Amazon May Take Another Bite from California Retailers Now That it is One.

Starting last Saturday, Amazon.com began collecting sales tax from California customers.  It was the completion of one of the most surprising turn-arounds in corporate policy in recent memory.  Ever since its founding, Amazon had avoided creating a physical presence in any state that had both a sales tax and a substantial number of customers, which doubly disqualified California.  Attempts to find a loophole that allowed the collection of sales taxes were met with strong consequences such as canceling all Affiliates, closing warehouses and sponsoring ballot propositions.  Then it all suddenly changed.  In exchange for a short postponement of California’s affiliate nexus law, Amazon not only agreed to collect sales taxes, but became a major proponent of a national law to allow cross-border state sales tax collection and even rewarded California with two huge new warehouses employing over a thousand people each.

In other postings I have discussed various reasons why Amazon may have made this change in policy.  They included:

1. It was affecting their public image.
2. The extra complexity of collecting and reporting multiple sales taxes from multiple jurisdictions made e-commerce more complicated, and that as a result more small to medium e-commerce firms would switch to using Amazon’s e-commerce services rather than doing it themselves.
3. Sales taxes are collected at the time of sale but reported/paid on some larger schedule such as weekly, monthly, or quarterly.  Thus there would be a substantial short term float upon which Amazon could collect interest.
4. Communities would compete aggressively for the economic benefit of having Amazon’s warehouses built there.  The resulting tax rebates and grants would provide an additional shadow profit source.
5. Amazon might decide to expand the Amazon Fresh grocery delivery business.

Recently in an interview with the New York Times, Jeff Bezos suggested one more thing he wants to get from these new nearby warehouses:

“We want fast delivery,” Mr. Bezos said. At a minimum, “we can work on making it the next day.”

The message is clear: Bezos isn’t talking about paying for overnight delivery, anybody can do that already.  He is talking about having next day for the same cost as the two day shipping, which for Amazon Prime members is free.  And what is also clear is that what Bezos really wants is free same-day delivery.  The thought of Amazon offering free same-day home delivery is more than enough to send shivers down the spine of any physical store retailer.

Is that feasible?  Can for example Amazon’s new San Bernadino warehouse offer same day delivery to all of Southern California for the same or less cost than they are spending for second-day delivery?  Could the new Paterson facility do the same for Northern Califonria?  I believe so, but not by following conventional methods, and that may be the other story.

Let’s start with some assumptions:

• The new 950,000 square foot San Bernadino and Paterson warehouses will be a 24/7 operation using Amazon’s latest Kiva System robotics and the best software Amazon has or can develop.
• Same Day Delivery to Southern California is only available for merchandise in-stock at the San Bernadino Warehouse. Or conversely in Paterson for Northern California.
• Same Day Delivery means being at the door between 8AM and 6PM less than 24 hours after the order is placed.

If you have ever tracked an important shipment on any of the major delivery services you know the sequence that a package travels through:

1. It is picked up by a delivery vehicle and taken to the sender’s local distribution center.
2. The package is unloaded and sorted at the distribution center
3. The package is placed on a truck or plane to the destination’s local distribution center.
4. The packace is then unloaded at the destination’s local distribution center, sorted, and placed in a delivery vehicle.
5. The package is delivered to the destination.

That’s a lot of steps, and the only way to get it to work for next day or same day deliveries is with a lot of rush handling and pushing the urgent packages to the front of the line. That is expensive, even if the package is not traveling far. Only so many packages can be pushed to the front of the line which is why the shipping companies charge such a premium for overnight and same day delivery.

Now consider the other scenario:

1. The order processing system accumulates orders until it has the number of packages to a particular zip code or adjacent set of zip codes to exactly fill one delivery vehicle.
2. The order processing system then directs the Kiva System robots to process those orders to the packing stations immediately adjacent to the intended delivery vehicle, in the order of the most efficient delivery route.
3. The package is then delivered to the customer.

Three hour driving distance from Paterson and San Bernadino from Mappoint. Note how neatly they together blanket the state’s population.

As you can see a lot of steps on handling, loading, and unloading are removed.  According to Google Maps a three-hour driving radius from San Bernadino will reach Santa Barbara, Bakersfield, and the Mexican Border in San Diego.  It would be feasible for a driver to reach the destination area, deliver a vehicle full of packages, and return in one shift.

But every motorist here knows how California traffic can lengthen those travel times greatly.  The order processing software can work around this.  The trucks to the far reaches of the delivery zone can be loaded to depart at for example at 5AM ahead of the traffic to arrive at the start of the 8AM-6PM delivery window and a second batch sent during mid-day traffic to arrive nearer to the end of the delivery window.  During rush hours deliveries will be processed for more nearby places.

Switching to a direct to delivery truck model for the warehouse could make a sub 24 hour delivery at the same cost as two-day delivery seem possible given Amazon’s scale and technical sophistication.

But here is perhaps the most interesting question raised: What color are the trucks? 

At UPS they would hope that the trucks will be brown.  For Fedex the Blue-Green-White of their ground service would suit them fine.  And the post office would be rooting for the Red, White, and Blue.  But all of the distribution and sorting infrastructure that represents these entities value-add have been bypassed.  It is just a delivery truck and driver.  Why couldn’t it be orange, black, and White…Amazon’s colors?  If Amazon decides to do the delivery trucks themselves these Amazon-branded trucks and drivers will be visiting every community each day and otherwise returning empty. So what’s to keep Amazon from saying “Got something you need returned? Let us know and we will personally come pick it up at your door for free!”.  One more thing to give the physical retailers nightmares.

None of this will happen immediately of course.  The warehouse itself is not yet operational, and a change of this magnitude will not be done instantly even after that.  But it would have been easy for Amazon to rest on its laurels after becoming the world’s largest book seller or the world’s largest internet retailer.  It would have been equally easy to say that locating warehouses in remote no-sales-tax states was ‘how it has always been done here’ and ‘how we got to where we are’.  But instead they are showing a remarkable ability to continue to look at what can be gained with large daring changes.