The Jason & Scot Show - E-Commerce And Retail News

Join hosts Jason “Retailgeek” Goldberg, Chief Commerce Strategy Officer at Publicis, and Scot Wingo, CEO of GetSpiffy and Founder and Executive Chairman of Channel Advisor, as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.
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Feb 18, 2022

EP287 - Amazon Supply Chain Deep Dive with Marc Wulfraat

Marc Wulfraat is President of MWPVL, a global supply chain and logistics consulting firm, and one of the foremost experts outside of Amazon, into Amazons supply chain.

In this episode to do a deep dive into all the elements of Amazon's supply chain, how it compares to other third party logistics providers, and most importantly if and how other retailers should think about competing against the enormous advantage that Amazon's logistics infrastructure provides

Episode 287 of the Jason & Scot show was recorded on Thursday February 17, 2022.

Join your hosts Jason "Retailgeek" Goldberg, Chief Commerce Strategy Officer at Publicis, and Scot Wingo, CEO of GetSpiffy and Co-Founder of ChannelAdvisor as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.


[0:23] Welcome to the Jason and Scot show this is episode 287 being recorded on Thursday February 17th 2022 I'm your host Jason retailgeek Goldberg and as usual I'm here with your co-host Scot Wingo.

[0:39] Hey Jason and welcome back Jason Scott show listeners
Jason were about 300 episodes into what I would like to call our podcasting journey and sometimes our timing has been terrible over that 300 episodes sometimes we roll the dice and
it comes up the right way tonight's episode is probably the best timing episode we've ever had
I mention this because yesterday Shopify announced their Q4 earnings that were pretty strong
but then they dropped a bit of a bombshell on Wall Street they announced that they're going to spend over a billion dollars on the next 3 years on what they call sfm Shopify fulfillment Network and they're going to compete with Amazon's FBA capabilities
and they also kind of said and we're going to essentially get to 2-day delivery across 90% of the United States
you and I were skeptical about that on on social media I said that's nice but Amazon has spent over 80 billion to get there and then you said.

[1:37] Yeah that there are also targeting a service level that's kind of antiquated like like to day is Amazon 2010 here in 2022 you know it's
at worst next day and increasingly at same day for millions of skews so I was a little surprised that they
their big splash was that they were going to invest a billion dollars to get Amazon service level from 10 years ago.

[2:00] Yeah that's where our timing gets interesting because you and I have long wanted to do an Amazon Logistics fulfillment Deep dive
and the person that knows more about this than anyone except for the folks inside of Amazon
is Mark Wolfe rat he is the president of mwp DL and we are really excited to have him on the show talk about all things Logistics.

[2:23] Well thank you kindly for having just gone through some really appreciate it before this.

[2:27] Oh my gosh Mark were thrilled to have you
Scott's too shy to mention it but but this is a rare circumstance where Scott is a fanboy of you because,
every time there's there's new data about Amazon's investment in their various elements of the
fulfillment Network he's forwarding stuff to me and he's like hey did you see what Mark and cover this week so I'm probably not gonna be able to get a word in edgewise but before Scott jumps in with the questions we do always like to get
a brief background of our guests and I'm super curious
understand how you got into the supply chain space and and sort of what led you to found em W PV l.

[3:12] Oh gosh well did I was a mathematician in my University days and,
I just accidentally got a job as a consultant you know what I got out of school and it was we didn't know what the word supply chain was back then it just didn't exist so I started a Consulting and distribution and then,
eventually went out and founded my own company and you know today we called Supply chains for 35 years I've been,
what the cost supply chain Logistics Consulting all over the world and it's been a blast I've enjoyed every minute of it.

[3:48] Very cool and does
I think of you as publishing all this Amazon specific data I assume that there's a non philanthropic commercial aspect to MB
W PV L are you selling consulting services to people that are trying to solve supply-chain problems to analysts like what can you tell us a little like what's the elevator pitch for your firm.

[4:16] You know that the whole thing about Amazon that we do is really for intellectual curiosity yet there's a little bit of money there but it doesn't it doesn't pay the bills so to speak,
you know really we work for other retailers that compete against Amazon and about 15 years ago when Amazon was becoming a household name.
I realized that they were very secretive about everything going on around but they didn't talk much about,
how they went to Market and as a supply chain practitioner I said well.
To wouldn't it be interesting to start diving into this and and I hunkered down in my basement and started to you know research the company and over the last 15 years 11 bowled we put together you know,
we'll put all the grease and we put our 10,000 hours into this we've got a huge database on every building they operate globally.

[5:13] We monitor the people that work in those buildings we have engineered the economics underneath the hood so to speak,
productivity rates than unit volumes package volumes Etc and that's enabled us to understanding your economics for their e-commerce operation,
including things like one of us automation done for them.
And that enables us to be more powerful as a consultant when we go to market for the rest of the industry and and they greatly appreciate the abilities that we have in terms of being.
You know conversant on areas like strategy which is a big part of what we do so I'll stop there.

[5:55] Yeah very cool so yeah I mean if you got to study the best to figure out how to you know,
scale up other other folks
so we definitely want to jump into this a kind of defer to you on the best way to explain to listeners the shape of the Amazon infrastructure from where I sit you've got kind of the core is the Fulfillment centers and these are these giant multi million square-foot buildings that house and ship product then there's sortation centers delivery stations then they've built this kind of airplane Network across that
how would you if you were at a if you were going to Justice and our listeners are pretty Savvy on this so how would you describe kind of the the core infrastructure that Amazon has right now.

[6:41] You just mentioned the core of it the I think a lot of folks don't realize that even before the Fulfillment center gets the inventory,
there's an important component to their supply chain which is called the inbound receiving Center and the inbound receiving Center is a holding tank,
sir inventory it is not meant to serve the public it's meant to if we to replenish inventory at the Fulfillment centers,
so typically what happens is when imported merchandise hits the apart.
It's brought from there into one of these inbound receiving centers it stays there until it's needed at the Fulfillment center.
And not doesn't just apply to Imports there's quite a bit of domestic merchandise that follows that logic as well so instead of,
ramming the Fulfillment centers with inventory like Christmas wrapping paper and I arrived in say the month of June or July,
instead of overstuffing and bloating the Fulfillment centers the hold it it means inventory tanks at the ports and then one month Christmas wrapping paper is needed at the Fulfillment centers they'll start shipping that say closer in November December.

[7:55] So that's really the first component of the supply chain are all of the major retailers like Walmart Target Home Depot they all do something similar they just called an import Distribution Center.

[8:06] Sanders come in various flavors the one that I think most of us recognize is the small sortable fulfillment center,
with goods are small enough to fit inside one of those yellow totes that can ride the conveyor system and go from picking the packing,
large not suitable for Fun Centers.
And they are usually a million square feet of me contain all the product that's too big to fit in those yellow totes and anything from an umbrella to a gas barbecue to an appliance that kind of thing.
We have specialty for Fun Centers that handle merchandise categories that are unique for a reason that perhaps they need some type of material handling.
Um you know requirement that is different.
For example apparel and Footwear or jewelry and even things like car parts or textbooks.
And then from there you have after the performance center I mean think of the Fulfillment center as being.
A place where inventory is kept and where orders are picked act and put into the shipping carton.
From there the typical shipping carton will now flow to us for Tatian Center which is a primary sort those buildings typically handle a 200 mile radius.

[9:25] They hit the packages get sorted by ZIP code palletized and then Trot to the nearest delivery station for that zip code.
Yes it's an Amazon Logistics delivery.

[9:38] Otherwise you will go to a post office or USPS post office that handles that zip code and that's typically,
the packages that are destined for the room low population density areas areas where you have high population density like Urban Suburban areas,
Amazon has built out their delivery Station Network.
So that they can deliver those packages themselves to have better speed more control and you know shall we say the capacity energy capacity to handle their package volume that's consistently growing.
And then of course there's UPS UPS picks up at the Fulfillment center so they don't go to the circulation Center the pickup directly at the foam in Center and they handle all the packages that,
are what I call out of region you think of a customer that might live in Montana or Amazon has no infrastructure,
PS would be delivering packages to Montana because Amazon doesn't have any Traditions Energy Delivery stations out there.

[10:37] So that's kind of the threefold passion others also are free and to that extent Amazon currently leverages 43 airports around the country.
Packages that are going are free or typically.
Adam should have picked in a fulfillment center for a customer that's Amazon Prime at lives very far away from where that item was picked ideally in a perfect world you'd never have your free because every fulfillment center Woodstock every item.
And everybody would live close to a fulfillment center so you want me to do this because it f8 in general cost seven times more than brown free.
So you don't want to do are afraid of unless you have to but it's an important part of Amazon's competitive positioning because if you're going to offer first to Coast to day service level for Amazon Prime.
Then you need her for you you can't get from Seattle to New York using ground free that would be five days.
So that's an important component to very expensive component what they do so packages will go fulfillment center to the air hub,
their hub from their planes will typically fly at to our regional airport public Dallas or Hebron Kentucky where their brand new airport Hub is been opened up last year,
and then from there the plans will take the packages to their respective regions and then from there to the delivery stations that end up delivering to the customer.
So that's where the I would say the main components of the supply chain I haven't talked about everything but that's the main just.

