Amazon speeds up spending to fend off eBay, Wal-Mart - The Buffalo News

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Amazon speeds up spending to fend off eBay, Wal-Mart

SAN FRANCISCO – is stepping up a warehouse-building spree, signaling the urgency of getting products to customers more quickly amid rising competition from eBay and Walmart.

Consider Amazon’s center in Chattanooga, Tenn., which opened in 2011 after about 10 months, compared with as much as two years for older warehouses. Boasting more space and technology that makes it easier to find items, the building is part of Amazon’s almost $13.9 billion spending binge on 50 new facilities since 2010. That’s more than the company spent on warehouses in its lifetime and brought the total to 89 at the end of 2012. Amazon has announced five more in the U.S. this year.

“We’ve standardized them in such a way that opening them and replicating them happens very fast,” said Dave Clark, vice president of worldwide operations and customer service.

The warehouse strategy carries risk. Fulfillment has become Amazon’s top operating expense, squeezing profit margins and contributing to a $39 million loss at the Seattle-based company last year. Yet Chief Executive Officer Jeff Bezos is under pressure to move more quickly as rivals including eBay and Walmart devise their own faster ways to deliver products.

“What Walmart and eBay are working on is, can they be faster than Amazon,” said Matt Nemer, a San Francisco-based analyst at Wells Fargo & Co. “It might not be the highest margin sale in the world, but they can potentially get something to you in an hour.”

At stake is leadership in the growing market for products that can be ordered online and then delivered to a customer’s door or a nearby store within hours. EBay has rolled out same-day delivery in some cities. And Walmart is increasingly moving its $482 billion in estimated fiscal 2014 sales online. The retailer has more than 4,700 stores across the U.S., most just a few miles from consumers’ homes.

Some competitors are either building their own delivery networks or relying on third parties, such as United Parcel Service. Amazon charges $3.99 and up for same-day and one-day delivery for users of its of Prime program, which includes unlimited two-day delivery for $79 a year. Non-Prime customers pay $8.99 and up.

So far, investors are giving Bezos the benefit of the doubt on the spending rampage. Amazon’s stock, which was trading at about $285 on Wednesday, has more than doubled since the start of 2010.

Amazon’s spending on fulfillment jumped more than 40 percent annually from 2010 to 2012, compared with 24 percent in 2009, according to data compiled by Bloomberg.

The spending is crimping Amazon’s margins. The company’s trailing 12-month operating margin of 0.95 percent lumps it in the bottom 3 percent of peers in the Standard & Poor’s 500 Index — even though it ranks among the top 10 percent of that group by sales, according to data compiled by Bloomberg.

And the margin pressure is rising as the price tag associated with warehouses is set to increase. The company said last month that it’s adding more than 5,000 full-time jobs in 17 U.S. warehouses. Those new hires will join more than 20,000 employees. Amazon said it’s also bringing on 2,000 staff for customer service, including part-time and seasonal workers.

If Amazon can place fulfillment centers nearer to the top 20 U.S. metropolitan areas, the company could reach 50 percent of the U.S. population with same-day delivery, compared with 15 percent now, according to supply chain consultants MWPVL International. That would require only opening another 12 warehouses beyond those built and announced, the firm said.

Competitors still see flaws in Amazon’s delivery systems.

Instacart Inc. is an online grocery business that guarantees delivery of goods in less than two hours. That’s faster than Amazon’s grocery business in Seattle and Los Angeles, called Amazon Fresh, which doesn’t make that guarantee.

“We don’t have to build warehouses, lease a fleet of trucks or manage perishable inventory, which substantially reduces our operational cost,” said Instacart CEO Apoorva Mehta, who founded the startup after working at Amazon.

Amazon’s warehouse boom gained momentum in 2011, when it agreed to begin gathering online-sales tax in more states. The company previously avoided setting up facilities in some states because a physical footprint triggered collection of sales tax from consumers, which undercut Amazon’s cost advantage.

At the same time, Amazon worked to improve efficiency in new facilities. The earlier centers included more manual picking and packing of items from shelves into boxes. They also had more storage on the warehouse floors.

Amazon decided new centers would have multiple floor levels and dense rows of floor-to-ceiling shelves. The company has increased the height and square footage of the buildings, and is using more cubic space within each.

“We now get about twice as much product in this building as we would have four or five years ago,” said Clark.

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