Amazon Expands Vertically and Horizontally

amazon-logoAmazon has recently announced plans to expand in two directions—a vertical expansion into shipping by competing with Federal Express and UPS, and a horizontal expansion into the grocery business in competition with Wal-Mart and other grocers. Initially a business that served as an online alternative to physical stores, first in books and then in a multitude of categories, Amazon now appears to be seeking to become a ubiquitous retailer of all products through all channels.

Will it work?

Over the last forty or fifty years, retailing has seen many changes. From downtown shopping areas in both urban areas and small towns to regional shopping centers; from specialty stores to mass market chains, from physical stores to online shopping. Recently, there has been some movement away from big shopping malls to more pedestrian-friendly environments and multi-use facilities.

Through all these changes, most of us have become comfortable with online shopping for many products that formerly required a personal inspection—such as clothing and electronics. Sometimes we use physical stores to try out merchandise, then buy online.

Amazon has become an online behemoth in many retail categories. As The Wall Street Journal put it in an article on September 27, 2016, Amazon’s move into shipping is “a brazen challenge to America’s freight titans.” There is every reason for Amazon to try to expand vertically to ship the merchandise as well as sell it, if it thinks it can do so more cheaply than the billions in freight costs it pays to carriers such as FedEx, UPS, and the U.S. Postal Service.

If Amazon can make this transition, costs to customers should go down, provided that the shipping companies remain viable competitors. Since even Wal-Mart has not destroyed the freight industry, Amazon would have a difficult time replacing the “freight titans.” Amazon itself told The Wall Street Journal,

“we are very happy to have the delivery capacity our carrier partners can provide. They provide a high quality service, and our own delivery efforts are needed to supplement that capacity rather than replace it.”

On the other hand, many big box retailers don’t like being showrooms for Amazon, and some have gone under because of consumers’ shifting buying patterns. Amazon already has around 70 facilities across the U.S. from which it ships to consumers, and over 40% of the U.S. population lives within 20 miles of an Amazon facility. So it’s difficult to predict what limits there are on Amazon’s efforts to expand into shipping.

Through all the changes of the last half-century, food has remained the one thing we typically buy ourselves in a retail environment. I may hate the weekly trips to the grocery store, but other than a few specialty items from proven businesses such as Harry & David or Kansas City Steaks, I wouldn’t want to trust my food purchases to someone else, particularly of perishable items.

And yet, I remember as a child that my grandmother—who didn’t drive—ordered her groceries from the shop around the corner and had them delivered. I remember my mother ordering milk deliveries three times a week. So why not? There isn’t any reason why Amazon shouldn’t attempt to expand its product lines into perishable items.

According to another Wall Street Journal article, Amazon is trying out both home delivery service of groceries and also small local stores where previously ordered groceries can be picked up. They are even trying drive-through. Wal-Mart is trying some of these things as well. Groceries are costly to deliver, so whether this business model will work is questionable.

Regardless which expansions prove successful for Amazon, it is clear that retailing will continue to change in the decades ahead.

What do you think—will Amazon be successful in moving into shipping and into the food business?


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