[12:06] Prickle and then so so when it goes to air it's kind of a bug right because you know
when it should have said Jason orders an Xbox and it's not near him in Chicago and it has to go out west or east and then fly it to him to since he's in the center of the country that may be a bad example but let's say there's someone on the west coast they order an Xbox it's not in stock and they have to ship it from the east coast and what does the network gets smart so do they have
the software that would then say all right we flown six of these across the country we need to kind of rebalance and get a lot of those closer to the West Coast is that kind of how it works.

[12:40] Yeah I think you're exactly right there's artificial intelligence you know where do you stock an item,
becomes a pretty important aspect of their business so I don't want to put windshield wiper blades that are for the winter in Miami,
in the Fulfillment center there right I'd rather have that open Detroit or Chicago so having the smarts to know if you're going to have 15 million items in a fulfillment center.
You want to have the smarts to position the rate 15 million items in each one of those small sortable fun answers.
And similarly if there's called 360 million items on the Amazon Marketplace that have been sold.
You're not going to be able to put 360 million items in every building.
So you have to have the smarts to be able to say if I see something will be frequently.
Um and it's going long-distance how can I fix that problem and save money and increase,
quality of service by adding either stop him or places or stock in different places so that's all part of the artificial intelligence behind the scenes that is part of the Amazon secret songs.

[13:50] Yeah let's put some members on this so we've got inbound how many of those do you think are just kind of roughly are there in the system.

[14:00] The inbound receiving centers.

[14:02] Yeah.

[14:03] We can't 29 right now within the US and there's about 11 more on the way.

[14:10] Could you be more specific.

[14:11] Sorry I.

[14:12] I'm just kidding that's what I love that's why I love about your data it's like down to the like you know decimal points of square footage so your how about fulfillment centers just all all flavors I guess.

[14:26] In the u.s. there's author fulfillment centers add up to roughly about 287.

[14:37] Jason for the longest time didn't Walmart have like eight is mm I remember free comes.

[14:43] Yeah Yeah by 8 to 10 for a long time yeah.

[14:46] Yeah I'm sure they've increased that but still they don't they don't have 287 I'll Hazard to guess.

[14:52] Northern the third scruffy but what Mark's been doing is they've been retrofitting many of their existing facilities to play a partial removal for e-commerce.

[15:02] I think that's why it's tricky to count because they have a pretty robust store infrastructure infrastructure for Distributing the stores and increasingly they're repurposing a portion of those.

[15:16] And then how about sortation centers that's a little tricky because some of them are attached to fulfillment centers right or do you keep track.

[15:22] Now we track those step we track those those are clean they've got 96 active sortation centers that's an area of the business has really grown in the last 12 months and then 22 on the way instruction.

[15:36] Wow that is big Cecil get 20% growth and then how about delivery stations.

[15:44] So two flavors of the delivery station one is the small package delivery station which is what most of us,
think you know think of them get an Amazon box and then there's also the heavy bulky.
Where you know they have a box truck with a license truck driver maybe two people are needed to unload the coach or whatever moves you whatever it is it's big and heavy that you ordered and so it's 515 delivery stations are active.
And 113 of the heavy bulky ones and we're aware of another roughly about 161 buildings that are in the works right now.

[16:21] Yeah and now that's that's probably the newest part of this right because they used to from sortation they would dump it mostly before they had the DSP program they would dump all that into USPS
FedEx and UPS and then that delivery station is that lacks mile where they've built and if you're saying there's 5 15 plus
113 plus 1 so there's like 700 or 800 of these those are mostly in like the last five years is that is that your recollection.

[16:48] Well I ran 2014 we got started on the first couple and it was so hard for the first few years but this is the part of the business just skyrocketed you know for the last 34 years,
they've been building these out not only in the cities what's interesting is last year they opened up 30 of these in the tiniest of towns.
No population 5000 kind of thing and short It's seems to me they're trying to get an ecologist The Wagon Wheel they're trying to get into the rural,
areas to do this work as well which tells me,
did you know that lost 50% of the population where it's really tiny towns that's the most expensive part of the country to get to you know lust population density widest geography so it's the most expensive last mile delivery you can possibly make.
But the fact that they're starting out with this lab test to say hey let's try these 30 a talisman,
their goal is to have every one of these zip codes under their control including all of the rural ones so this is an interesting story that's unfolding.

[17:53] Yeah and then the thing that's kind of a if your UPS what's tricky about this is
you were in FedEx you were delivering all this stuff for them and then I imagine you know the Amazon robot
in the sky the a I basically said that's a profit or out for us we'll take that over this is a prophet I can just kind of picture them like snipping the tree and then adding these delivery stations and just slowly but surely and conversely someone on the FedEx UPS side watching that
all that margin go away is that kind of how you envisioned they rolled this out.

[18:26] I think it's a lot simpler than the AI in the sky you know I think it's just sort the US population in descending sequence right.

[18:34] Yeah okay.

[18:35] Start out with New York La Chicago and so on and working way down the list until you conquered all the big cities and then keep going down from there and and.

[18:43] That's not as ominous as an AI in the sky the.

[18:45] Yeah it sounds better.
That's really the way it works is they and it instantly for the Fulfillment center build out you know right now they're targeting towns in that four to five hundred thousand population range,
I like Green Bay Wisconsin that kind of thing and you know the that's on the list of places they're going and it's because they've already done the ones that are 600,000.

[19:10] Let's um so two of my favorite areas of the infrastructure to kind of poke around and is the Fulfillment centers and you know so I think the average in your data is something like 800,000 to a million and maybe that's maybe that's the small sort of bulls but,
it's hard for people to imagine a building like that until you're inside of one and you know the one way I've helped people to try and understand it as it's like
22 to the 30 Walmart's just kind of stacked in the cubic volume of that many Walmarts you get inside one of these things and you can't really
see the you might as well be on the moon because you can't really see the Horizon per se because it's just like it's so stack the stuff you don't really know where you are in the if you weren't familiar with it you're not really
no sure where you are how do they and then Amazon is pretty unique in the ones that aren't robotic with how they put product up is my understanding what what what system do they use for that or do you know.

[20:05] So you're talking about like the large no shuttle facilities where they are more manual.

[20:09] Or yeah we're there more manual.

[20:12] Yeah that is actually equipment being used for that is nothing special that's pretty common place it's called an order picker truck and an order picker truck is a vehicle that runs on a wire guidance that's buried in the floor.
So that it doesn't go left to right it stays true to the wire and an operator goes up with the unit load rather than staying at ground level and raising a bow.
The operator rise to the bull head of the 40 foot building takes the boxed off the pallet and then inserts it into the location in Iraq so it's called a man up system.
That's fairly common in most walks of life that's not something you need Amazon.

[20:52] Yeah and then don't they do it where the stuff they put on the shelves by shelf height they found it was kind of randomly placed on shelves by.

[20:59] They use random stoics that's great and I think when you're trying to manage you know one of those large amounts sort of a building's could easily have two million items,
and one of the small suitable for mysterious could easily have $15 I say items I don't mean units of inventory I mean unique SKU variety and,
even when you're dealing with that are sort meant that that's that's also coming and going you know it's not like there's one new item a day,
or we it's like there's thousands of new items every single day hitting you it would be,
an exercise in futility to try to organize it all in some meaningful way so that the fastest-moving Needham's are positioned strategically in the building and so forth that's the way most Warehouse is try to operate whether,
this is an item that generates a lot of excitement let's put it in a in an efficient place in the world of Amazon,
especially in the world where robots are retrieving the product and bringing the product to the Picker it doesn't really make sense to do that so they use random stowage and it works well for them.

[22:04] Yeah and then so they acquired Kiva that's been quite a while now where where are they on the Kiva robot system as it relates to fulfillment centers.

[22:14] I have to tell you a true story here I was at a trade show and they bought tear and I had chest,
it's done a huge interview and a big article and Kevo with the prior owners and I said to them you know this is a great system but it would never work for Amazon.
And they said the continent is said hey could you strike that from the article please,
I have no clue the next day they announced that they were acquired by Amazon and I thought what a what a boy Amazon overspent they spent 750 million I said,
all laughing at the trade show how much money Amazon spent on TiVo you know we thought they were fools at that we were wrong,
was I wrong you know I've never been so wrong the whole life that that's been a huge win for Amazon and to my knowledge there's about three hundred and fifty thousand of these Roomba star robots running around out there across the world,
and we've done the reverse engineering on their labor chewing we've put a lot of Manpower and we try to figure out.
What would it what would their roles look like today.
If they hadn't done this if they were continuing to operate with pushcarts people walking 12 miles a day to pick these orders that kind of thing and the math we keep coming up with is she not to push out five million units a week.

[23:36] Out of a small sort of a fulfillment center you need about three thousand people,
if it's got robotics same building no robotics you need about 4,800 people.
So the cost per unit when you look at all the labor cost in in the manual building it's about 95 cents a unit.
In the automated building it's about 60 cents a unit so it's it's been about a 37% labor reduction they have a cost reduction for them.
Now I was on doesn't like talking about that they like to say well actually in our automated buildings we sometimes have more people than in our manual abilities,
but what they don't mention is that they're pushing out way more volume.
With those extra people that they've got in Atlanta so they're at the end of the day you can't look at it that way you have to look at it is.
If the volume is constant how many people would I need manual versus automated and in our opinion they're saving about 37 percent of their love the labor requirements by putting this Automation and that's why they've been,
I showed in every single building that they put up in the US and and in the developed world because of the huge labor cost savings.

