"I think the big challenge [Google and Facebook] has (entering eCommerce) is just that ... with advertising, ... Every day you wake up and you look at your bank account and you ask ... how much money did we print today?"

I said this on a recent podcast. John Ghiorso, who hosts the Orca Pacific eCommerce Deep Dive podcast and I spoke about Amazon, the COVID crisis, and what is happening in e-commerce now and in the future. People vastly underestimate the challenge it takes to win in eCommerce and move from search/social to Commerce successfully.

Few questions are more persistent than "is Social Commerce the next big thing"?

Ultimately, I think of social commerce as I think of my Apple Watch. It's not going to take over my phone, but it is going to allow me to do a lot of interesting things that I wouldn't even consider before in terms of discovery. It has already been very successful in Asia and across many influencers on Instagram with the amount of GMV being driven on these platforms.

The big question to me is the "big blue" Facebook platform itself. Most people don't consider that you can buy directly there. Certainly, you have that "intent" problem where you didn't come to buy there. But then you didn't go to click on an ad either, and look what happened.

Transcript

Rick Watson (00:00):

But I think social is an interesting one where you have players like Facebook trying to take steps into commerce. Could they use this next six to 12 months to capitalize on the shift to online, particularly in these categories where Amazon isn't traditionally great at?

John Ghiroso (00:20):

On this episode of e-commerce deep dive, I speak with Rick Watson. Rick is a veteran of e-commerce and marketplaces and we have a wide ranging discussion. We cover the impact of COVID on different channels with e-commerce, how consumers are behaving in different ways online. We talk about the future role of social, Facebook, Instagram, et cetera on commerce and how that may impact Amazon's competitive mode. I think you'll get a lot of value out of this. I know I did. Without further ado, here we go.

John Ghiroso (00:53):

Why don't we just start out, tell our audience a little bit about you, what you're up to today and just kind of your background in the e-commerce space.

Rick Watson (01:01):

Yeah, thanks John. My background is really started out as a technologist. I've been in and around the e-commerce industry as an entrepreneur and as an operator for the past 20 years. I kind of got my start learning really in the marketplace world. One of the first several employees at a company called ChannelAdvisor, which is one of the pioneers in the marketplace industry going back all the way to 1999 so I'm dating myself a little bit, even before Amazon had a marketplace and eBay kind of was still the king of everything. Building the initial versions of ChannelAdvisor's platform and then running the product and engineering teams there, so that was kind of the first 10 years of my career. That really kind of formed the foundation of like how I thought about the e-commerce world I would say.

Rick Watson (01:55):

From there I was actually recruited to New York City to launch and operate the barnesandnoble.com third party marketplace, kind of building that from really zero and a bunch of alternative categories. I have a interesting perspective being able to build a marketplace from the ground up and all the policies and recruitment and fraud and all those things required to make that possible. Then from there I was involved with a private label marketplace and drop ship platform called Merchant Tree where I was CEO for over two and a half years that we ended up selling.

Rick Watson (02:32):

Then finally the last couple of years of my career was with Pitney Bowes global e-commerce team, particularly in the cross border business, which runs eBay's global shipping program as well as kind of the border free business. That's kind of the quick tour of my history in the last year. I've actually gone out on my own when I founded my own strategic e-commerce consultancy where I work with primarily investors and management teams, helping them wade into this whole direct to consumer space, mostly around strategic questions and then incubating these new businesses and getting them off the ground.

John Ghiroso (03:09):

Awesome. You deal with kind of e-commerce overall, so across platforms, direct to consumer, Amazon, eBay, you name it.

Rick Watson (03:18):

Yeah, that's right. Yeah. Anything from ... What's interesting is the types of people I work with are not just the brands and the retailers. I also work a lot with the service providers too. Because of my background at Channel Advisor and software companies, I'm able to speak to the C ... like an entrepreneur CEO who's trying to sell something new to Amazon sellers or trying to build a new supply chain tool for returns for direct to consumer and they need help with go to market strategy as well as the investor who needs to then go back and hire all those people.

John Ghiroso (03:52):

I know we talked about this a little bit before we hit record here, but you know you work a lot with organizations and kind of give them advice, consult on how to structure an organization internally to approach e-commerce and to maximize the opportunity. What are some of the things that you still see organizations getting wrong in their approach to e-commerce in terms of kind of internal structurally from a budgeting perspective, kind of what are people not getting?

Rick Watson (04:26):

Yeah, I think they're two big things I find. One of them is they're treating e-commerce technology like a MIS or a help desk function. This is a true story, I was in a major retailer in a call in the last couple of months and the whole organization reported up to the same person who if your phone, if your desk phone back when we still had desk phones before COVID-

John Ghiroso (04:59):

Yeah, for sure.

