Amazon as The Terminator

In recent days the Internet has been abuzz with discussions of Amazon’s decision to reverse its position on sales taxes. Until very recently, Amazon has refused to collect and pay sales taxes wherever it operates. It has used provisions in US law regarding needing to have a (physical) “presence” in a state before sales tax collection and remittance is required. In Europe it established its business presence in Liechtenstein to avoid paying taxes in the EU and last year paid no UK tax on sales to UK customers valued at £3.3-billion.

Amazon has suddenly begun to make arrangements to pay taxes with multiple states in America. It has not been losing major tax battles with those states, so something else is happening. Bear in mind as you read the explanation below that books are just a small part of Amazon’s total business: Amazon sells everything from power tools to footwear and food.

Amazon has developed an incredibly efficient supply chain. It moves purchased items from its distribution centres to consumers very, very quickly, and it is getting faster every year. Right now, when an American orders something from Amazon, standard delivery might be quoted at five to eight days, but she will also be offered two-day delivery for an extra fee. If you are a member of the Amazon Prime service ($79 per year) one of the many benefits will be that two-day delivery is free for all purchases.

Faster delivery

Amazon’s sudden 180-degree turn on local sales taxes is because the company has launched an aggressive expansion of its warehouse distribution system across America. Massive new warehouses, employing “intelligent” robotics, are being built in or very near large cities (Los Angeles and San Francisco in California, for examples). More warehouses are being built in other strategic locations across the country. One estimate is that, within a few years Amazon will spend around $500 million and employ as many as 10,000 people in nearly a dozen warehouses in California alone. Amazon bought the warehouse robot maker, Kiva Systems, for $775 million in cash earlier this year.

Why would Amazon give up its tax advantage and suddenly commit a few billion dollars to warehouses? The only logical answer is, Amazon is going to move to same day delivery.

The ultimate disruption

Amazon’s long game is clear: the company wants to replace traditional retailers of all stripes. Much as it pains me to say this, I suspect Amazon will succeed. I’m old enough to remember when most retailers, even the big stores, had great service and lots of knowledgeable help on the shop floor. Then the “big box” discounters perfected their low-staff, low-margin, high volume game and everyone moved to buying at their massive stores in the suburbs. Old-school, “mall anchor” big stores reacted by cutting service staff and still bled profits.

I think Amazon is about to wreak similar havoc on the “big box” discount chains and those “mall anchor” chains which still exist. Do you actually like driving to the mall, or to one of those big discount boxes, and then dealing with finding parking, finding the items you want to buy (usually without any store staff help), wrestling the trolley through long checkout lines, and then unwinding the parking lot battle? I don’t. I hate the exhausting, abusive time-sink it all adds up to.

Support your neighbourhood store? My answer to that is, what neighbourhood store? The nearest retail outlet to my home is a 25-minutes-each-way hilly walk away, and it is a “convenience” store at a gas station where inventory is severely limited and prices very high. Like most suburban dwellers, I have no choice but to drive to do the household shopping, and at that point the convenience of getting most things at a reasonable price in one place (horrid though the experience might be) totally trumps any other approach.

I think my attitude is very common among shoppers. And I think that is what Amazon understands and is preparing to exploit. I’ve done some shopping on the Web for years. I buy most of my computers that way because I know exactly what I want and am willing to accept shipping which can take almost a month for something like a custom-specified new model from Apple. This past year I have purchased a few electronics items from Amazon and each time have received a price which was as good or better than my local big box offered, and each time was amazed to get delivery a day or two faster than Amazon stipulated at the time of order.

So, if Amazon does go to a same-day delivery “deal” bundled with Amazon Prime membership for where I live, yes I will sign up in a flash. If I can place an order in the morning and get delivery that afternoon and the price with taxes remains very competitive, it is a no-brainer. Then the family grocery shopping might be just for fresh produce and we already try to do that at small, local vendors of fresh local produce.

Going global

I should emphasize that what Amazon is doing in the US is not unique to its home base. It is building new distribution centers everywhere from Europe to China. What it is starting in the US will be a global push over the next few years.

Goodbye malls?

If Amazon succeeds as I think they will, shopping malls and big box store chains are going to implode. Amazon will do to those businesses what it is doing to bookstore chains. Possibly with less competition because it will be so far ahead of everyone else.

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