[24:48] Very cool I had not heard that step the,
so then the other one I think is really interesting is these delivery stations and some of the materials you have you have a kind of a really cool picture for how this is maybe a maybe try to walk people through kind of like how this is set up and what it does
on a day-to-day basis.

[25:11] Yeah I think there's a misconception sometimes that are delivering station yeah in the media they sometimes come to the room stations fulfillment centers and they get it mixed up delivery station is purely.
A secondary sortation Center the first sort took place back at this rotation Center we're all the packages for a 200-mile region,
were organized by ZIP code and then for a specific area within that 200-mile region that's very very tight.
Call it an area where the driver can leave the delivery station and go no further than 60 Minutes of drive time to get to the market that he's making deliveries.

[25:53] That's small ships unit circle,
it's what's being serviced by the delivery station in there could be many of those circles within the region that the sortation center serves so this is the secondary sort and all those packages arrive at the delivery station that they got downloaded to a conveyor system,
people sort those packages out,
to route and a route is quite simply a grouping of streets that are close together in a neighborhood,
so that a driver goes into that neighborhood will be as efficient as possible when making that last mile delivery and a delivery station you know in the old days they used to put on so that the Vans would drive through the building,
and the loading process would take place in the building and that is still done in Northern climates like Chicago like where I live,
because you can't effectively load of an out when it's snowing outside and so forth but a lot of the newer ones that they've got.

[26:50] You could easily have anywhere from 250 to 750 Vans pulling up to the side of the building underneath an extended canopy outside,
and they're getting loaded out very much in military discipline stock so you'll have a platoon of 72 Vans pulling up,
in 20 minutes later they've got,
all their packages for their roads and they're leaving in the next platoon of 72 is pulling in 20 minutes later they're gone the next platoon and so on and over the course of two and a half hours,
three hours you Amazon's loaded out upwards of five 600 fans and they're out there on the streets doing those deliveries and it's not unusual for a bad people,
quiet day with operative 175 packages or more on a busy day with upwards of 250 packages or more.

[27:42] And these drivers are going over a 10-hour day and when you do the math on the time it takes for them,
between deliveries some of these guys are average me three minutes per delivery.
Which is astounding because these numbers no one else is hitting them this is unique to Amazon they've got enough density,
and demand for their product and the service that they can go out there and every three minutes make a package delivery it's a,
it's incredible how much volume they've got we think that in the US last year in 2021 the came close to six billion packages delivered through the Amazon Logistics,
delivery Station Network which is incredible because when you look at that volume you compare it to seeing UPS or FedEx,
UPS is our is 120 Euro a hundred three hundred fourteen year old business and they're achieving about that same volume as we speak so they've been able to build since 2014.
Company a transportation company that they're on themselves that is basically doing the same volume as a hundred fourteen year old UPS.
So I find that and that's over and above everything else they've done whether it's at this is just history in the making.

[28:57] Yeah it's pretty amazing when they when they go to fill one of the Vans is it prepackaged like on a pallet and they just left a pallet in there or like a swarm of people are dumping packages in there.

[29:08] No actually it's pretty smart what they do they.
Each time a package is removed from the conveyor belt on the inbound it's being scanned into a canvas bag,
the canvas bag think of it as kind of like a hockey bag almost,
where you're putting a group of boxes that logically and should be together because they're close in terms of proximity as to where they need to be delivered so they
doctor soil 225 packages on into the back of the van Loosely they organize it by these bags,
and the operator who the driver has to make these deliveries is told what bag to go to in order to retrieve a specific,
parcel that has to be delivered so it takes a problem of say 250,
boxes and breaks it down into smaller subsets to make it faster for the driver to find the actual package.

[30:01] So then how many canvas bags are on is it like 25 or something.

[30:07] You know I don't know that's a good question that I've never been able to figure out.

[30:11] I stumped you.

[30:12] You stopped me.

[30:14] It took awhile,
yeah it's just fascinating to watch these deliver and then the thing that Amazon does is so they'll have one of these delivery stations and let's say you know to your point they'll Maybe
hundreds of ants may be up to 1,000 bands that service one of these and then there's different dsps running these things and they put them in competition with each other over routes
maybe say a little bit more about I don't think a lot of people realize that's going on so maybe maybe explain how that works.

[30:43] Yeah so you know when you when you look at UPS unit FedEx and the other large carriers out there they all have employees.
They sometimes have to deal with units transportation to heavily you know it's sector of the economy so how do you build a transportation business that's non-union.
How do you build a transportation business where,
no one has the ability to organize and come after you and go on strike and start causing problems for your business and how do you keep costs down,
well Amazon her everything about everything you really have to respect about this company and they've done it differently.
And I got thousands of stories that kind I can talk to that,
you know will describe how they just don't think the same as the rest of the world they say they don't allow themselves to be stopped by existing paradigms so what they said was.

[31:40] Last of all and help entrepreneurs get started.

[31:45] Ruth help them get the Vans will help them Finance the whole process of getting into business,
and the other load and higher the employees who will do the deliveries so they're that creates an arm's-length agreement between the driver and,
Amazon it doesn't become their HR problem becomes the HR problem that DS p--
and let's make sure that every one of these delivery stations is not being serviced by 1 DS p-- no no no,
we have to have that with 356 sometimes 90 a speech why because,
yes p number one starts rattling assume that he's not making enough money,
or he doesn't provide adequate service or something bad happens with one of the drivers or you know you can think of a Litany of other reason you fire them,
and you bring in another bsp to replace them so they're all powerless,
and they're all captive to Amazon so it kind of reminds me of the old family days when you know if you went off and sold Emily product at,
and even space is my captive rate what could you do about nothing,
in this case Amazon control is everything these dsps cannot go do deliveries for other people they're captive to Amazon Amazon own SEC passing,
and the dsps have to deal with all the churn and burn that was on a high turnover labor environment that they're dealing with.

[33:10] And I've got to perform because Amazon is monitoring them every step of the way there's cameras on these vehicles they can tell whether or not the vehicle is doing what it's supposed to be doing or if the driver is doing something wrong.

[33:22] And they have to perform and if they don't perform them there let go so it's a way of keeping,
this massive network of thousands and thousands of drivers without the ability to organize and form a union without the ability to,
gain any power and yet they can guarantee fast you'll be there for them when we need it so it's brilliant it's a stroke of Genius.

[33:46] They're not franchise right there their 1099 so the kind of like how FedEx set up ground is my understanding is that is it.

[33:54] There are there people that often times used to work for Amazon in the warehouse.
And then they took hold of this opportunity and said hey why not give this a try and they became entrepreneurs and now these business people.
Are out there having to manage sometimes 30 40 50 drivers are more and everyday they're under pressure to get this job done.
Do I think at the end of the day Kudos Amazon for figuring out how to do this and not be saddled with labor costs that are prices high right some of these drivers,
turn twenty to twenty-five dollars an hour you start looking at the wage rates fully loaded that a FedEx or UPS driver is making and,
sometimes those folks are out there making 70 thousand dollars a year to drive a vehicle,
number two new drivers when it's foot when you consider the benefits so that's what happens when you have employees and you know you treat them right and you have benefits everything else Amazon is gone,
hello cost way to db2 see and keep their costume we think the average delivery is coming in somewhere around a dollar 75.
And that's pretty hard to match you know when you start looking at the others.

[35:14] Yeah what what would you say FedEx and UPS around.

[35:18] It's hard to sort of cost structure is but if you you know you all you have to do is go there and say Hey I want you to shoot this package and it's still going to be 67 dollars,
a portion of that 67 dollars goes towards the last mile delivery function but a pretty big portion.

[35:35] So Mark I talk to other people that have kind of a simple model in their mind of how this works that way,
you know gosh Amazon puts one of everything in a huge fulfillment center and puts the Fulfillment centers close to people but I think the problem Amazon solves is even much more complicated than most people realize
did I hear you right a big Amazon fulfillment center holds about 15 million skus is that order of magnitude right.

[36:04] That's all that's not a bad number.

[36:06] And then how many skus do you think Amazon sells I have seen a number of numbers I thought I heard you say 360 million but I've seen some estimates that are even quite a bit north of that.

[36:17] And to confess I only know what I read as far as that goes so the number that I saw last was somewhere around 316 million or so.

[36:27] Okay so let's see.

[36:28] That's her prime eligible I think I think that's Prime eligible and then non-prime eligible ev's another 300 million yeah I think I think that's where the bigger number is Jason.

[36:36] That would totally make sense so to kind of frame this it's it's not like you place an order and everything can get shipped from the Fulfillment center that's closest to you right like the,
you know they're strategically staging different long tail inventory all over this network and then you know.
Impressively maintaining this high level high service level even when that product is in close and that's where a lot of those like are exceptions that you and Scott talked about in the beginning come in right is.

[37:07] Write that obscure Halloween costume you're buying for your daughter right.
That is only stocked in the Seattle fulfillment center and you're in New York he wanted two days so that's an example of something that would go by plane if your Amazon Prime.

[37:24] Yeah and the.
You mentioned so one funny thing so I live in a multi-unit apartment building a 12 unit Condo building and I like to think of us as an Amazon laboratory because we're in Chicago Chicago has every kind of
fulfillment infrastructure here and and are 12 units get about 50 Amazon Parcels a day and it
every single day in our mailroom there are Amazon labeled boxes delivered by the postal carrier there are
tons of Amazon boxes delivered by Amazon you know dress dsps and their their Amazon boxes delivered by UPS is,
is in your mind is that because people are ordering longtail items and they're having to use all these other delivery vehicles or are some of those boxes because,
their vendor fulfilled inventory or you know things like that.

