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[21 comments]

Amazon Gets Robotic

March 27, 2012

In its biggest acquisition since the 2009 purchase of Zappos, Amazon agreed to pay $775 million for Kiva Systems, a maker of robots that move items around warehouses. While expected to help speed up deliveries, the bigger benefit is expected to come from cost savings from reducing manual labor.

Kiva's orange robots, which slide about grabbing and moving shelves and crates of products, are used by many retailers including Gap, Staples, Toys "R" Us and Saks. The deal with Amazon is expected to close in the second quarter.

"Amazon has long used automation in its fulfillment centers, and Kiva's technology is another way to improve productivity by bringing the products directly to employees to pick, pack and stow," said Dave Clark, vice president, global customer fulfillment, Amazon.com, in a statement.

To some, the acquisition was notable since Amazon often looks to outsource through licensing agreements, such as its partnerships with Viacom and Discovery Communications to distribute streaming online video content.

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The move comes as Wall Street is said to be losing patience with the company's measly operating margins and the payroll for its full-time as well as temporary-holiday warehouse staff stands as its highest variable operating costs.

While touting its two-day shipping Prime service, Amazon is in the process of adding 17 warehouses to its current 52 warehouses to better manage its growth. Offering fulfillment services for third-party retailers is also a growing revenue generator.

"It's an internal infrastructure play, and it comes at a time when their headcount has been growing faster than revenue," Colin Gillis, an analyst at BGC Partners LP, told Bloomberg News. "One of the knocks on Amazon is that their fulfillment is an expensive, manual process. They're not getting the benefits of scale. So they're taking some steps towards it."

Amazon also recently disclosed in a corporate filing that its fulfillment network "becomes increasingly complex and operating it becomes more challenging" as it expands.

StorefrontBacktalk also wondered how Kiva's customers would feel about Amazon ownership. Wrote Evan Schuman, "How will all of them feel about systems in their warehouses — which know everything about product flow and, even worse, can control speed, accuracy and efficiency of product flow — being owned and controlled by Amazon, a direct rival?"

FINANCIALS:     [NASDAQ:AMZN]

Discussion Questions:

Discussion Questions: What is your reaction to Amazon's purchase of Kiva Systems? How will this affect Amazon's competitive position in the marketplace?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Are you more or less optimistic about the competitive positioning of Amazon following news of its purchase of Kiva Systems?

Comments:

Smart move. Expanding the number of its warehouses allow Amazon to get greater geographical coverage which impacts its delivery speed and costs. The acquisition of Kiva systems will allow it to better control its fulfillment costs. The combination of the two should help Amazon to maintain its competitive position. What is not covered is the net impact of lowering these costs versus the increase in price when it starts collecting sales taxes in every market.

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Steve Montgomery, President, b2b Solutions, LLC

Seems to be a pretty straightforward play to drive efficiencies in their supply chain, including labor expense. The question is, will the acquisition of the Kiva and using their own technology in-house drive greater efficiency than on-going purchases of such technology solutions on the open competitive market, where innovation is driven by broad, global competition?

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Verlin Youd, Principal, VPY LLC

Amazon knows that "you gotta do what you gotta do."

As its business grows and becomes more competitive, Amazon must become increasingly automated and efficient. The purchase of Kiva Systems is part of the methodology to be the "lead dog" that others will follow in the foreseeable future.

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Gene Hoffman, President/CEO, Corporate Strategies International

Well, I don't get it really. Why did Amazon have to buy the company? Licensing the technology, I get. Buying the company, not so much.

One of my analyst friends postulated that it was less expensive to buy the company than to buy 52 licenses for the DC's...but I think Amazon has reached a point that many retailers before it have reached. It's time to ask itself what it wants to be when it grows up -- a technology company or a retailer? The answer is obviously "retailer."

Of course, existing Kiva customers are not going to be happy. Amazon's statement of support for existing customers was lukewarm at best. But that doesn't mean new alternatives won't be available. There are few barriers to entry and a fair number of materials handling companies that can create competing technologies.

