Tag Archives: profits

Amazon’s future might be less about drones and more about operating its own trucks

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The idea of Amazon using delivery drones attracted attention but one commentator thinks owning and operating its own trucks would be more feasible and important:

Ajay Agarwal knows Amazon. As a managing director with Bain Capital Ventures, he led a big investment in Kiva Systems, the warehouse robot company that Amazon paid $775 million for last year. Agarwal says that Amazon may be taking an ever-greater chunk out of the world’s brick-and-mortar retail sales, but physical stores still have Amazon beat in one key area. “What’s the biggest negative of Amazon? Returns,” he says. “It’s a royal pain…I feel like a daily, weekly exercise for me is breaking down boxes, doing returns, printing out return labels, etcetera, etcetera.”

But a dense network of Amazon delivery trucks could make returning unwanted items as easy as taking out the garbage. Unlike electronics or books, which most people shop for sporadically, grocery shopping takes place regularly and often. If Amazon Fresh takes off, that will mean frequent, predictable trips by Amazon trucks down residential streets. For every grocery order delivered, those trucks will have room for another return. “They take packages, and they take packages back,” Agarwal says, much like the milkman who in distant days not only delivered your milk but also picked up the empty bottles. “They control the entire infrastructure.”

That deep control has been a signature element of Amazon’s operations, from the first website visit to the moment an order leaves a warehouse. But that’s when Amazon hands off that order to a third-party carrier, typically UPS or FedEx. Such a concession must drive a control freak like Amazon CEO Jeff Bezos nuts — even if those companies have helped cement Amazon’s reputation for reliability by delivering on Amazon Prime’s promise of two-day shipping. With an army of its own trucks on city streets, Amazon cuts out the middle man. Meanwhile, returns could become as easy as handing a box back to the same Amazon driver who brought it in the first place…

But, he adds, Amazon must tread lightly. For now, the company depends intensely on UPS and FedEx to make its business work. At the moment, Amazon can’t make them angry. It’s telling that a day after Bezos revealed Amazon’s flying drone ambitions on 60 Minutes, which would also be a form of direct shipping, news leaked of UPS’ own drone plans, as if the delivery company was saying: “Don’t test us.”

Companies like Amazon like having control over the whole process for several reasons. One is that everything is then under their control. (Except the production of products which still have to be designed, made, and placed in Amazon distribution centers.) From beginning to end, they can set quality standards and track information. The other important part of this is cost and I’m a little surprised Agarwal doesn’t say anything about this. One appealing aspect of drones is that they remove the need to have people involved with the delivery of packages. In contrast, trucks require drivers and maintaining equipment. (This also doesn’t account for the need for Amazon, companies, and taxpayers to also support and pay for roads.) Could Amazon do trucking cheaper?

Maybe Amazon doesn’t care. Compared to other companies, Amazon seems relatively unconcerned about its profits. For example, see this opinion piece on “Why Amazon is a Lousy Business:”

Unfortunately, it’s not a great business.  According to Yahoo Finance, the company earned only a slim 1% operating margin during the last 2 years and a not particularly impressive 4% margin in 2010.  While there’s more to a business than just the bottom line, those are worrying numbers.

Jeff Bezos insists that he can turn on the earnings spigot any time he wants and is merely plowing money back in order to grow the business, but that seems thin to me.  Last year Amazon grew its top line 27%, very good, but not unusual for a technology company (Google, for comparison, grew 32%).

Drones, trucks, or otherwise, Amazon will have some choices about how to proceed with deliveries.

Should new “Buy American” pushes be lauded if they occur because goods are now cheaper to make in the US?

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Walmart is purchasing and selling more goods made in America – primarily because making some things in America is now cheaper:

In many cases, Wal-Mart’s suppliers had already decided to produce in the United States, as rising wages in China and other emerging economies, along with increased labor productivity and flexibility back home, eroded the allure of offshore production.

Though wrapped in the stars and stripes, the world’s largest retailer’s push to bring jobs back to the United States also makes business sense both for suppliers and retailers.

Some manufacturers are finding they can profitably produce certain goods at home that they once made offshore. And retailers like Wal-Mart benefit from being able to buy those goods closer to distribution centers and stores with lower shipping costs, while gaining goodwill by selling more U.S.-made products.

“This is not a public relations effort. This is an economic, financial, mathematical-driven effort. The economics are substantially different than they were in the 80s and 90s,” Bill Simon, chief executive of the Walmart U.S. chain, told the Reuters Global Consumer and Retail Summit earlier this month.

To restate, this isn’t because of some commitment to the United States or patriotism or creating American jobs. This is because the goods can be made more cheaply in the US due low-wage workers in other countries now earning more and rising transportation costs. Thus, if items could once again be made and shipped more cheaply overseas, businesses would likely chase that again. Granted, profits of American companies might be good (shareholders, for example, might be happy) but is this the only way to assess manufacturing and sales decisions? Is selling products partly on the fact that they are made in America then somewhat deceptive?

