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Amazon's Quickly Catching Up to the Only Advantage of Brick-and-Mortar Retailers

By Adam Levy – Oct 12, 2020 at 11:18AM

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Amazon's physical presence is getting a lot bigger a lot faster.

With hundreds of stores spread throughout the United States, Walmart (WMT 0.21%) and Target (TGT 0.53%) have a competitive advantage over many other retailers in distribution, getting packages to customers quickly and inexpensively. It's a big factor in enabling them to mostly keep up with Amazon's (AMZN -0.07%) Prime Shipping benefit without requiring memberships.

But Amazon's quickly catching up to the two companies' cost advantages, building out hundreds of new fulfillment centers and delivery stations to get customers their items just as quickly as ever, but at less cost to Amazon.

Amazon delivery vans in loading area.

Image source: Amazon.

The Walmart and Target store advantage

Walmart and Target run trucks full of inventory all around the country to stock their stores. The retailers take in inventory, put it in their warehouses, and regularly replenish store stocks from there. Fully controlling this distribution to get items close to customers (i.e. in stores) cuts costs for the big-box retailers.

Target has been aggressive in using its stores, instead of dedicated warehouses, to fulfill online orders. Last quarter, Target fulfilled more than 75% of online orders through its stores by either shipping from the backroom or having customers pick up orders at a nearby location.

Walmart hasn't been as quick as Target to adopt that model, but Walmart accelerated its ship-from-store efforts this year as the COVID-19 pandemic led to a surge in online orders. About 2,500 of its stores are now shipping items out of the backroom to customers' homes.

Using stores instead of warehouses allows Walmart and Target to fulfill orders faster, offer later order cut-off times for next-day or two-day delivery, and do so with lower total expenses. It's also an extremely efficient use of their distribution networks and capacity, which is already transporting inventory around the country for in-store shopping.

The equivalent of an Amazon store

Amazon's brick-and-mortar presence, except for Whole Foods Market and a few other high-tech grocery and convenience stores, is practically zilch. But the retailer is quickly building out its fulfillment network, and its biggest area of growth is its last-mile delivery stations.

Think of delivery stations more like a Target or Walmart store that only fulfills online orders. But instead of sending packages out of the backroom on a third-party courier's truck for delivery, Amazon dispatches its own trucks and vans through its delivery service partner program. 

So, it's not a perfect analogy, but it's the driving force behind Amazon's ability to deliver more of its packages itself, thus cutting down shipping times and expenses. It produces the same, perhaps greater, benefits as Walmart's and Target's store fulfillment efforts.

Amazon plans to open more than 250 new delivery stations in 2020, according to data from MWPVL International, a supply chain and logistics consulting firm. That's more than double the number it had at the end of 2019. For reference, Target opened 17 stores in 2020. Walmart's U.S. store count actually decreased by five since summer 2019. The new delivery stations should help Amazon win more sales, particularly last-minute holiday purchases. 

Over the next few years, Amazon may open 1,500 more distribution centers at the outskirts of suburban neighborhoods. That would put its distribution center count on par with Target's store count.

Amazon's also investing in other parts of the network. As the demand for online shopping increases, it needs to build more warehouses to store all of its inventory. It's opening 75 fulfillment centers this year, warehouses with 500,000 to 1 million square feet. It currently has nearly 200 active fulfillment centers and plans to open 86 more in the very near future.

As Amazon continues to build out its fulfillment network, including fulfillment centers, sorting centers, and distribution centers, the advantage of Walmart's, Target's, or any other retailer's physical stores disappears. In fact, Amazon's focus on its own last-mile delivery network makes its strategy even more cost-effective than fulfilling from stores through third parties.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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