[38:22] You know people ask me this kinds of questions I don't know all of the inner workings of how things function but I can only surmise so,
there is a significant amount of merchandise that's sold on the Amazon platform that's been fulfilled.
So if it comes in an Amazon box then it's probably Amazon Fulfillment right and if it's arriving by the post office and your,
area where you live is being service primarily by Amazon Logistics drivers.
Chances are it's coming the ship from location is such that it will ship by another former Senators far away.
Where for whatever reason the post office was used and maybe that customer that ordered that box was not Amazon Prime so they ship it from a farming fulfillment center,
and it arrived 345 days later and that was the lowest cost way of getting it there.
Right and something for UPS center maybe it's coming from a location where UPS provides the best value to get it to the customer address and remember not everybody's Amazon Prime so the rush to get it,
in two days is really an Amazon Prime only issue right.

[39:42] Wait there people in the world that don't have Amazon Prime and I'm teasing
so so now I do want to Pivot a little bit as if this kind of logistics wasn't difficult enough now there's all this demand for what to me seems like even more difficult distribution which is like all these
perishable locally sourced by grocery case.

[40:06] Yeah.

[40:07] And
what when you use it off all the various types of fulfillment centers in the beginning one thing we didn't talk about that my understanding is that like Amazon is likely also starting
to build a lot of are these smaller fresh distribution centers that are you know located closer to customers you know with various degrees of same day service.

[40:33] Yes of the you know Amazon's been very slow to step up to the plate for the food side of the business right so what they did initially was they opened up these Prime now hubs,
many of which had fresh capability fresh or frozen so these are smaller type of operations that are interested in.
My mom wanted to small running with 25,000 square feet type thing.
And they would be there real life was to you know pick your order for food and have it delivered to your house and say two hours.
And it was never a money-making side of the business because primarily everything that's going on here is manual so when they acquired Whole Foods.
And you know they said well here's always starts right we've got those 500 stores let's leverage them as being miniature Depot's that we can depart and do home delivery.

[41:33] And that's really been I think the focus over the last few years is how to get as many of those more food stores delivering your grocery orders as possible and fairly recently they did away with the free delivery,
our whole foods and we put up to ten dollars.
And that's the show I might add even if your Amazon Prime because it does cost a huge amount of money to do a delivery of food might say why.
Well food is the type of merchandise that you can't systematically.
Synergize and build-up Innovation for a day's worth of work when someone orders their food.
Usually what ends up happening at least in the case of Amazon is the delivery function is made in an unrefrigerated vehicle like a car.
You know I flexible driver and wait take several orders that I'm going to deliver them and that delivery function is usually within 15 to 30 minutes of the store.

[42:38] Because you don't want your chicken breasts sitting in the tropical car for 4 hours or you're a scream or anything else that could cause a food safety issue.
So that type of service when you're paying somebody 25 to 40 dollars to deliver a handful of borders that are food.
So often times it ends up costing seven to eleven dollars to perform one delivery.
And in the world of food it's a two percent net margin so you can lose your shirt quickly when you start paying for that and not charging a customer.

[43:09] Amazon is still trying to figure it out and I believe what they've decided on and so the strategy here is that they will.
Very gradually start building out the Amazon Fresh stores that don't require check out our cashier.

[43:27] Rotisserie snout that they're working on those.
And as they build up more of those stores and they get more volume to layer on top of the Whole Foods Network.
I believe that Amazon will start to develop their own supply chain capabilities behind the scenes meaning.
Highly automated distribution centers strategically positioned in at least seven major markets that will feed the stores.

[43:55] Giving Amazon the ability to buy efficiently and to distribute efficiently.
And how we do the automation will be applied to minimize the labor cost in these buildings and then we'll over the next decade.
Below are very robust supply chain that's similar to what Amazon are sorry Walmart big during the 1990s.
Walmart went to town they put 46 million square feet of distribution center space up in the span of a decade.
And they built out all those super centers with food capability during that same decade.
During that same decade Walmart put over 25 companies of business that we're long you know long-standing Regional grocery retailers.
It's so the next big wave or the next tsunami of competition in the food industry will be Amazon.
Are they doing it now no they're just getting started we haven't seen very much activity here I think they've really pushed this one off and they've formed a strategic Partnerships with UNFI and what's Spartan Nash but,
I said come 20/20 special reference start to see a lot more activity here.

[45:08] Yeah it's a it's a big chunk of consumer spending I get its lower margin and more difficult but eventually it seems like it will it'll be the place to invest I am curious though do you like I often talk about,
by God this general merchandise as being like deliverable via a route and a lot of this perishable merchandise,
at least at the moment people feel like you have to do point to point deliveries because you got to get the ice cream,
to the homeowner when the homeowner can put it in the in the freezer pretty promptly.

[45:40] Yeah and the other the other thing is the homeowner wants to know when you're coming so there's a specific delivery time window.

[45:47] Exactly and and pre-pandemic all these two income households there are very you know the there was,
a scarcity of squats win-win homeowners were available and it was the same slot for everyone right so it became so it's really hard some of the people some of Amazon's competitors are experimenting with these novel,
you know very small things but like hey let's put
refrigerators on customers porches and will deliver you to the refrigerators or let's get smart locks and you know deliver to the consumers home refrigerator like.
I don't know do you you imagine the Amazon is going to have to come up with some novel solution.

[46:30] No no don't forget there's all kinds of spaghetti get in front of the wall and half of it's not sticking right if so I like the idea where I'm going to let some stranger into my house to put food in my fridge,
um that's not lawsuit written all over it I can't imagine that's going to last very long.
Walmart's doing it and they're expanding it actually but you know I'm going to predict that once a dead duck.
When you get down to brass tacks we work with quite a few retailers in the grocery sector depending on the geography we're talking about.
Some of these retailers have 90% order of the orders that are ordered online or pickup at store.
So some will place an order at 10:00 11:00 at night and arrange to pick it up at 5:00 the next day after the work is over.
And the like that convenience because they don't have to go in the store and waste their time and it's on the way home it's from their local story anyway.

[47:30] And when you think about it 90% pick up at store 10% deliver that's exactly what a grocery retailer wants because that eleven dollar delivery to the house was the way that cost goes away.
Customer likes it because they don't have to spend the money on that bus too.
Start looking at the cost of instacart and what it cost for a valet to go shop you ordered and delivered to your house and after you look at the markups that are put on the product that no one really knows about because they're not looking at the fine print.
After you pay for the delivery fee the tip etcetera it's not uncommon that 100 all orders now 125 to 130 dollars coming out of your pocket as you want to the store would have been 100.

[48:12] And that business model will be what comes Under Fire as more and more people tune into that cost increase.
Amazon's proposition on the home delivery side will with the increase of these Amazon Fresh stores and the Whole Food stores I think they're going to try to go,
to the pickup at store model as well more storage more opportunity for that less expense.
And also try to get more efficient with scale at doing the home delivery model right because it requires scale.
Really touch and if you really want to do it right you won't with refrigerated trucks that's what Kroger's doing so now you can send a driver out for a day's worth of work with a refrigerated truck,
with appointment schedules and all that done and then and now you've got you know a uniform driver and a logo on the outside of the vehicle and it's far more professional than you know some Flex driver showing up at your front door.

[49:08] There's lots of things going on as you can people play with the proboscis down the sidewalk to do the to do the delivery of the order,
wait for a New York is doing that and we'll see whether or not any of these things and you know I've always been about Bethel that a single robot that might possibly thousand dollars.
Is is a good way to spend your money to go and deliver one order 9f you doing 10,000 orders a day when I need 10,000 of these robots have been waived spend capital.
Probably not so I and that's why drums never took off I am 137 million packages a year,
with drones you just can't right here you're going to need billions of drones to make that happen it's just it's not realistic.

[49:53] Yeah,
let's pivot a little bit so let's talk a little bit about kind of the future so you've given us your really good good lay of the land of and even some future that they're you know they're there,
increasingly investing in these things one of the things I've kind of long predicted you mentioned the last mile is maybe like
a buck and change to deliver something do you think Amazon will eventually just compete with that axe UPS where I'll just throw some packages on my door like let's say I'm going to ship,
Jason a new microphone I'll just put it on my front porch address it to Jason and when the Amazon comes they'll pick that up and take it to him for three dollars or something.

[50:32] The question I get quite often asked quite often and I always start out by explaining you know Amazon is a business that there are days during Q4 were they on the hill quite a few days,
in the fourth quarter the volume this ship relative to an average day is 2X.

[50:54] So like a fulfillment center that there's a half a million units on an average day is spent a million units output on a busy day.
Repeat it and the same thing goes for the delivery stations right you might have a delivery station doing fifty thousand packages now doing a hundred thousand on a peak day,
so during the first quarter of the whole company stressed.
With trying to get all these resources to work longer hours huge amounts of overtime and everybody's tired and there isn't any fat in the system,
to be able to take on additional nice to have volume to try to subsidize your business.
Your just got every pair of boots on the ground trying to manage your own customers and your own needs.
Sorry you set something up where Logistics is a service during q1 through Q3 when you have a lot of slack in the system by frankly.
Matthew 4 well one way you could do that is on your 3p Partners you could extend an offering to them and say hello,
your only business partners will do your deliveries for you during q1 323 but not during Q4 and if they're small Mom & pops and they're going to get a significant cost break because of that,
don't jump on board and now you've got that additional volume that you need during she wants review 3,
to help Finance or subsidize your own Logistics operations and indeed that opportunity is readily available today and I think that's the first Port of Call.

