Beloved online shoe retailer Zappos has announced it will become a wholly-owned subsidiary of Amazon in exchange for almost a billion dollars worth of Amazon stock. Both of these companies are interesting because they have mastered making the connection between a quality online experience and physical delivery of tangible goods offline.
Is this just a story of a big online shopping mall buying up a hot little online shoe store? Taking a closer look at the offline supply chain of each company indicates that there may be more to this deal. Some supply chain analysts believe that the two companies are actually radically different, but complementary, and their union could help Amazon both change the way it relates to its customers and reach a whole new group of customers willing to pay more for a high-quality user experience. This is a story of two different ways of selling things on the internet and delivering them to your door.
The Business of Delivering Stuff
Amazon is a master of the supply chain. It’s got so much capacity, for example, that the company last year opened up a “supply chain as a service” business, just like it created a surplus cloud computing as a service business years earlier. (Amazon’s Newest Web Service: Shipping Center APIs)
Zappos is no slouch at rushing goods to your house either, though. (Just last week their elves delivered a new pair of shoes to my house the next morning after I ordered them late at night!)
It appears that Amazon will leverage at least some of the existing Zappos supply chain; Zappos CEO Tony Hsieh wrote today that Amazon doesn’t have any warehouses as close to the UPS Worldport hub in Louisville, Kentucky as the shoe company does and will likely store some Amazon inventory there, for example.
Amazon could also remove a substantial amount of the Zappos distribution infrastructure that now becomes redundant and isn’t scaled as well. That would mean lower overhead for the Zappos subsidiary and increased profits for Amazon.
That might make sense from a short term bottom-line perspective, but even in terms of the supply chain it may not be the whole story. “Amazon might go to shareholders and say that’s the plan,” procurement analyst Jason Busch of SpendMatters told us. “But what you tell Wall Street and the reasons why you do this kind of deal are often very different.”
Not All Supply Chains Are The Same
Busch argues that the two companies have very different, and possibly complementary, kinds of supply chains.
Amazon has innovated around warehousing and operational efficiency. Busch says the company has acquired software makers that specialize in processes like high efficiency inventory picking and inventory tracking.
Zappos, on the other hand, has built up a different kind of supply chain. “From keeping diverse inventory in stock to very high-touch order fulfillment, the Zappos customer experience is seamless and integrated,” Busch says.
“Amazon would never upgrade shipping to overnight for example, as Zappos does, except through the Amazon Prime program. Amazon’s warehouse is very innovative, but Amazon is focused on warehousing and lowering costs. Zappos has learned it’s about more than just cost, it’s about user experience and people are willing to pay for that. It’s not surprising that Amazon realized they can acquire the skills and knowledge that Zappos has developed, in addition to the business side where they were not a major player in apparel. “
Amazon may be reconsidering how they serve customers, so they may choose to keep some of the redundant Zappos infrastructure.
-Jason Busch, SpendMatters
Lora Cecere, Vice President of Value Chain Services at AMR Research, says she agrees with Busch. “It’s now a multi channel play,” she told us. “Zappos deals with quick cycles, Amazon has longer cycles and is warehouse centric. They are really dealing with different supply chains. I wonder if it wasn’t a preemptive move to block another competitor from acquiring Zappos.”
Zappos had been talking lately about moving into the home electronics business, something Amazon excels at. Now the two companies won’t have to compete, but will aim to gain from each other’s different experiences and resources in order to target different types of customers seeking different shopping experiences. Some sources say that Zappos didn’t want to sell itself, but was pressured by its investors. The value to Amazon seems clear on several levels.
Bringing Zappos into the tent could make Amazon an even more interesting company. That’s something that could very well be worth giving up almost a billion dollars in stock for.