Rick Watson (05:00):

... when your desk phone wasn't working ... the same person when your desk phone wasn't working was the same person you called if your e-commerce site wasn't functioning. So, organizational alignment for it ... to me having a technology leader that really thinks like your customers do, for instance, your parcel path and your customer flow and your financial flows, those need to be managed by someone more strategic, then is someone who's like, if your Outlook isn't working or your Gmail isn't working.

Rick Watson (05:35):

I would say that's one big issue we have. Then I would say from a budgeting point of view, I think the big thing is that people don't know what to expect when they start on their direct to consumer journey. They don't know what the line items should be. They don't know what the margins they should be looking at. They don't know. They don't realize how complicated the space is. They're like, "Oh, we should just be able to put up a website and be done." I mean this ... dozens of software platforms, probably half a dozen agencies that you'll have to work with just to make the thing run on a day to day basis.

John Ghiroso (06:09):

Sure, sure. We still see a lot of conflict between sales and marketing functions internally and I ... conflict may even be an overstatement, but just you know, I mean the same budgets ultimately are kind of ... different budgets going to the same platforms, the same mechanisms through which you'd spend that budget can just create inherent conflict, not to mention some of the other incentives and alignment issues. Do you kind of give advice on how to align sales and marketing teams? Is that something specifically you get into?

Rick Watson (06:46):

Yeah, definitely that's the case, because a lot of times particularly you have cross channel conflicts who gets ... we still in 2020 still have questions about who gets credit for the sale. Should the store get credit or the store or the e-comm get credit and how those work together. I think from a sales and marketing point of view, usually that has to do with attribution and if you're a rep in the account you want to be paid more and you think you've done it all yourself. Whereas the marketing team needs to understand what's working and what's not working, what should we not be spending money on. Those are definitely topics that we give advice on when we go into a client, yeah.

John Ghiroso (07:32):

Hey everyone, John Ghiroso here, I hope you're enjoying the podcast so far. I wanted to let you know that this episode has been brought to you by Orca Pacific, the agency I founded to help brands succeed on the Amazon platform. If you need any services that relate to success on the platform, whether it be content, advertising, SEO, help on the back end when it comes to operational support, et cetera, training for your team or even just some advice on a place you may be stuck, feel free to reach out to our team. The best way to get in touch with us is on LinkedIn or at orcapac O-R-C-A-P-A-C dot com.

John Ghiroso (08:11):

I know it's hard to have a conversation about e-commerce without talking about the COVID impact. It's obviously impacted all of our day to day lives, but it's also impacted the businesses that we're in, in a significant way. What's interesting to me in the e-commerce world is it's not all bad. I mean there's clearly a headwind here, consumer spending is down, there's lots of disruption to supply chains, all kinds of things. But then obviously there's a big shift from brick and mortar to online shopping as well. So you kind of have these countervailing forces. I mean, what have you seen over the last even couple of weeks in terms of the biggest impacts to e-commerce from this pandemic?

Rick Watson (08:55):

Yeah, I mean I think the biggest impacts overall is ... there are a couple of different things I think you see behavior shifts, a shift to online spend, particularly across a few categories, essentials, pharmacy, and then home improvement in particular has been pretty strong. I think a lot of other categories are very much down between 30 and 80% depending on who you talk to and kind of where you fall on that continuum of, if you're ... have a nice designer dress that's ... you're going to go out to a dinner and a movie. Clearly you're on doing that now and as well as the restaurants and those places that depend on people going out are down a lot. I think if you look at some of those behavior changes, people are getting more comfortable ordering online.

Rick Watson (09:52):

I think pick up like, not necessarily pick up in store, but curbside pickup seems to be getting a lot more traction now than before. I think what we're seeing is that people that are a little bit younger and people that are a little bit older are getting more comfortable with purchasing online as well, whereas kind of the mainstream I think was online.

John Ghiroso (10:19):

Do you think that has staying power? I mean do you think that that stays around? You know, vaccine is here 18 months from now, totally back to normal, do you think people keep buying online or do you think they kind of say, "Wow, I miss going to the store?"

Rick Watson (10:33):

Yeah, I think it's interesting. I think the governor of New York, Andrew Cuomo this morning was talking about this topic. I don't think you ever go back to the old normal. I think there will be a new normal, I do think some of it has staying power. I don't think it will snap. I don't think it'll snap back a 100%. I don't think it will stay where it is now either. What I do feel is that once you start to form those habits, you become comfortable doing something in a pinch. Whereas in a year or two years we might be wondering why e-com penetration in particular categories has ticked up twice he last three years in terms of its penetration.