[52:22] 24 on the other hand they might just turn that tap off and say we don't need the revenue and what really needs every boot on the ground to support our own business.

[52:30] If you're a serious ship and by that I mean spend five to ten million dollars a year on parcel free.
What happens is the people like FedEx and UPS first thing in the new you they come into your place and they say look what your business,
you gave us a commitment for the 10 million in volume and we'll take the whole thing and we'll give you a nice juicy discount.
So it's not something that you can carve up by quarter.
Commit at the beginning of the year to doing 10 million shipping volume may give you an extra Cent discount in exchange for that,
and you stay the whole year with that one partner so this Logistics as a service concept is is,
really something that you have to be careful with because it's a bad idea for the first three quarters but not the last one and it's not like AWS which is a commodity that you can sell to everybody.
It's something that requires lots of lots of vehicles delivery stations for patients centers drivers There's real resources that are needed to make this happen.
And you can't put a peak on top of a peak because that 24 Peak that's happening in the Amazon is happening everywhere else in the b2c world as well.

[53:40] So I think they'll become a competitor to FedEx and UPS and I think I'll primarily compete in the b2c spaced delivering consumers because that's what they're good at they're not trying to do,
the deliveries that you know it's 50 packages a delivery at a business and I'm trying to be that work that's still going to be the domain of UPS and FedEx but I see this competition really being something that,
we'll probably wind down towards that fourth quarter of the year.

[54:08] Finishing yeah the so we've seen an enormous amount of venture investing and go puff and what are these companies called Jason there's some cool name that you you guys use.

[54:20] Like ultra-fast delivery.

[54:21] Fast delivery do you yeah the gorilla and all those guys do you feel like you're going to have a better system than Amazon or do you think that they're foolishly going to crash into the Rocks the Amazon rocks.

[54:35] Yeah I think I think that's what's going to happen I think all of those especially the 15 minute guys I think they're all going to burn out and I Venture Capital money is going their way of course but.
You know anything to do with food requires volume,
and stale and you're not going to make money and find resources that are going to.
Stick around for the long run in this big worker economy of 15-minute deliveries when you're constantly under stress that that's just a recipe for disaster I wouldn't put a name on to that myself,
um the good parts of the world will see I'll hold off on that when they've got 500 of these fulfillment centers that call but their time kiosks really at the end of the day and,
you know it's a huge cost model to operate that way and I honestly think,
um you know this is all exciting and new but when the expectation to make a profit starts to become a reality I think a lot of these guys are going to go away.

[55:39] Yeah this is kind of a correlated question we're so you talked about you know some of the Amazon numbers you are putting out there you know you said they're going to add,
you know,
122 sorts and more another 161 delivery stations where does this stop and you meant also mention the Wagon Wheel where they're actually starting to get out into pretty Loosely populated areas is is there a point in time where,
we're done like and when is it.

[56:09] Well here's an interesting sound bite for you know when we add up all the square feet that Amazon added in the u.s. 2021 including the message.
Crossover in fact it came to about a hundred and thirty six point six million square feet okay keep in mind the entire Walmart Network that took 49 years to build.
Totals up to about 150 million so we're talking about company during covid conditions when it's impossible to get lead times that are decent and suppliers to do the work on society Etc,
this guy's built almost almost an entire Amazon just in the u.s.a. sorry and I'm tired of Walmart just in the u.s. in one ear,
and when you look at what there.
On schedule to build in 2022 148 million more square feet will be added in 2022 and that's the size of the Walmart Network that's been built over the last 50 years.
So this thing isn't going to slow down anytime soon even though in the last quarter they announced that they're going to take a breather.
Now you know when you hear that what that means is the number of new facility announcements that we would normally expect.

[57:27] To happen this time of year is down way down compared to last year.
So that means 2023 2024 I would fully expect this speak to start really slowing down.
At least on fulfillment center side.
The logistic side they've probably got another 750 to 800 buildings to put up between now and the next five years in order to hit true Coast-to-Coast coverage across all zip codes,
they may change direction to say about to do that but if they do decide to do that,
there's a good 800 more buildings they have put up that are Derby station since rotation centres and are hubs in the lake and that's not have to have an output of energy and but I would see within the next five years,
we should expect.

[58:22] That this engine will start to mature and it's quite the growth of warehouse space,
for Amazon is directly correlated to the product sales growth that you see on their quarterly statements,
so if sales go up by ten percent they're going to need 10% more space at least from fulfillment center perspective all of the logistics buildings are more geographically driven.
So the question is your how much more will e-commerce grow.
Over the next five years relative to what we know today that's a hard one to answer that I see that,
in the u.s. you know our expectation is 10 percent growth this year in 2022 slowing down probably eight six and four percent over the next several years so I think the growth in just e-commerce in general.
Combined with this mature Network that they've already got combined with the fact that I mean you can only build so many of these anyway.
It doesn't make sense to put up a 300 million dollar building a town of 200,000 probably not.
Now it's better to ship the product further than to spend all that capex and on a small town or small in time so these things lead me to believe that we're going to spoke we're hitting the top of the bell curve and we're heading down the other side.

[59:42] Marc this has been great this does kind of trigger one last question that
I maybe should have started with so you kind of have in a different field but the same job I have I jokingly tell people my job is to
unsuccessfully helped other retailers compete with Amazon and yeah you've just painted like a pretty impressive picture of,
like how daunting the the Advantage Amazon has and how far ahead of everyone they are you mentioned you work with a lot of other retailers like,
at the highest level I assume it can't be your advice to anyone that they should try to catch up right like is the
is the answer to like find some white space that's an alternative approach to brute-forcing this like what what do you tell other retailers that engage you.

[1:00:33] No one needs me to tell them that they can't compete against Amazon me this is history in the making right we've never seen anything like this in modern in the history of modern man this speed the sheer speed at which this has happened.
I can remember going to trade shows not that long ago when people said yeah but they'll ever make any money,
and you know pooh-poohing Amazon is slow they're going to be extinct in real time and you know what's happened since the mid-90s till today in a relatively short period of time has been devastating.

[1:01:09] To the retail industry to shopping lost every aspect of retail you can possibly imagine.
And it's going to continue to happen and sir you can't say to a company,
wow and become better at e-commerce than Amazon is because that's a losing battle I think you just have to understand when Back to Basics you know what made you great in the first place,
don't try to become a five hour delivery firm.
Because you're not going to get there without huge cock question and it kind of brings us to Shopify and how much money will Shopify end up spending.
In order to get the two-day next and all the rest of it well I think determine the two days but they absolutely need to be competitive,
mom you know go and build you are six or eight fulfillment centers however many that's going to end up being one put those in place either with a third-party Logistics partner through your own resources,
and stop and stop it today because there's no point in trying to be next day,
that just gets way too expensive and then focus on the core values right wider Shopify,
exists with a high degree of success and growth it's because they offer something that Amazon doesn't offer right then it has nothing to do with its owner has everything to do with the vendor.

[1:02:29] And same thing with wafer you know a lot of folks asking what about wafer wafer has a fantastic product offering.
Right I mean they the customer shop on the wafer safe for the products that are sold there not because Wayfair can deliver within the same day.
So don't even try to become an Amazon trying to be the best you can with the resources you have but you know focus on what makes you great first place.

[1:02:56] Well Mark that is great advice and that is going to be a great place to leave it because it's happened again we've used up all of our listeners a lot of time but this was an amazing conversation really appreciate your time if listeners enjoyed this show we sure would appreciate it if you jump on iTunes and give us that five-star review.

[1:03:16] Marc Lee really appreciate you taking time to share your deep knowledge of Amazon's infrastructure
if folks are interested in reaching out to you maybe maybe you've piqued their interest to help them figure out some stuff what's the best way for them to reach you or read what you write online.

[1:03:35] Our website

[1:03:38] Awesome well thanks everyone and.

[1:03:42] Until next time happy commercing.

Feb 4, 2022

EP286 - Amazon Q4 Earnings 

Amazon released their Q4 (and full year) earnings for 2021 on Thursday February 3rd. In this episode we do a deep dive into all the details.

Key Topics:

  • Amazon North American Revenue grew 18.4% in 2021, which was just above the industry average of 17.9%
  • Amazon has broken out their ad revenue for the first time. In 2021 total revenue was $31.16B growing at 32% Year over Year. Ready Jason’s Forbes Article here.
  • Amazon is raising the rates for Amazon Prime from $119 to $139 per year.

Want to learn about Amazon’s sneaky fulfillment advantage (Amazon Key for Business)? Check out our YouTube video here

Episode 286 of the Jason & Scot show was recorded on Thursday February 3, 2022.

Join your hosts Jason "Retailgeek" Goldberg, Chief Commerce Strategy Officer at Publicis, and Scot Wingo, CEO of GetSpiffy and Co-Founder of ChannelAdvisor as they discuss the latest news and trends in the world of e-commerce and digital shopper marketing.



