Amazon already is the biggest online retailer in the U.S. and the second biggest retailer overall in terms of sales, but Doug Herrington, the company’s CEO of Worldwide Stores, thinks there’s room to be even bigger.
“Our decision to invite sellers into our store nearly 25 years ago was one of the best things we ever did for our customers, because the sellers brought in this just amazing array of products and brands and great prices,” he said at the Amazon Accelerate conference for its third-party sellers earlier this month. “It turned Amazon into a store with the largest selection, with the fastest delivery, bar none. We can serve any customer for any shopping occasion.
“But as much as we’ve accomplished in our partnership [with sellers] in the last 25 years, as successful as it’s been in growing our joint businesses and building something phenomenal for customers, we’ve still just got an amazing opportunity ahead of us,” Herrington added. “You can see it with the size of the market segments that we’re going after, the customer bases and the new technology that’s opening up all kinds of new things that we can do together.”
What Amazon plans to do next is grow, and how Herrington plans to do this boils down to two factors: delivery speed and what Herrington calls “cost to serve;” essentially, finding cheaper ways to be faster.
Advertisement
“When we speed up deliveries, we sell more,” Herrington explained. “When a [product] offer has a faster delivery speed, it’s going to get a higher conversion rate, more sales per glance view. But what’s even more interesting and has a bigger impact is that customers who experience those faster delivery speeds will come back sooner and shop more, so that growth flywheel gets going because of speed.
“Cost to serve is the second [piece of the equation],” Herrington added. “You can think of it as the cost to put a single item all the way through our system. As that number goes up, fewer and fewer items make sense to flow through our system, especially lower-priced items. So as that number goes up, lower-priced items get squeezed out of the [Amazon] store. The good news is that as that number goes down, the reverse can happen — selection grows, and as selection grows, traffic and then sales follow.”
This last factor is critically important now to Amazon, which faces more ecommerce competition than it ever has before — from China-direct apps like Temu and Shein as well as from established retailers like Walmart and Target that are now emulating Amazon’s marketplace model.
But while improving on Amazon’s already high bar in the arena of delivery and price might seem like a tall order, Herrington sees ample opportunity to do just that. To prove it, he laid out how the company already has achieved remarkable improvements in delivery efficiency and cost while also hinting at where he plans to find future optimizations.
Mindset Shift: Instead of One U.S., 10 UKs
The biggest way that Amazon has improved both of these ecommerce dynamics — delivery speed and cost to serve — has been through its years-long effort to regionalize its fulfillment network in the U.S. When Herrington joined Amazon 19 years ago, the company had six U.S. fulfillment centers serving the whole country. Now Amazon has built hundreds of fulfillment centers across the country, along with a range of middle-mile and last-mile operations to connect them.
It may seem obvious now that having more nodes in the supply chain would make delivery faster and more efficient, but as with many good ideas it wasn’t initially apparent. In this case, inspiration came in a conversation with John Felton, who was Amazon’s Head of Operations at the time.
“We’d been running the same [fulfillment] network in the UK for a long time, and we had better costs, better speed, better quality,” recalled Herrington. “[John] looked at it and said, ‘I wish in the U.S. we had 10 UKs instead of one U.S.’ That got us down the path of why not have 10 UKs in one U.S.?
“We took our network and we said, let’s take all those connectors and, instead of trying to desperately connect every fulfillment center to every household in each region, let’s redistribute them and try to connect the regions as densely as possible and connect those FCs in the regions to the households in the regions,” Herrington added. “That meant we had shorter, thicker and more frequent lanes between those connection points.”
How Regionalization is Making Amazon Delivery Faster and Cheaper
“It was almost like a switch was flipped when we moved over,” recounted Herrington about the impact of the regionalization strategy. “We saw items traveling 15% fewer miles; we had 15% fewer touches, so we got speed and cost to serve on the same thing. It was phenomenal for us.”
Now that that regionalized network is established, Amazon is focused on what it calls “perfect placement,” or as Herrington described it, “maximizing the probability that when a customer places an order, [the product] is already in the region where they live and, better yet, already in the fulfillment center that’s closest to them.” Solving this problem is less about infrastructure and more about technology, so Herrington said the improvements has been largely “algorithmic, and gen AI has played a big role recently.”
Additionally, Amazon is fast at work adding new types of nodes to its regional networks, in particular its same-day facilities, which operate as hybrid fulfillment centers and delivery stations. These facilities are smaller than the typical Amazon FC, although Herrington said they still feature the full suite of Amazon robotics. The result is that “when a customer places an order, within 15 minutes that order can be picked, packed and on the dock ready for a driver to pick it up. Combining fulfillment and delivery not only reduces time, but it reduces touches which, once again, lowers the cost to serve [and leads to] faster delivery speeds.”
These improvements have helped Amazon cost-effectively add even more selection to “The Everything Store” via its third-party sellers, particularly lower-priced products. This matters to the company because low-ASP (average selling price) items are where Amazon is seeing some of its fastest growth these days.
“If you think about your own household, low ASP products are the vast majority of what any household buys, like 80% to 90%,” said Herrington. “As big and successful as we are, we’re still relatively underpenetrated in those low-ASP items. So as [sellers] add those items into the system, customers are expanding their wallet with Amazon by buying more and more in those categories. The knock-on effect of that is that those new purchases are driving new shopping missions on Amazon, increased visits, increased traffic, and when they do that, they’re buying more of everything else, the higher-priced products as well.”
Amazon’s Future Growth Opportunities: More Regionalization, AI
Despite all the work Amazon already has put in toward this regionalization effort, Herrington said the company still has “a ton more to go” in this effort, as well as with its perfect placement undertaking.
In addition to the continued momentum that Herrington expects those ongoing efforts to bring to the famous Amazon flywheel, he also pointed to advanced robotics and generative AI as further drivers of scale and speed — both in fulfillment and other areas of the business.
“This gen AI transformation we’re going through is just amazing,” said Herrington. “We’ve gone through technology shifts before — I remember the shift to mobile; I remember when social became a big thing — but nothing like this, nothing as big as this, nothing coming on as fast as this. And the toolset that [gen AI] is providing us is just amazing. We’re able to go back to a lot of products and services that we’ve had for a long time and rebuild them or enhance them with generative AI, and the part that I love is we can also now invent new services and customer experiences that just seem like science fiction. There’s really not a team across my organization that’s not using generative AI in some way to work on their products and services across the whole suite.”