Rick Watson (11:19):

It's because someone, rather than going to the grocery, making that Costco run every single week, maybe you might skip a week or you might order if something is not quite as convenient, you won't go out of your way to do it because you'll just do it when you get home and then you'll wait for the next time. I do feel some of that stuff will snap back, will have staying power.

John Ghiroso (11:43):

Yeah, yeah. Interesting. What has the impact been on logistics in the e-commerce realm from this new COVID dynamic?

Rick Watson (11:56):

Yeah, and I see all the shippers really scrambling and trying to streamline what their operations are. I mean, you see Walmart and Amazon is the most visible. I haven't seen sort of UPS and FedEx saying like, "Look, we're going to handle you and we're going to hire like 150,000 more workers," like I have with those companies, which is I think interesting on its own. Maybe it's because of union dynamics in one of them and something else in another. But the obvious Amazon answer is, they've made some big pretty big FBA changes that inconvenienced a lot of sellers.

Rick Watson (12:39):

From an FDA point of view, Amazon just yesterday I believe, announced that they're even stopping their pilot independent third party shipping program, which I wrote about a little bit this morning that ... So they put that whole program on pause for non-Amazon parcels, not Amazon shipping non-Amazon parcels. I think Amazon is just really in a kind of a wartime mode. They are, if it's not essential, we're going to cut it. Prime inventory I think is down overall. Certainly delivery promise dates had been pushed out very far and there doesn't seem to be ... Amazon, the person who sort of invented the hyper focus on metrics and e-commerce really, if you think about their marketplace standards, like ODR and all these things, they have found that throwing caution to the wind with all that.

John Ghiroso (13:38):

Yeah, absolutely.

Rick Watson (13:39):

One week ... What's four weeks between friends? Like why do we care?

John Ghiroso (13:44):

Yeah. Yeah. It is funny how much they've just thrown that out for the time being. It's a three week ship window or it's four days or you order it in three weeks and get it in four days. We don't know. Just figure it out. Yeah, it's actually been bizarre from my perspective to watch these dynamics and there's all kinds of volatility too. We're seeing some brands where they have a top seller in a category that has a three week ship window and then their competitor is at two day ship window, but they're a lower seller and then we had ... it's a categorization thing. There's all kinds of wacky stuff going on. I mean-

Rick Watson (14:21):

I heard about that bug, that oops bug, where if Amazon didn't have the item, they still didn't service the lowest shipping rate from even their 1P vendors.

John Ghiroso (14:32):

Yeah, that was actually a big problem. They've since resolved it. But yeah, it was ... I mean in normal circumstances a Prime Offer will always be faster than a drop ship offer. But if Prime Offers all of a sudden or three weeks and drop ship offers five days, then yeah, they were still servicing ... Yeah, I mean there's just, there's so many second order effects of these kind of overnight changes that ripple through the platform. It's been fairly chaotic. My obviously ... my purview is Amazon, but I'm curious, have you seen that same dynamic with the other platforms D2C, E-bay, Walmart, those guys?

Rick Watson (15:12):

Yeah, I mean I have seen timeframes pushed back across the board. I think Amazon benefits disproportionately from being the leader-

John Ghiroso (15:23):

Just cause they're the go to, "Oh I need to buy [crosstalk 00:15:27]

Rick Watson (15:27):

From everyone. I think the effects are really muted-

John Ghiroso (15:32):

Interesting.

Rick Watson (15:33):

... by and large across the firm, just from a supply chain point of view. They have the big problem that I ... you talk to some businesses and if they were shipping non essential products like let's say out of Manhattan, then they can't really do that anymore. Some of these were Amazon sellers shipping seller fulfilled Prime out of their office in Manhattan.

John Ghiroso (15:59):

Sure.

Rick Watson (16:00):

They're like, "Well, can't do that anymore. Our office building is closed. So let me scramble on that side." But I think for broader e-comm, the biggest problem is that volumes are way down. I think a UPS or a FedEx or a company at that scale is able to kind of absorb and flex their network from that point of view just because they're across so many broad categories.

John Ghiroso (16:29):

When you say volumes are down, you mean overall consumer spending is down.

Rick Watson (16:34):

Yeah, overall concern is down and in particular what I'm referring to is the non-essentials more or less.

John Ghiroso (16:40):

Got it. Got it. Yeah. Yeah. It's interesting for us, like from our perspective on Amazon, we're actually starting to see now consistent, elevated levels of demand over and above-

Rick Watson (16:55):

Wow.

John Ghiroso (16:55):

... what we would expect this time of year for non-essential products, but the conversion rates lower because they're still, a lot of them are in a position where they don't have a prime offer now. It's interesting. This has been a really ... it's like a big question mark for me still and we're starting to see some preliminary data. I'm curious to hear your perspective on this, but it's the idea that we know the overall pie is going to be smaller. We're in a recession, consumer spending's down significantly, we know that that pie is going to be smaller, but can Amazon pickup such a bigger piece of it that their overall sales actually remain elevated and we know that that's the case in essential product, but we're starting to see indicators that it might also be the case in non-essential product, which is really interesting. Are you seeing that in other channels as well or is it just still kind of overall suppressed because all of retail suppressed?