The most profitable song is “Margaritaville”

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Copyrighting the words of “Margaritaville” as well as trademarking the name has been quite lucrative for Jimmy Buffett:

To think that all of this poured forth from a goofy, three-chord song—a mere 208 words, roughly half the length of this article—written about being lazy and getting drunk. But as Buffett’s Parrothead empire continues to spread, one can’t help but wonder whether a more lucrative song exists. “If there is anything on the same scale as a Margaritaville, it’s not a song—it’s a motion picture,” says Robert Brauneis, a professor of intellectual property at the George Washington University Law School and author of a research paper on Happy Birthday to You, which continues to generate upwards of $2 million a year. “When you’re talking about hundreds of millions of dollars, you have to think in terms of Star Wars, Winnie the Pooh, or Transformers. That’s probably in the same order of magnitude.”

As a recording, Margaritaville doesn’t post stratospheric numbers. After debuting on Buffett’s 1977 album Changes in Latitude, Changes in Attitude, it peaked at No. 8 on the Billboard 100 charts. According to the 2012 BBC documentary The Richest Songs in the World, Margaritaville doesn’t crack the top 10, which is populated by three Christmas songs. The two highest-ranking pop songs are You’ve Lost That Loving Feeling, by the Righteous Brothers, and Yesterday, by the Beatles. (No. 1 was Happy Birthday to You.) “If you want to get technical, there are two Margaritavilles,” says Brauneis. “There’s the copyright that protects the song, which is valuable because of the stream of income. Then there’s the trademark that has developed out of the song’s title, and legally that’s a different piece of intellectual property.”

Of course, this means the song and the brand are separate legal entities and could, in theory, be sold separately. But this isn’t the case. If you want to check Buffett’s tour dates, there’s no JimmyBuffett.com—there’s only Margaritaville.com, where his music career and the rest of his empire are seamlessly melded into one site.

“From a larger business perspective, when you combine the two and look at what the song stands for as a lifestyle and as a branding vehicle,” says Brauneis, “it’s worth far more than Happy Birthday. I can’t think of another example of a song that has that total impact.”

The key here is not really the song itself but the business opportunities the song has led to. This is spectacular branding: Buffett and others have created a sellable lifestyle out of the song and there has been a willing set of consumers willing to eat at the restaurant, buy merchandise, and go to concerts. It is hard to imagine a “Yesterday” themed restaurant – the song is really sort of sad – or one centered around “Happy Birthday” as this is an event that only comes around once a year. Indeed, it would be interesting to see how other artists have tried to capitalize on individual songs and the outcomes of those ventures. Is there any other song that could potentially lead to such financial opportunities? Is this a future source of income for musical artists?

Illustrating the issues of food, technology, and human interaction at Chipotle

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Chipotle has clearly staked its place as a progressive fast food restaurant (though they would claim they are between fast food and sit-down restaurants) with no antibiotic meat and organic fillings but it too struggles with some basic issues present in today’s economy: how much should companies rely on human employees versus using cheaper technology?

Like others in similar positions, he’s got a wide palette of gee-whiz technologies at his disposal — tablets for ordering, mobile payment systems, in-store ATM-like machines for ordering that replace cashiers. Yet he eschews most of them. He’s in no rush for tech to dramatically change the Chipotle experience at its more than 1,300 stores worldwide.

He hasn’t found the perfect solution yet. And, besides, he likes the human interaction.

That said, Chipotle, based here, happens to have a wildly popular app, a free tool that shows you where the nearest location is and lets you order and pay on the iPhone, iPad or iPod Touch. Nearly 5 million customers have signed up since 2010 and use the app to go straight to the front of the line to pick up their orders…

But that’s about as far as he wants to go. A future where all orders are made digitally?

“I hope not,” Crumpacker says. “I hope the experience of coming into Chipotle and ordering on the line is substantially superior to ordering on the phone. There’s all this communication as you watch what’s being made.”…

Meanwhile, Crumpacker hopes his next in-store tech play is a mobile payment system so customers can shave a few seconds off the checkout process by paying for menu items on smartphones. He’d like to see a standard on all phones that would support his in-store system…

“Consumers go to restaurants to be served,” she says. “The human element is part of the restaurant experience.”

This is an interesting explanation of the restaurant experience: people like the human element of service (though they are clearly paying for it). I suspect this may not really be the human element that people enjoy about restaurants. How many people really enjoy interacting with the waitstaff and other employees versus the opportunity the setting provides to interact with those at the table and to be part of and observe the social scene taking place around them. This could be a big difference between the Chipotle experience and eating at an urban cafe: Chipotles are often located in suburban settings where one may be able to sit outside or look outside but the primary view is of parking lots and speeding cars. In contrast, a full service restaurant offers more of a scene, particularly if located in a more urban setting where there is a mix of activities. Perhaps we need a sociological experiment to tease this out. Such an experiment could be based on a three by two table: fully mechanical food delivery versus human preparation (Chipotle) versus full service and then placed in a more dull setting versus a more happening location.