Mostly I view the purchase as a distraction. Amazon could have de facto owned the company by being its largest customer. Now it has inherited customers. Who needs that?

Like I said, I don't get it.

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Paula Rosenblum, Managing Partner, RSR Research

I think this is along the lines of Amazon leveraging its best practices and doing acquisition to diversify out of being just a retailer. Think Amazon Cloud Services, Online Media, etc. This one is a bit out of line, but for the price Amazon now can customize the technology, license it to 3rd parties, etc. Also perhaps behind the scenes, the owner of Kiva was looking for an exit. This way Amazon controls one of its strategic suppliers in a niche market.

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Kenneth Leung, Director of Enterprise Industry Marketing, Avaya

This will improve customer service and reduce costs. I think it will further solidify Amazon's retail power.

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Joe Nassour, Chief Technology Officer, RetailTactics

There should be an antitrust review of this acquisition. Amazon purchase of a robotic fulfillment service that provided service to other competitors does not bode well.

This is the same technology that can create robots to automatically stock grocery store shelves during the night hours -- now someone like Walmart or Kroger has to go through Amazon.com for this technology?!

Ed Dunn, Founder, (Stealth Operation)

It seems pretty straight forward to me -- Amazon wants to utilize the technology to drive down unit costs while controlling the technology so as to keep it away from their competitors.

In a highly competitive environment such as Amazon operates, pennies count, whether it's pennies that you're saving, or pennies that are more difficult for your competition to save.

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Ted Hurlbut, Principal, Hurlbut & Associates

Amazon -- and etailing in general -- has represented a tradeoff of unlimited selection with the added cost of shipping. An individual shipment to someone's home has always been the most expensive way of getting a product from point A to point B. Then etailers all realized that free shipping was becoming a cost of entry, especially during the holidays.

Now Amazon is finding a way to offset the costs they are forced to eat by consumer imperatives regarding free shipping. The need to do this is critical. I can't really provide an informed opinion on this particular acquisition, except to say that market leaders need to own what is core to their business; or I assume Amazon sees it this way.

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Joel Rubinson, President, Rubinson Partners, Inc.

I mostly agree with Paula.

There has to be more to it than controlling the supplier of one piece of their supply chain technology. It's hard to imagine that they will forget about selling systems elsewhere and justify the purchase for internal consumption only. If that were the case, I'd guess a light bulb manufacturer would be next.

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Ken Lonyai, Digital Innovation Strategist, co-founder, ScreenPlay InterActive

The deal re-emphasizes the value of logistics and supply chain technology in retail.

John Johnson, Editor, RFID 24-7

I think the question here is the effect that Amazon's purchase will have on other retailers who use Kiva. In theory, the company will now be able to create innovations, and limit their use to Amazon, selling less advanced technologies to other retailers. If I worked at Staples, I'd be wary.

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Cathy Hotka, Principal, Cathy Hotka & Associates

As Bloomberg News reported last week, Amazon has a commercial offering, Fulfillment By Amazon, which provides fulfillment services to 3rd party sellers. The business is growing and helping transform the warehouses from cost centers into (at least partial) profit centers. The acquisition of Kiva was mostly about supporting and growing this business.

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Martin Mehalchin, Partner, Lenati, LLC

Amazon's purchase of Kiva is yet another example of Amazon operating as a platform, not just a retailer. I do see reason for concern and the potential for (more) defections from retailers that use Amazon's fulfillment arm. Amazon should be prepared to offer some pretty robust reassurances that the Kiva-bots won't collect data that Amazon Central can aggregate and use to its competitive advantage.

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Carol Spieckerman, President, newmarketbuilders

I'm with Paula -- I don't get it. At least, I don't think it makes a lot of sense.

Amazon is drifting into mega-success syndrome. That's the point where you start to think you can do everything better, manage everything better, innovate everything better than anyone else.

One of the most successful food companies in the world still lives by the principles of its founder -- one of which is "we will do only what we do best, we leave all else to the experts and buy what we need from them." Amazon would do well to pay heed.

