AmazonColocation WSJ 10-14-2013
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Transcript of AmazonColocation WSJ 10-14-2013
1
Soap Opera: Amazon Moves In With P&G E-Commerce Giant Sets Up Shop Inside Warehouses of Suppliers WSJ - Updated Oct. 14, 2013 10:52 p.m. ET
TUNKHANNOCK, Pa.—Atop a hill at the
end of a road called P&G Warehouse Way sits
a warehouse stocked with Pampers diapers,
Bounty paper towels and other items made
byProcter & Gamble Co. PG -1.45% It also
houses an ambitious experiment
byAmazon.com Inc. AMZN -1.38%
Each day, P&G loads products onto pallets
and passes them over to Amazon inside a
small, fenced-off area. Amazon employees
then package, label and ship the items directly
to the people who ordered them.
The e-commerce giant is quietly setting up
shop inside the warehouses of a number of
important suppliers as it works to open up the
next big frontier for Internet sales: everyday
products like toilet paper, diapers and
shampoo.
The under-the-tent arrangement is one
Amazon's competitors don't currently enjoy,
and it offers a rare glimpse at how the
company is trying to stay ahead of rivals
including discount chains, club stores and
grocers.
Logistics have long been crucial to success in
retail. Years ago, Wal-Mart Stores Inc.WMT -
0.42% set up a system that lets suppliers
monitor what needs to be replenished.
Amazon instead is going out to its suppliers
with a program it calls Vendor Flex. By
piggybacking on their warehouses and
distribution networks, Amazon is able to
reduce its own costs of moving and storing
goods, better compete on price with Wal-Mart
and club stores like Costco Wholesale Corp.,
and cut the time it takes to get items to
doorsteps.
A few of Amazon's rivals have caught wind of
the arrangement and aren't happy about it.
"Retailers don't like things that benefit their
competitor but not them," said Anne
Zybowski, vice president of retail insights at
consulting firm Kantar Retail.
Yannis Skoufalos, P&G's global product
supply officer, said the company values its
relationships with all its customers and works
closely with many retailers to help reduce
costs in their supply chains and meet their
unique needs. For example, P&G works with
warehouse clubs to keep its products in stock
without taking up too much storage space
inside the stores.
Household staples have traditionally been
considered too bulky or cheap to justify the
cost of shipping. Americans currently buy just
2% of such goods online, retail analysts
estimate. Yet even that sliver of business was
worth $16 billion in 2012, according to
Nielsen Holdings NV, and the research firm
2
believes online sales will grow by 25% a year
to $32 billion in 2015.
Enlarge Image
Consumer-products makers selling through Amazon like the idea of locking shoppers into their brands with the subscription program, and in some cases help fund the discounts. AFP/Getty Images
More efficient distribution and changing
consumer habits are unlocking the market. If
online sales of consumer packaged goods
could rise to the 6% share the Internet claims
of retail overall, Amazon could generate an
extra $10 billion in revenue selling nonfood
consumer goods, up from less than $2 billion
currently, estimates Mark Mahaney, an
Internet stocks analyst at RBC Capital
Markets in San Francisco.
"This is one of the biggest growth areas for
Amazon," Mr. Mahaney said.
"We continue to innovate on behalf of our
customers to offer fast delivery, low prices,
and vast selection," an Amazon spokeswoman
said.
The company signaled its interest in selling
consumer staples online with its $500 million
acquisition in 2011 of Quidsi Inc., the owner
of Diapers.com and Soap.com that
subsequently added sites selling toys and pet
supplies, among other things.
P&G began sharing warehouse space with
Amazon around three years ago and has
expanded the practice. Amazon is now inside
at least seven P&G distribution centers world-
wide, including spots in Japan and Germany,
said a person familiar with the matter.
The economics of the arrangement benefit
both sides. For Amazon, 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 distribution centers. The location in
northeastern Pennsylvania is 5 miles from one
of P&G's largest plants, which makes diapers,
paper towels and toilet paper, and within a
day's drive of major cities in the U.S.
Northeast and Canada. The warehouse also
stocks other P&G products from pet food to
razors to shampoo.
P&G, meanwhile, saves on the transportation
costs that it would have incurred trucking
products to Amazon's regional distribution
centers. Plus, it gets Amazon's help in
boosting online sales, a priority for many in
the industry.
Amazon is already inside or in talks to enter
the warehouses of companies including
Seventh Generation Inc., Kimberly
Clark Corp. KMB -0.42% and Georgia Pacific
Corp., people familiar with the matter said.
Seventh Generation said it is in talks with
Amazon to ship its diapers, baby wipes and
cleaning products directly from its
warehouses. Chief Executive John Replogle
said more than 20% of the Burlington, Vt.,
company's sales come via the Internet—a
3
percent that has doubled from five years ago,
he said.
"This is the fastest-growing part of our
business," Mr. Replogle said.
Kimberly Clark and Georgia Pacific declined
to comment.
Amazon—which posted $61 billion in sales in
2012, up 27% from a year earlier—has a
service called Subscribe & Save to tap into
that area of growth. With items like vitamins,
cereal and toilet paper, Amazon automatically
ships them to customer's doorsteps on a
regular schedule. Shoppers that buy at least
five eligible items per shipment get a 15%
discount.
Consumer-products makers selling through
Amazon like the idea of locking shoppers into
their brands with the subscription program,
and in some cases help fund the discounts.
Clorox Co., whose Brita water filters, Burt's
Bees skin-care products, and namesake
disinfecting wipes are increasingly sold
online, often via Amazon, is expecting
companywide sales from e-commerce to hit
$200 million in 2020, up from $75 million in
the fiscal year ended in June.
A.G. Lafley, P&G's recently returned CEO,
has identified e-commerce as one of the
biggest opportunities for the Cincinnati-based
company, which is trying to accelerate sales in
an economic environment where growth is
hard to find. P&G doesn't disclose what
percentage of its sales come via the Internet,
but the growth is faster than other retail
channels, notes Bernstein Research analyst Ali
Dibadj. P&G's Pampers and Luvs diapers,
Duracell batteries, Gillette razor cartridges and
Braun shavers are among the items that
consumers are increasingly buying online,
company executives say.
In recent years, P&G's online sales of diapers
have grown sharply. The company's goal is to
get consumers who buy diapers online to add
more of its products like skin cream and
laundry detergent to their orders as well.
P&G has long honed its ability to sell products
in physical stores with shrewd in-store
marketing and packaging designs. But it is a
neophyte in the world of online sales and
could use Amazon's help.
"They need to figure out what they can do to
influence online sales," said Mr. Dibadj. "This
is a whole new world for P&G."
—Greg Bensinger contributed to this article.