The article makes mention of Chipotle’s dropping stock price since mid-summer and I wonder if this is what will ultimately force the chain’s hand: if they need to demonstrate higher earnings and labor costs are too high, technology might be the way to close this gap. Or what might happen if Chipotle employees start demanding higher wages and/or more benefits? At that point, perhaps human interaction simply becomes too expensive, a luxury, as consumers might miss being served but would also not like to pay higher prices.

What is “The Big Data Boom”on the Internet good for?

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The Internet is a giant source of ready-to-use data:

Today businesses can measure their activities and customer relationships with unprecedented precision. As a result, they are awash with data. This is particularly evident in the digital economy, where clickstream data give precisely targeted and real-time insights into consumer behavior…

Much of this information is generated for free, by computers, and sits unused, at least initially. A few years after installing a large enterprise resource planning system, it is common for companies to purchase a “business intelligence” module to try to make use of the flood of data that they now have on their operations. As Ron Kohavi at Microsoft memorably put it, objective, fine-grained data are replacing HiPPOs (Highest Paid Person’s Opinions) as the basis for decision-making at more and more companies.

The wealth of data also makes it easy to run experiments:

Consider two “born-digital” companies, Amazon and Google. A central part of Amazon’s research strategy is a program of “A-B” experiments where it develops two versions of its website and offers them to matched samples of customers. Using this method, Amazon might test a new recommendation engine for books, a new service feature, a different check-out process, or simply a different layout or design. Amazon sometimes gets sufficient data within just a few hours to see a statistically significant difference…

According to Google economist Hal Varian, his company is running on the order of 100-200 experiments on any given day, as they test new products and services, new algorithms and alternative designs. An iterative review process aggregates findings and frequently leads to further rounds of more targeted experimentation.

This sounds like a social scientist’s dream – if we could get our hands on the data.

My big question about all of this data is this: what should be done with it? This article, and others I’ve seen, have said that it will transform business. If this is just a way for businesses to become more knowledgeable, more efficient, and ultimately, more profitable, is this enough? Occasionally, we hear of things like discovering and/or tracking epidemics by looking at search queries or tools like the “mechanical turk” to crowdsource small but needed work. On the whole, does the data from the Internet advance human flourishing or concentrate some benefits in the hands of a few or even hinder flourishing? Does this data give us insights into health and medicine, international relations, and social interactions or does it primarily give entrepreneurs and established companies the chance to make more money? Are these questions that anyone really asks or cares about?

Quick Review: The Facebook Effect

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Facebook, which went online in early 2004, is now old enough to be the subject of retrospectives. There is a new movie about the company, The Social Network, coming out this fall. There is also a recent book, The Facebook Effect: The Inside Story of the Company That is Connecting the World by David Kirkpatrick. I recently finished this book and have a few thoughts about the story of Facebook:

1. The idealism of Facebook comes throughout the story. Even from its early days, the founder Mark Zuckerberg was more interested connecting people than in just making money. This has driven many of the decisions made by the company and created friction between Zuckerberg and his coworkers as some wanted a greater emphasis on profits. At the end of the book, Kirkpatrick elicits some interesting thoughts from Zuckerberg regarding the differences between Google and Facebook. Zuckerberg describes Google as a passive company that tries to categorize the information that is already out there. In contrast, Facebook is a company that helps people express themselves and divulge information.

2. The growth in terms of number of users is remarkable. Kirkpatrick mentions several times seven or eight countries where 30% or more of the residents are on Facebook (not just 30% of Internet users).

3. The potential for profits comes from Facebook’s unique user database. With users voluntarily uploading information about themselves, advertisers can then target messages to particular groups. While most advertising is aimed at vague categories or misses its mark altogether, Facebook offers the opportunity to really reach certain segments.

4. While Facebook might have a unique mission, the story of its early history sounds similar to other tech companies. The founder has an idea that builds upon his previous work, he finds others to help him out, some of the key people drop out of college to focus on the company, and for years the company operates more like a frat house than a legitimate business.

5. Kirkpatrick recognizes that Facebook has had its issues and he points out when he disagrees with the company. However, several times he suggests that users ability to protest Facebook’s actions (like when privacy settings have been changed) is only made possible because of Facebook’s genius.

6. The main founders were from Harvard. There is little discussion in the book about how the advantages the founders had (generally wealthy families, exemplary educations, the connections one can make at a place like Harvard) could help make Facebook possible compared to starting a company like this elsewhere.

7. The big question that comes after reading about Facebook: how exactly does this or will this change the world? Does it improve the world? Kirkpatrick seems to buy into the big ideas of Zuckerberg: the book opens with the story of how a single man in Columbia was able to kick-off a nation-wide protest against the existing government through Facebook.

I am more skeptical. While this online world does seem to represent something new (people voluntarily giving up their privacy and forming communities), I don’t think it has yet translated into much real-world action. Does being open online (even though openness really is more often sculpting an idealizing image of oneself) necessarily lead to being more open in the real world? Perhaps greater results will be seen when younger generations who are always used to having Facebook around grow up.

In summary, this is an intriguing look at how Facebook has developed and about the ideals that motivate its founder.