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Ben Ball, Senior Vice President, Dechert-Hampe

When I first saw the announcement of this acquisition a couple weeks ago, I thought it was a big deal, then as I thought more it just seems to be typical Amazon. Just as they have "commoditized" their technology platform by buying the hardware and offering it as a service to other businesses, doing the same for their warehouses and distribution network by offering order fulfillment for other businesses, and even designing the hardware used for delivering electronic books (i.e. the Kindle), now they are going to design the hardware for improving warehouse selection. There has been no dearth of customers for their other offerings so I don't know why current Kiva users would not want to continue to use the robots that reflect Amazon's expertise in addressing warehouse efficiency.

The other thought I had at the time is "What a novel approach." Although it has turned out that perhaps it is not really that novel. Efficient warehouse operation is all about minimizing travel time. Traditionally the effort has been to arrange the selection area using flow racks, pick to belt, and other techniques that minimize the travel time of the selector. The approach being pursued here seems to be to keep the selector stationary and bring the product to them; that makes travel time zero. This would seem particularly beneficial in a slow moving or large assortment environment where products can be received and put away without consideration for retrieval. In fact, that might be where they expect to see the greater labor savings.

I must confess I have owned Amazon stock off and on for quite a while. I am impressed by their willingness to take a long term perspective for achieving greater profits. They have seemed to recognize that there are no boundaries in the modern business environment and that the only way to stay ahead is to keep improving.

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Bill Bittner, Principal, BWH Consulting

When I read the headline I thought this was a smart, bold strategic move. Reading the article makes me a little concerned. Why would Amazon need to purchase the company? Aren't they now making Kiva's customer base a bit concerned? It's baring Kiva's client list and customers to a potential interloper. Talk about a security risk, this is one.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Carol Spieckerman hits the nail on the head.

Amazon understands that it is a platform company. Their (huge) retail operation is the proving ground and the "anchor tenant" for a number of capabilities they have developed, perfected, packaged, and resold. These include cloud computing (http://aws.amazon.com/); e-commerce services such as Amazon Webstore and Checkout by Amazon; fulfillment services (Fulfillment by Amazon); and publishing services such as CreateSpace and Kindle Direct Publishing. The Kiva purchase is just another building block in that platform capability.

Even Amazon Prime, with its included free shipping, streaming video content, and Kindle lending library, encourages consumers to think of Amazon as the platform for digital content as well as physical goods.

Why make money on only your own retail sales when you can take a slice of everyone else's online business, and benefit from the collective economies of scale to boot?

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Ben Sprecher, Business Development, Google

I have often commented that Walmart is the #1 logistics organization in he world and Amazon is the #1 "selling" organization in the world, and that it is much easier for a selling organization to learn logistics than for a logistics organization to learn selling. Amazon is well on the way to supplanting Walmart as the #1 retailer in the world, regardless of their current ratio of businesses.

Never forget that "sales" leads the world, the bringing of the minds of buyers and sellers together. As has been said, nothing happens until someone SELLS something. Passively waiting for shoppers to sell themselves something will NOT dominate retail 50 years from now, as it does now. The "Amazonification" of "Walmart" continues, whether those two business entities continue to own their own DNA or not.

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Adjunct Senior Fellow, Ehrenberg-Bass Institute

On what Amazon wants to be when it grows up -- I have to disagree with Paula. Amazon is not just a retailer; the tech side of its business is probably just as big as its retail. Amazon has a host of B2B services and products, including Amazon Web Services, Elastic Compute Cloud, Mechanical Turk... the business there is huge. I am generally pessimistic when it comes to companies getting out of their core line of business, but Amazon knows tech, so I think it's going to prove a smart move.

Tracey Croughwell, Vice President, Sales & Marketing, Evofem

Smart. Amazon didn't need to purchase the company to take advantage of the robotics it uses, but the advantage of diversifying their portfolio and increasing their robotic investment (at a lower cost since they would own the company), makes great sense.

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Kai Clarke, President, Kowa Optimed, Inc.

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