­so­ci­ated Press

AMA­ZON CUR­RENTLY op­er­ates fewer than 100 dis­tri­bu­tion cen­ters in the U.S. Above, pack­ages in a Boe­ing hangar in Seat­tle.

As­so­ci­ated Press

AMA­ZON BE­GAN test­ing drone de­liv­ery in De­cem­ber, with the first ship­ment go­ing to a U.K. cus­tomer. At top, boxes are sorted at a Phoenix fa­cil­ity in 2013.

Ross D. Franklin As­so­ci­ated Press

Robert Gau­thier Los Angeles Times

AMA­ZON’S DEAL could also make com­pet­ing de­liv­ery ser­vices such as In­stacart — which Whole Foods in­vested in last year — su­per­flu­ous. Above, In­stacart shop­per Kara Pete checks a food or­der on her phone.

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