[0:23] Welcome to the Jason and Scot show this is episode 286 being recorded on Thursday February 3rd 2022 I’m your host Jason retailgeek Goldberg and as usual I’m here with your co-hosts Scot Wingo.


[0:38] Hey Jason and welcome back Jason Scott show listeners.

I’m dying to talk Mandalorian with you but I don’t want to do any spoilers so I’m just going to skip the Star Wars chat this week until I think we’ll give it until all the episodes out plus two or three weeks and then we can talk about so until then.

It’s business only.


[0:58] I accept your promise for a later conversation I would only say watch it people go watch it.


[1:05] Yeah it’s gotten really good okay so it has been Star Wars dramas aside it’s been a mega cap Tech stock drama this week so it’s been a very interesting week.

And we’re excited to kind of culminates in the Amazon news that came out today so this is this is our hot take on Amazon’s Q4 but I think it’s important to back up

about six steps before we jump into that briefly so setting the stage back in episode 257.

We were super Clairvoyant and in March of 2021 you and I were the first I’m pretty sure and we can get you into fat check this.

A lot of people were talking about am apples I DFA and that’s their new privacy where they’re killing the cookie and doing a variety of things to really limit the amount of tracking available to apps.

Inside of their ecosystem amongst email and a bunch of other stuff but the primary one is apps can no longer really track what’s going on

there’s a lot of talk in the ad World about that but you and I believe were very early talking about the impact on e-commerce so.

So we had that and then you know I went back and looked at our notes and our prediction was that this was going to put Facebook in a world of hurt.

So then Flash Forward.

[2:25] Past this is a in your hot tub time machine and episode 285 which we did a couple weeks ago our previous episode you took us through some really good data we got a lot of really good feedback from that show from folks and everyone enjoyed your presentation.

And except for that one person who said that you’re too verbose and your slide presentations are too long so shame on them anyway they in there.


[2:48] They’re probably not listening to our super long podcast.


[2:51] It probably we self-selected them out there listening to some 5 Minute Podcast.

Or they’re listening to us on 4X and they’ve totally missed this whole segment anyway so you one of the data points you put out there that is that e-commerce crew 18% that right.


[3:09] You do yeah well no retail grew 18%.


[3:11] Retail grew 80% okay so that was kind of the watermark and then e-commerce grow a little bit more is that correct like 21 or so.


[3:18] So we don’t know for sure non-store sales grew about 20.


[3:22] Yeah okay so we’ll call it 18 to 20 then last week and over kind of like the last.

Since College January 20s the stock market has really slid into a bit of an abyss so the there’s the whole saying don’t fight the Fed so the

inflation has been on a terror so the FED has signaled they’re going to do some pretty aggressive raising of interest rates.

So the market kind of did a total sell off and basically went into this let’s throw out all the babies all the bathwater we don’t care everything’s so expensive and it kind of went into what Wall Street people call quote-unquote risk off so

we don’t want any risk anymore we love to risk now hit

so that was the set up kind of coming into this last five days and then on January 27th which was last week Apple had a surprisingly strong quarter.

[4:14] Serving one ever was kind of like on pins and needles because they’re the supply chain really hasn’t improved in some areas it’s gotten worse seven was like surely Apple could not have had a good quarter there’s no way they could get all those complex little

cogs and widgets that go inside your phone but sure enough being Apple they were able to navigate that and they actually had a pretty surprisingly strong quarter

now Apple doesn’t call out anything around there add product or anything like that so it was just kind of a is largely a hardware type discussion

then so the market got a little relieved and then next up to bat was Google or alphabet and that was Tuesday this week so February 1st

and they blew it out of the water so they had very strong earnings and in the conference call their CEO Sundar pichai he specifically several times mentioned e-commerce and

it was kind of interesting because I was thinking you know they’ve really done anything in e-commerce Dave

they’ve they’ve kind of played around with Google shopping and they made it free and then they charge more and they’ve got this experiment to be a Marketplace but if you ask anyone including you and I you know it really hasn’t been like they done anything particular

they did call out I’m pretty sure you probably picked up on this that they’re going to do more Integrations with YouTube on e-commerce and then they have a

Tick-Tock competitor called YouTube short setting.

[5:39] Or short and they’re going to do kind of a livestream tie in there with e-commerce so that was the that was that was the take there.

[5:48] Wall Street was loved this result and the stock shot up 20%.

And when we’re talking about these companies as a reminder these are mini all these companies we’re talking about except Facebook are well over a trillion dollar and market cap.

So when you move something like that 10 or 20% that’s two and four hundred billion dollars of Market.

[6:11] Money sloshing around up and down so so this was an up

and it was like you know it was like effectively three to four hundred billion dollars of value added to Google literally in a.

12-hour day so that was interesting.

[6:28] Then so that was kind of a roller coaster was on the upside and then Facebook now called meta reported the next day on Wednesday and that was the exact opposite it was a total and complete

bloodbath the CFO got on and specifically talked about three reasons that they had a really bad quarter the first one was the iOS changes and then they kind of quickly moved on and talked about inflation and then

exchange rates where the dollar has gotten weak because of this fed tightening

but then as they got into so that was the cfo’s prepared remarks and then in the Q&A

Wall Street analyst being good at sniffing out trouble they spend all their time on the iOS changes the IDF a and it was interesting to asked

Sheryl Sandberg and they finally kind of got her pinned down and I thought this quote was interesting.

And she said Apple created two challenges for advertisers one is the accuracy of our ads targeting decreased so that they’re lost targeting which,

increases the cost of driving the outcomes the other is that measuring the outcomes because we’re.

And then the CFO came back on and said you know just to be specific we missed about 10 million dollars of Revenue this quarter due to these iOS privacy settings.

[7:45] And then and then I said well how how long is it going to take you to figure this out and they said this is going to be a significant headwind for our business and it’s a number of verticals and it’s gonna be a multi-year problem

so yeah that was not good and basically you’re.

You’re the ad Guru here but you basically can’t Target and you can’t measure so you know they’re bad that is not good if you’re spending money on the Facebook platform.

Any any comments on that before I go into a another little piece of the story.


[8:16] I think you summarized it really well like I feel like it’s even more acute when you’ve spent the last like 10 years telling people that targeted ads are the best right like that so I think that’s a challenge and I think,

meta don’t really talk about it but I would actually argue there’s kind of three challenges that you can’t Target as well you can’t measure the effectiveness

but also a heck of a lot of the best-in-class advertising on Facebook is what I would call real time optimized wide because they had this like real-time closed loop of performance you could.

Dynamically generate some add content see how well it worked and then change it on the fly so the ads got better really fast and part of the,

the problem with,

not being able to measure it as well is it breaks that real-time Loop so so I would I would say that also is adding insult to injury in terms of the.

Effectiveness on Facebook so I feel like after their earnings there was kind of a consensus that like man,

advertising dollars are shifting from Facebook to Google because Google has a less acute version of this

data problem than Facebook has and Google has more measurable Commerce events on their platform than Facebook does at the moment.


[9:37] Yeah and that’s that’s exactly right so.

So and just so listeners understand to the problem is most people are using the Facebook platforms so which the.

They have WhatsApp but they don’t make any money off what’s up that I’m aware of they make a little bit it’s de minimis so where they’re where they make their money is off Instagram and Facebook and ads inside of there

will guess what people use that you know.

[10:00] Instagrams level like 99% mobile and Facebook’s probably 80 90 percent mobile so they have some desktop traffic where you’re still probably getting some decent first-party cookie data but you know.

So then

what’s called 85% in aggregate of their ad businesses on the inside the mobile app a big chunk of that well over half is inside of the iOS

and then the other problem is Google wants Apple to this Google has increasingly decrease the ability of apps to track things to see if it’s just

it’s pretty bad well Wall Street was freaked out and basically the stock went down 26 percent in one day today and that’s the biggest one-day drop ever

and they lost two hundred and thirty two billion Market in market cap so so basically what happened is

you know Google backed up the truck Google and apple backed up the truck and load it up

a big 30% chunk of Facebook and split it between them and drove off into the sunset it was pretty.

Pretty interesting to watch this happened in literally like a 72-hour period and to your point Wall Street figured this out pretty quickly and said hmm.

[11:12] Google was kind of talking about how that they kept talking about e-commerce

Facebook keeps talking about these people that want to really track things so while streets kind of figured out that what’s happened here is e-commerce dollars

the all those Shopify merchants and all the way from mini little Shopify stores all the way up to the big guys they very rapidly this is the challenge in the digital world

you can move dollars instantly two different mechanisms unlike TV where you’re locked into the Super Bowl ad for for six months or whatever so over the over the course of.

Effectively the holiday period dollars sloshed out of the Facebook ad bucket and into the Google and then I imagine also into the Apple ad Network

um as well so and then we’ll talk about Amazon also so that was really fascinating as a third party Observer to watch that happen and how rapidly these it’s kind of funny it was.

I would say these changes.

Have been known but then happened like rapidly and almost makes you start to be a conspiracy theorist right so back in March last year you and I were talking about this and we could kind of see it coming

but then it really didn’t hit until fourth quarter and if you were in hindsight if you were diabolical and really trying to put the crunch on this e-commerce segment on Facebook that’s exactly when you would

would really kind of clamp down on them so I don’t know if there’s any of that going on but it was it was really really brutal for those guys.


