Who is the customer for AWD?

Reading the tea leaves

If you have not read the classic "Amazon's New Customer ", written 5 years ago, you should. Ben Thompson describes the goals of Amazon and how its internal businesses become its 'first-and-best' customer before they roll out the service to the world.

Amazon progressed from 'building a place where people can come to find and discover anything they want to buy online' to 'earth's most customer-centric company.' The progress in their mission statement reflects how one should view their investments in warehousing, especially in the last two years. Amazon doubled its warehousing capacity, causing a shortage of industrial warehouse space in the US. Then it slammed the brakes (or so it looked like). While consumer demand is cyclical and Amazon may respond?to softening consumer demand by adjusting its last-mile fulfilment footprint, first-mile is a different thing. The cost of upstream logistics (receiving goods, storing them in bulk, and distributing them to retailer warehouses and wholesalers) is high and unpredictable. If I have to nerd out on this topic, the expectations have changed upstream. More frequent replenishment, rainbow pallets (mix of cases), and the rise of micro-fulfilment centers that need to be serviced add to the cost and complexity.?

Amazon's Capacity

Amazon is on track to add 3 mega warehouses, each with 3M+sq.ft in New York, California, and Colorado. They plan to open 21 more such facilities in the next 6 months,?adding 62M sq.ft. of warehouse space. These facilities act as 'first mile' for its sellers.

Chief Financial Officer Brian Olslavsky estimated on the company’s earnings call that Amazon is allocating 40% of its spending capital to support warehouse and transportation capacity. He added that it expects to grow into its excess warehouse capacity as the year goes on.

In a year where consumer demand is fickle, how would Amazon grow into excess capacity?

AWD is how.?

Amazon's Warehouse Dominance

Amazon has introduced the 'atom' version of AWS called 'AWD'. AWD is the 'pay as you go' way for sellers to ship inventory to 'any location,' be it a wholesaler or a brick-and-mortar chain. Amazon has built facilities to handle bulk inventory and automated distribution for its sellers. Connecting the dots, Amazon wasn't making a U-turn when it came to leasing or opening new facilities. They merely adjusted the mix.

Megalith warehouse expansion over smaller facilities effectively decouples Amazon's logistics revenue from consumer demand that comes from its marketplace. With sellers now being able to ship to 'any location,' AWD takes off the burden of managing bulk inventory storage and distribution for sellers that sell across channels. For AWD, the seller is the customer.

But that brings us to the question: Which seller?

Who is the seller that has the problem of bulk storage and distribution to 'any location?'. Most Amazon sellers are small businesses. According to Helium10 (our group company), almost half of Amazon sellers earn somewhere between $1,000 and $2,500 per month, with some sellers reporting earnings of up to $45K per year. Less than 10% of Amazon sellers have made lifetime sales of more than $5M. Amazon USA has about 1M sellers. Assuming 100,000 have had cumulative sales of more than $5M, we have at least a few tens of thousands of omnichannel sellers.?PipeCandy?estimates that more than 1 in 5 Amazon sellers in the US have another channel that they sell through. Some sellers sell more on other channels (traditional brands with retail presence) than on Amazon, generating substantial revenue outside Amazon.

The answer to the question, "Which seller?" is important because the way we understand AWD and its scope depend on this answer. Will Amazon be able to build a profitable business of meaningful scale with its seller base of few 10s of 1000s? Is it a matter of time before AWD gets decoupled from its seller program? On the upstream, the tonnage for B2B dwarfs the tonnage for 'direct-to-consumer' fulfilment. Does it mean that AWD is a preparatory step towards a big B2B blitz?

What's your guess?