Wow! Isn’t it amazing how quickly things change? In the early 2000s, the very pinnacle of outsourcing was Walmart. Walmart didn’t outsource its own operations. Instead, it made history by working with offshore suppliers, introducing American consumers to low-cost Chinese goods. Consumers fell in love with the low prices, and Walmart grew to 14,000 stores, becoming the biggest corporation in America. Only later, Americans asked, “Why can’t I buy an American made hammer?” Walmart benefited individual consumers but wiped out family-owned stores, family-owned factories, and American jobs.
Recently, Walmart’s brightly burning star has begun to dim as the internet replaces brick and mortar shopping. But as Walmart declines, Amazon rises. While Walmart revolutionised the supply chain, Amazon has changed the shopping experience. Amazon has more or less inherited Walmart’s supply chain, which is filled with Chinese products. As a virtual store Amazon can carry an infinite number of products, more than even the largest Walmart. That allows Amazon to sell both Chinese manufactured goods under American brands as well as brands directly from China.
These two different models are headed on a collision course. Already Warren Buffett, considered one of the biggest and best investors in the world, has started to sell off Walmart shares. Other financial analysts are laying their bets that Amazon will win the battle between these retail giants. What will that mean for the future of retail, outsourcing, and employment? Let’s take a look.
The Walmart megastore is huge... and cheap. Just their food section is easily the match of many local supermarkets and grocery stores. Walmart has taken over in these areas, and if they were to collapse, much of small town America would have few if any remaining stores. In America, and elsewhere in the world, people are moving into cities, where Walmart does not have a strong hold but where Amazon is rapidly expanding. Busy urban shoppers find that a trip to the store is too much effort. Online orders with home delivery are becoming the preferred method of shopping.
Amazon has mastered how to ship products around the world and is piloting even faster drone-based delivery. Meanwhile, Walmart still struggles with their basic “free” delivery model. If Amazon’s drone service works, it could be the biggest “insourcing” project in history. Just a few years ago, no one would have bet that delivery services in America would be brought back into any major American corporation. If Amazon combines drone delivery with their increasingly robotic warehouses, they can crush Walmart (and similar competitors) while attracting more allies and partners to their merchant services.
Amazon is also looking into brick and mortar stores, if only on a limited basis. Amazon’s model for a physical store, naturally, has a very different model for staffing these stores. There is no checkout counter and almost no staff. You find what you want, take it, and leave. A combination of artificial intelligence and image recognition tracks you and figures out what you took, and sends the bill to a payment system on your phone. Contrast this to the vast number of workers at Walmart’s 12,000 stores.
Walmart has revenues of $483 billion and employs 2.3 million workers, which yields 4.8 jobs for every million dollars in revenue. That’s our baseline. How does Amazon compare? Amazon’s revenues are just $136 billion, which means that it still has quite a way to go to dethrone Walmart. They have 341 thousand workers or 2.5 workers per million in revenue. That’s nearly half the workers per million in revenue.
Were Amazon to absorb Walmart’s customers and their $483 billion in sales, 1.1 million workers could lose their jobs. However, that doesn’t mean that an Amazon job will be the same, or pay the same, as a Walmart job. Walmart has “greeters”, cashiers and people who go out into the parking lot to bring back shopping carts. Amazon has a lot of programmers and marketing people. Very different jobs, but a lot fewer jobs. Consider the following:
Amazon Merchant: Amazon is more than an online department store. As Amazon builds its own services, it repackages those services and sells them to other businesses. Amazon will absorb some customers from competitors, and at the same time, they will make small and medium-sized businesses part of Amazon through their Merchant services. Amazon acts as the anchor store in a mall, allowing other businesses to be part of a larger “Marketplace”, under the Amazon identity. A small business no longer needs to set up servers, develop a marketing strategy, etc. Amazon handles all of that. Score another outsourcing service for Amazon!
Amazon Delivery: As customers continue their move their shopping experience from physical stores to virtual shopping, there will be a greater need for delivery services. Between Amazon drones and autonomous cars, the entire package delivery industry will be completely disrupted in the next few years. The post office has already committed to closing nearly half of their post offices and their staff. The Amazon model, and similar models, depend on exceptional delivery services. Hopefully - for Amazon and other new services - the disrupters will build the future faster than they tear apart the past.
Amazon Web Services: AWS is a huge cloud service provider. Move your data, move your servers, move everything to AWS. Merchant services are good for a small business that wants a ready-made web presence. AWS is for any company, including some very big companies. A firm of significant size could be run by just a handful of people. AWS outsourcing can make a company a lot more profitable, but it will eliminate jobs…. not because of offshoring or even automation. As technology scales up it becomes a lot more efficient. And AWS has a massive market to scale to.
Alibaba: While Amazon is America's biggest online merchant, China’s Alibaba had sales of $485 billion in 2016. That’s on par with Walmart and three times the size of Amazon. While Alibaba is focused on China, it will soon compete with US and European merchants, creating stiff competition and driving more efficiencies.
Consolidation: The small store is disappearing, especially in small towns. In big cities, we have the “corner store”, a convenience store just a block or so away. That’s where you go stop on your way home to pick up a magazine, a candy bar, maybe a Red Bull or a packet of tissues. Time-pressured urbanites often just run from their apartment to a taxi or UBER car, go to work and then do a reverse version on the way home. Even going to the corner to pick up a few nicknacks has become too much trouble. Services like FreshDirect are replacing supermarkets and delivering food to your home. Can Amazon replace the corner store? If they can, perhaps with an advanced drone service, will we need all of the remaining drugstores, convenience stores, and bodegas? Or will they consolidate into a few "super corner stores"?
Shopping is moving from the real world to the virtual world. That move means that consumers will have more convenience, more options, more products, 24x7 shopping and lower costs. But it also means that there will be a downside, fewer physical stores, fewer merchants and fewer jobs. Nor does it matter if your virtual store is owned by Walmart, or Amazon or anyone else.
The real conflict is between the consumer and the worker, who is often the same person. As consumers, we want our shopping experiences to be better and cheaper. Over the last century that shopping experience moved from a small local store with a limited set of products, to the department store, to Walmart's superstore, to Amazon’s virtual shopping. Each step has improved efficiency, improved the variety of options, lowered cost, but also reduced the amount of labour needed to serve consumers. Whether this is called automation, outsourcing or just plain efficiency, the direction towards less labour is consistent and irreversible.
Will the retail world eventually be workerless? Maybe. The choice is ultimately up to the consumer. Do human workers make your shopping experience better? Do you enjoy having workers help you get what you want, or do you feel that workers are in the way and make shopping more difficult? Consumers need to decide which world they want because the next model for shopping is about to arrive!