It was 1998 when
introduced us to the underpants gnomes, a group of subterranean
entrepreneurs trafficking in dirty laundry. They had a three-step
1. Collect Underpants
In the 15 years since "Gnomes" first aired, these little guys have
become a kind of grand metaphor, cited by the
New York Times
, Forbes, and the
Wall Street Journal,
and used to describe everything from dot-com startups to American
presidents. They illustrate - rather colorfully - the idea that
it's not enough to know where you're going. You also need a plan
for getting there.
) sells underpants and does just fine with them, thank you very
much, but toilet paper may be the online retailer's undoing. Amazon
now shares warehouse space
Procter & Gamble
), and is in talks to do the same with other vendors, including
Seventh Generation Inc. and
). The intention is to ship personal care products straight from
the assembly line to the customer, eliminating the need to
Sounds efficient, right? The
Wall Street Journal
thinks so, arguing that "co-location reduces the cost of storing
bulky items like diapers and toilet paper and frees up space for
the Web retailer to stock higher-margin goods in its own
The Daily Ticker agrees
. "[W]hy should P&G make the paper towels in one manufacturing
facility, ship the product to a warehouse, which then ships to
Amazon or to a store, when it could directly ship it to you right
from the start?"
The move is just one part of a larger strategy to decentralize
Amazon's supply chain. Over the last few years, the company has
been opening fulfillment centers around major cities, trying to
speed up delivery times and make possible new lines of business
like grocery delivery. Where once Amazon shipped everything out of
a handful of massive warehouses, it now relies on a system of
smaller, more proximal depots. Again - seems efficient, doesn't it?
But remember the underpants gnomes. The retailer still has to get
its products to customers, and in Amazon's case, the cost of
shipping is the question mark. The company has almost no ability to
pass these expenses on to customers. Prime Membership gets
customers (and up to four family members) unlimited 2-day shipping
for $79/year. Nonmembers can take advantage of free shipping on
larger orders, and a ubiquitous $3.99 option for lesser hauls.
So long as Amazon can package everything in a single box, then all
is well. If it needs to ship items separately, then costs quickly
escalate. The model turns into something like a milk delivery
service - not worth it.
Co-locating is a gimmick. Co-packaging is Amazon's entire business,
and it becomes a tall order when the supply chain is balkanized.
Consider that last year Amazon introduced a new "add-on" category
for small items. Now, they'll only ship with a minimum order of
$25. It may be that too many Prime members were demanding rush
delivery of toothpicks. In any event, Amazon is trying to get order
sizes up. Of the three add-on items I've purchased in 2013,
however, two came in separate boxes, from different fulfillment
A second problem is the economics of paper towels. There's a reason
that P&G doesn't have a subscription service, and won't ship a
3-pack of Bounty or a box of Tide to your front door - something it
could do very well without Amazon, and in fact, something it could
have done at any point in its 175-year history. The expense would
be prohibitive. High-bulk, low-margin items are better suited to
trains than to delivery trucks; they're more practical in an
overloaded shopping cart than under the arms of a footsore mailman.
Contrary to what the
Wall Street Journal
article proposed, the lack of high-margin items is a liability. It
ensures that, for every Amazon package leaving a P&G facility,
there's little opportunity to make up the shipping costs. In
fairness, toothpaste might raise the margins somewhat; but as
Amazon enters the consumer care business, it's also moving down the
food chain, and away from the delivery-friendly products like books
and consumer electronics that used to account for most of its
business. At the same time, the retailer appears to be finding
fewer opportunities to ship all of these things together, in bulk.
It is, in fact, losing the advantages of scale.
None of which changes the fact that brick-and-mortar stores like
) are scared, or that they're following Amazon
down the rabbit hole
by offering increasingly inexpensive (read: subsidized) shipping
) has been aggressive in matching prices with its online
counterpart, and last month it
rolled out a diaper subscription plan
to better compete with Amazon Mom. The question now is whether
these big box stores can get away with the sort of prodigality -
indeed, the flagrant gnomishness - that's now synonymous with
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