[12:39] Yeah and you didn’t there’s some slightly weird timing just in that like shortly after these changes happened who took it in the shorts right away was like Snap

and they you know they came out right away and said hey we’ve had a material dip and their stock took a dump and comparatively Facebook wasn’t as hurt in the narrative coming out was we’re better insulated from these changes than others and it’s now starting to feel like

maybe no you weren’t.


[13:09] Yeah and then you know it does hurt confidence because if we knew all these things were coming in March why did it take till Q4 for them to realize how much it impacted so yeah I don’t I think

I think we’ll find out a lot more it’s all still fresh information and all these companies also file

more detailed documents later as they file with the SEC and the will be combing that for listeners to see if there’s any other tidbits for what Facebook says about this idea of a problem surfacing.


[13:36] Yeah one another tidbit before we go on to Amazon for deep listeners you’ll remember our privacy show where we kind of talked about these these problems wounding and we talked about.

Google’s proposed alternative to the third-party cookies was this cohort based system that they called flock and

side note fun fact Google has already completely abandoned flogged.


[14:03] Yeah yeah yeah.


[14:05] So like it’s really the wild west right now like they’re they’re you know turning off these old Legacy Solutions and they’re kind of winging it on what they expect to replace them with.


[14:17] And in some way they don’t care because they’re you know they’re winning.


[14:22] Yeah no rush.


[14:23] Yeah not a big rush we’re coming to save you Facebook give us about six years we’re on our way we’re really really coming

coming fast okay so then you know the market kind of held its breath and was like holy cow we thought you know Apple did great and then Google and then we thought for sure Facebook would be doing okay because to your point that kind of signal that everything was good

and then they totally crashed what’s going to happen with Amazon so these stocks are called Feng we don’t you and I don’t talk about

Netflix but that’s the end but you have Facebook Apple Amazon Netflix and Google that’s the Fang and so we don’t talk about Netflix but they’re having a.


[15:03] Blockbuster alumni I’m contractually prohibited from talking about Netflix.


[15:08] Will be happy to hear they had a little bit of a rough spot too but anyway so.

This was the most dramatic turn of events that I’ve ever seen and I’ve been following a stocks for quite a while and since maybe 08-09 when everyone was kind of like what is going to happen to these companies through this Great Recession so so I would call this kind of like.

Wanted a 14 15 year kind of event that we kind of witness it’s me.

Seven was kind of sitting there wondering what’s going to happen to Amazon and in you know I think a lot of people felt like it was going to be,

pretty bad now you know you and I know that Amazon is largely immune to these problems because

yes they drive a lot of volume through their app but they have the benefit of inside the app closing a transaction and they have first-party cookie kind of they have a lot of first-party data is kind of how to think about that and closed loop

so you know in many ways they’re actually sitting in a really good position in the Commerce world because they do have that data and

and then inside of the app and then they can even sell some of the ads so you could imagine if you had extra dollars the problem with.

If you move dollars from Facebook to Google a lot of times you can’t spend more on Google you can but it’s not super effective because you’ve covered all the Search terms you can’t create more volume so then I think a lot of those dollars probably sloshed on over to Amazon as well

so that was the setup.

[16:34] So one one one just quick wholesale note Amazon lot of these companies report two sets of numbers they just report the absolute and then they do it without the impact of foreign exchange

gyrations and in Wall Street they call that X FX all the numbers we’re going to give you our XFX unless we explicitly stated otherwise and it does swing the numbers a lot because of the interest rates changing you know the

the dollar went from strong to weak and it created a lot of headwinds vs. Tailwinds on these foreign exchange calculations

okay so Revenue came in at 137 point four billion which was in line with Wall Street estimates and it represents 10% overall growth if you take the fourth quarter of

2021 and compare it to the fourth quarter of 2020 now you have a good observation about prime day.


[17:28] Yeah so as we’ve talked about before Prime day has moved around a bunch which is problematic for comps so if you remember in 2020 Prime day was in.

Late October so kind of right on the shoulder between Q3 and Q4 and so you know some of the cops are saying now are against the like Prime day augmented sales and this year Prime day was in.

Q early Q3 two years ago it was in late Q2.


[17:59] Okay and then one of the other key measures there’s like six ways you can report

earnings for Amazon but will do ebit so earnings before interest and tax and that came in at 3.5 billion and that blew a Wall Street estimates of 2.5 billion so a billion dollar kind of.

Overall win on the profitability of the business so

what what had happened is Wall Street and Amazon Wall Street at Amazon’s guide last quarter to Q3 when they did the results they had put a lot of extra cost in there due to covid and supply chain and all these in labor and it

It’s seems like that did not end up being nearly as expensive as Amazon had initially thought or they were sandbagging we’ll never know so I would call that a revenue meet and a bottom line be

so that was that was a positive and then we’ll go through some more of the details and then the guide is really in a couple other things or what really got,

Wall Street pretty excited so it’s hard to predict so in the after-hours Amazon is up 14% And you know the the analysts are coming out

as we’re recording this very positive on the quarter so I think

I don’t know if it’s going to be a Google level result but it’s certainly not going to be a Facebook level down 26 type result so you know I think Amazon is going to become in the win column

let’s peel the onion little bit and go into why.


[19:20] Yeah so start with one that’s not that financially material but Amazon breaks out their sales for physical stores

and they grew 17 percent for the quarter so they were just under 5 billion and

in brick-and-mortar sales and and for Amazon brick-and-mortar sales is largely Whole Foods there’s you know.

A smattering of Amazon book stores and a couple of five-star stores and you know we now have like 30 of these.

These non Whole Foods grocery store so you know one day it will be more material but it today it’s mostly Whole Foods.

[19:56] What’s interesting about 17 percent is physical stores had actually been shrinking for Amazon and.

Part of the the the likely reason for that is the pandemic shifted a lot of people from.

Shopping in a whole food store to having groceries delivered to their home and Amazon has has like somewhat unique accounting practices that that sales shifts from

from Whole Foods and physical store sale to a

in e-commerce sale when when you get those groceries delivered to your house so kind of you know it that artificially made stores look small so I just think it’s interesting because this is a weird time in the history of e-commerce


e-commerce for most retailers as you know over the last decade has grown kind of like 15 to 20 percent a quarter and brick-and-mortar stores grow like 32 Port four percent a quarter and so this q 4

because e-commerce is comping against the monster Q4 from last year and brick-and-mortar was really soft last year and is doing better this year it’s like the first time in our lifetime we’re in many cases.

Brick and mortar is growing faster than then e-commerce and that was actually true for Amazon in North America.

[21:18] So that online sales just for Q4 actually went down for Amazon by one percent and again I would I would attribute that largely to you know

comping against a crazy number that also had prime day in it.


[21:33] You want to do the Geo segments you want me to.


[21:37] Sure why don’t you do the quarterly ones.


[21:43] Okay so North America grew nine percent and so this these are all cordially so this whole section where in is quarterly comparison so we’re comparing Q4 of 21 to Q4 of 20

so North America grew nine percent International was down one percent and that’s kind of what that’s a that’s kind of what netted out to be

this looks at online and offline so that’s what netted into the 10% go through.

On the third party side there’s two line items at Amazon reports we won’t get gmv calculations from analyst for another week or so but when we do we’ll mention those on the show so seller Services which is revenue from largely from.

[22:23] The.

Prime no sorry from FBA is that grew 12 percent to 30 billion and seller units remain stable at 56% so

we use this nomenclature first part of units in third-party so therefore first part of units were 44 percent and third party were 56%.

It’s important to note this is a unit measure not gmv and you know you historically.

The GM V for first party is the Espeon first party is significantly higher than third party because you’ve got all the Amazon owned and.

Branded products like candles and all that good stuff so usually.

Usually the gmv is more flips the other way where it’s kind of maybe 60 first party forty third party we’ll see.

And then this is exciting and I texted you the second I heard this because I called it retailgeek.

For the longest time they have kept the ad business kind of tucked under this exciting category called other where they have a bunch of other things,

does the name other and for the first time they have broken this out as quote unquote ad services are you excited too.


[23:35] Yeah yeah that was a big deal I’m mildly annoyed because I want to say in

20 21 of my Jason and Scot show predictions was that they would start breaking out ad revenue and I feel like I didn’t get credit for that prediction and then you know the next year when I gave up on it they of course did it.


[23:52] I called him to tell him it was okay to finally finally do that now that the prediction had lapsed.


[23:56] Yeah that’s kind of petty of you I’ve been meaning to talk to you about that but yeah so so for the first time they disclosed how much General Revenue they generate in on ads the CFO was asked why they did that and he’s like.

[24:11] It just was becoming more and more material and I was getting tired of saying on all these earnings calls and other which is why largely the ad business so.

For the quarter they they reported ad revenue of nine point seven billion.

Um so for the year they reported 30 1.1 billion in ad revenue and they also showed their growth rate.

Their growth rate decelerated a little bit for that business to 32% so they’ve got a an annualized business is generating Thirty 1 billion and AD Revenue that’s growing at 32%.

To put that in perspective in September emarketer estimated their ad business at like 24 billion so.

Materially bigger than I think some people realized and by far the third biggest digital ad Network.

In North America and so super exciting that there were starting to get more visibility into it as we’ve talked about a lot on the show retail media networks is a big trend.

Um across all retailers but you know Amazon represents about 77 percent of the total retail media Network size at the moment.

