Ask a number of analysts what is the secret to Amazon's retail (if not overall) success, and 9 out of 10 times the answer will be its meticulous, seamless, and incredibly efficient distribution and logistics system. Or, as Credit Suisse puts it, Amazon has stumbled on (really created) a new distribution model: a "pull" (or demand) model in which the Distribution Center is at the center of the shopping/retail experience, vastly different from the old "push" model, which centered around the retail store.
It's also what Credit Suisse calls the "Amazon Effect", and is the biggest (not so) secret behind the company's retail success. Here is how Credit Suisse describes it:
Amazon has helped fuel the demand chain by offering best-in-class fulfillment capabilities and guaranteeing quick response delivery of packages. Amazon commits to providing free 2-day and deeply discounted 1-day shipping to Prime members (~50M-plus).
In this quick response world, inventory availability within a close enough proximity to the customer is key. Amazon has worked to build out its distribution center network with 230 active fulfillment centers (ex. pantry/fresh food DCs) in the United States.
In our opinion, Amazon's network enables the company to fulfill in the new "pull" distribution model. This is in vast contrast to companies in our coverage which follow the traditional "push" model and only have a few key distribution centers located around the country.
This is also known as the Amazon moat, or why Jeff Bezos' company, well on its way to becoming a mononpolist across many industries, remains insurmnoutnable. Conveniently, it can also be quantified by the number of fulfillment, or distribution centers across the country in comparison to the rest of the retail sector. As the chart below shows, as of this moment, with 230 DCs, Amazon has 40x more logistics centers across the US than the average number of distribution centers across the Credit Suisse coverage universe, and roughly twice as much as the rest of the entire retail sector combined!
So with such a massive moat, in both logistical and invested capital terms, is Amazon simply unreachable for its nearest competitor(s) in this new, "pull model" world of retail sales? Not necessarily.
According to Credit Suisse retail analyst Christian Buss, one possibility would be the conversion of existing brick and mortar stores into mini distribution centers to directly compete with Amazon.
Building out logistics facilities is expensive and time consuming. Brick-and-mortar retailers already have stores built out across the U.S., but we believe these stores could be used in a more efficient way to better capitalize in a demand chain world. Some stores might be put to better use as mini-distribution centers located close to the consumer. Stores located in malls are not ideal as there aren't store specific loading docks and logistics would likely be more challenged.
We estimated the number of Off-Mall stores for our coverage universe and combined with fulfillment enters to get an idea of the total possible distribution network available. In this framework, traditional softline and broadline retailers become more competitive on the distribution front.
Perhaps instead of accusing Amazon of being a monopolist, a war of attrition whose success is hardly guaranteed even under the receptive Trump administration, a better approach would be for the rest of the "legacy" retail sector - which is losing the battle against Jeff Bezos' juggernaut - to request government financial assistance to refit its existing store base, a financially feasible exercise, and then at least take on Amazon on an equal footing. Failing that, it is difficult to see how the prospects for the US legacy retail industry are anything but dire.