[25:34] And I always like to contrast that with the business that analysts will have the most at Amazon which is a WS.

So you know the common narrative is the most profitable sexy business and Amazon is a WS.

And it had a great quarter it grew by 40% which is actually an acceleration of its growth which is.

Pretty remarkable if you if you think about what a big business it was they sold almost 18 billion in Q4 and I want to say they’re annualized.

Aw s business was like 63 billion and they made like 18 billion in net income on that so that’s that’s a.

Super good business that you’re still you know growing it nearly fifty percent on a business that’s spinning off 18 billion dollars a year in cash but.

It also is highly Capital intensive so they have to spend a bunch of money to make that money and so if you compare the

the 60 billion that they make on a WS that they have to buy all this hardware for against the

30 billion that they make on ads that they have almost no cost of goods associated with the ad business is almost certainly more profitable to Amazon than a didn’t even a WS.


[26:59] Do you think it was a bit of a flex to break this out kind of after seeing Facebook had such a rough time I don’t think they could have done.


[27:07] Yeah I think the timing is not right I think that like this was inevitable like I don’t know what I mean you probably are more familiar with.

Like I think the the Gap reporting requirements are that it’s quote unquote material and it’s like now that we see the number it’s kind of hard to argue it’s not a material number so I assume at some point they they run into SEC problems if they.

Disclose that but I.


[27:32] The definition of materiality is 10% in my recollection so and you know I think it could be argued it’s one of those squishy things where you know I don’t think this is ten percent of Revenue is it.


[27:45] No


[27:46] No but Eva died probably is so then why yeah that’s probably it probably triggered something on the bottom line out imagine.


[27:54] Yeah and so one other side note I want to call out on AWS this news actually broke.

Yesterday but then they definitely cooked it into their earnings called today the Amazons been on a nice winning streak with AWS clients.

That are there are moving to the cloud but one that would be most relevant and somewhat surprising to our listeners is yesterday Best Buy announced that they were moving

all of their IT services to AWS and the reason that’s surprising is obviously Amazon and Best Buy are.

Are occasional Frenemies but they’re mostly competitors and you know it’s somewhat surprising that a retailer like Best Buy would

by its infrastructure from a direct competitor like Amazon.


[28:40] It is and I think some of the you know I’ve heard that like some of the retailers even ask their vendors that not to use AWS or you know they they.


[28:50] Yeah I think that’s a general policy at Walmart for example is that like that you can’t host any solution you’re pitching the Walmart on on AWS.


[29:00] Oops okay anything else that you saw that was interesting and adds an AWS.


[29:07] No no but that was exciting.


[29:10] Yes oh so Wall Street is a what have you done for me lately so the once they once they kind of heard that the revenue and was in line and

the bottom line was beat for the quarter then it’s kind of like well what’s it looking like for next quarter so Amazon’s Guidance the guided revenues for the first quarter to 112 21 17 billion

those in line with Wall Street,

the bottom line was better than Wall Street was expecting a 3.9 percent Gap margin compared to Wall Street at 3.6 so again that was kind of a sigh of relief and then that Revenue range is pretty.

Pretty slow so it’s three to eight percent growth.

So I don’t I don’t know if this is a lapping thing they’re saying or not or maybe their sandbagging here but that felt kind of like pretty slow to me,

but again it’s kind of like how does it match the expectations of the forward guidance not like what is the absolute number so Wall Street seemed to like that and then.

Did you want to do the annual View.


[30:11] Yeah so so for the year that top line revenue growth was like twenty one percent.

North America ended up being 18.4 percent for the year I think I mentioned that earlier in international was 22 percent,

those two numbers are getting closer together by the way like you know historically International was much more and growing much faster and there still is a lot more International that’s not as penetrated by Amazon so that’s a little bit interesting.

The North American number 18.4% sounds like a pretty good number until you you realize.

They’ve never been below 20% before so that’s that’s kind of a Debbie Downer and then the US Department of Commerce data says all of retail was up.

By 18 percent normally e-commerce grows faster than brick and mortar so if all the brick-and-mortar retailers in America on average grew 18 percent and then you know the biggest best e-commerce.

Retail in North America only grew 18.4% I would actually call that kind of lackluster.


[31:22] Yeah the you know doing that on about a 500 billion dollar number those is a pretty good the Amazons defied the law of large numbers for quite a while.


[31:31] Yeah unfortunately they’ve ruined it for themselves like I totally agree like if you if you just started a business and and Drew out this hockey stick everybody would be perfectly satisfied but

based on the the unrealistic expectations that Amazon has habitual eyes Dart 12 it’s a,

slightly tougher so letting for them now.


[31:53] One couple of other tidbits that I thought were interesting as someone that hires a lot of folks Amazon reported that for the end of the year they just cross 1.6 million employees

I cannot even wrap my head around that.

What does that that’s like the size of my residential area is all employee in the triangle area where I live is 1.2 million so there’s more people to work at Amazon that live in my entire

area here my 30 mile radius the other thing I thought was interesting and again like.

[32:26] Yeah we’ll get a look at the queues in the case and all that jazz when they file them I guess it’s K is when they for the annual

and that’s the SEC docs and they did report one I’ve been keeping an eye on is fulfillment investment and the cost for fulfillment only grew ten percent year over year in the fourth quarter

and that has been more running at like 40 50 percent and like

like me you probably see a lot of new Amazon Vans out there and a lot of activity going on in the shipping world so it feels like that data point indicated to me that they may be added

bit of a end of a so Amazon goes to these phases where they’ll have kind of a

invest in Harvest kind of cycle so it feels like we’re at the end of a

delivery invest cycle and kind of heading into Harvest when the cost of shipping is kind of caught up to the amount of volume that they’ve surged up to it this latest covid driving everyone to digital

any other tidbits you saw.


[33:28] So a couple of small things first of all with regards to that that Capital spending there was an interesting,

segment in the the Web Conference where the CFO kind of drilled into

expectations for future Capital spending and he kind of broke it out and he said hey the biggest chunk of our capex goes to AWS infrastructure that’s still a really fast growing business and that that kind of investment that

piece of Investments probably going to have to continue the second biggest chunk of our investment is fulfillment and he actually broke out

delivery and and.

Warehouses and you know he kind of implied that that both of them had probably gone over the peak investment and that they would probably be able to start slowing those Investments and so I have a feeling.

That that was good news to Amazon or to investors and then he did mention that less than five percent of their total capex goes into things like

new stores so all of these people including me tracking all their new store Concepts

in wondering if there’s some like big large scale deployment looming,

totally possible but they’re certainly not foreshadowing that in there.

In their capex spending at the moment and then the the other.

[34:56] Like potentially big piece of news that I think really was catnip to investors and I suspect will show up in that stock price tomorrow is that they also announced that they are increasing the price that consumers pay for Prime so

I think it was 120 bucks a year 100 119 a year and now it’s going up to 139 a year so they’re adding.

20 dollars to that super valuable super sticky service and I think investors will like that because it shows,

how you know sticky they think they are with with consumers that they’re able to get away with that kind of price hike in that of course will fall straight to the bottom line.


[35:42] Yeah Zack and I are you going to cancel your Prime subscription.


[35:45] I am not.


[35:47] What do you like ten boxes a day someone at Amazon is calculated the point at which that they’ll they can make you leave so that they could get some of their money back.


[36:00] Yeah side note on that,

you know I feel like there are all these advantages that Amazon has that we don’t talk about very much and I actually made a short little YouTube video about one of them that we’ve talked about on the show before Amazon key for business so if you’re you’re bored

you can I’ll put a link in the show notes you can watch my little YouTube video about about some of the sneaky advantages Amazon has that make themselves more sticky.


[36:25] Yeah

yeah that’s an interesting they’ve tried with Amazon key they tried going in your garage and your car and consumers did not care for those two options but I suspect I haven’t seen your awesome video I suspect you’re talking about where they work with property managers to get access to multi-unit.


[36:41] Exactly I’m specifically talking about multi using unit dwellings I’ve actually heard slightly different I’ve heard the car thing was a total dud,

which sounds like what what you heard as well but I’ve heard that the in some Suburban areas that the garage access is actually working pretty well so I.


[36:59] Okay we’ll save that for a future episode anything else you want to talk about.


[37:07] No I think that’s it for Amazon that was a lot it was an exciting quarter Ruiz.


[37:12] Yeah so just to kind of put the kind of

the tale of the tape if you will so the Biggest Loser was Facebook / meta they really got hammered by these changes and they thought they had figured it out and it turns out in the fourth quarter they had not so those those

fluid ad dollars left there left their coffers and went into Google’s apples and Amazon’s so those were the net winners for the quarter so it’s a really interesting

kind of set of events and yeah we will continue to report on it as we learn more as the company’s file they’re more detailed filings.


[37:48] Yeah

and and Scott in honor of my coworker who accidentally sent me an email saying that my my presentations are too long and rambling I think we’re gonna try to end this show a little early this week and so if you enjoy the shorter show you have my my coworker to thank and you can certainly send us that that feedback

but if you’re using our show to get your workout in on the at the gym and and suddenly you’re not getting as much cardio as you used to you you have that employee to blame.


[38:22] Yeah and this is either way I hope you like the our content and if you’d leave us a five star review on your favorite podcast listening technology that would be amazing thanks everyone.


[38:34] And until next time happy commercing!