Rick Watson (17:55):

I think eBay has been down but not terribly down from my conversations. eBay has generally been a relatively recession proof business because it's usually off price. It's a lot of times a channel of last resort for a lot of these merchandise. It's unique inventory. It's the original market for anything that needs a price. Like, "What should this cost? I don't know, let's put it on eBay." I think in those sorts of channels we are seeing a little bit different behavior. On Amazon, it's interesting you mentioned that, I would, without having seen the data, I would suspect that look traffic is up for essentials. I mean you're having to check Amazon over and over to get a delivery window, right?

John Ghiroso (18:48):

Yeah.

Rick Watson (18:51):

Some of that traffic, if you're not jabbing for Amazon for non-essentials, you might be more apt to cross shop, which would kind of go to your point that traffic is up, conversion is down. I mean, those things were inverse in e-commerce generally, right? Those things kind of add up. If the consumer is already on Amazon and Amazon is good at cross selling, which we know they're amazing on it, so I think they're going to benefit from this for sure.

John Ghiroso (19:22):

Yeah. Yeah. I mean you think about the Q4 dynamic where obviously toys gifts, consumer electronics are massively spiking in Q4, but then you also see spikes in things like apple sauce and socks because people are just on the platform more and they're just shopping more in general. I agree, I think what we may be seeing is the same dynamic plus that's exacerbated by the fact that people just aren't going to physical stores. [crosstalk 00:19:58]

Rick Watson (19:57):

Yeah, and this is the same company that figured out that if you watch a video on Amazon Prime Video, that you're going to buy more shoes. I'm pretty sure they're going to figure out how to capture more share from this.

John Ghiroso (20:14):

Yeah, yeah. Agreed. Agreed. Longer term, I guess over the next, let's say over the next like six months, I think we've kind of determined Amazon's probably a winner in the aggregate due to this new changing consumer behavior. Are there any other channels or retailers, eBay, Walmart, direct to consumer, any specific platforms that you think are going to be disproportionate winners or particularly positioned to take advantage of this?

Rick Watson (20:48):

Yeah, I mean look, I think the social channels I think could be winners because people are chatting more. I think all the gaming platforms have benefited, if you look at like Tencent and their business in Asia and Microsoft and Sony are reporting like, I don't know, huge increases in volume. But I think social is an interesting one where you have players like Facebook trying to take steps into commerce. Could they use this next six to 12 months to capitalize on the shift to online particularly in these categories where Amazon isn't traditionally great at? Like fashion or beauty, like even no one is fantastic at beauty online.

John Ghiroso (21:40):

Yeah, agree.

Rick Watson (21:40):

Just from the category penetration, but those are two in particular areas where if there's anyone who has a better than even shot to take share in that category, it's Instagram.

John Ghiroso (21:53):

Yeah, that's super. Are you kind of saying it's the same dynamic that we just talked about with Amazon where they're maybe not directly benefiting from this, but if more people are using Instagram and a certain percentage of those are converting to make purchases on Instagram, they just have kind of a disproportionate win because of that? Or do you think they are more specifically going after ... Are they, I guess, are they ramping up their e-commerce capabilities operations, like in addition to this kind of just natural shift to social?

Rick Watson (22:31):

Yeah, I actually, I think both. If you take your second one first, I mean Mark Zuckerberg just two months ago, which two or three months ago, which seems like forever ago now, before the crisis was on everyone's minds, he basically put commerce as one of his top three priorities across the entire world. They plan to be a big player in commerce, period, across all their properties, WhatsApp, Facebook and Instagram. But in terms of ... To me like, in selling anything, particularly online, your number one ... if you can get an audience that trusts you, then it becomes easier to sell anything. To the extent that people were spending more time on Instagram, I think it benefits them as they continue to release these tools like ARVR into Instagram from a lens point of view or showing how products show up and releasing these commerce tools where you've seen some fashion and other brands testing like Instagram stores that you can promote the fan doing sneaker drops.

Rick Watson (23:49):

I think it will take them a while to figure it all out just because it's new. It's like building a new muscle for them. I mean, just think about how long Google has been trying to iterate on commerce. It feels like for 15 years and it kind of still feels like they haven't really got it right. I think the big debate in commerce right now from a social point of view is like where is Facebook on that curve and will they end up like Google? Kind of like so much potential but never figuring it out or will they end up like, I don't know, like you just pick a brand like Glossier that started as a blog and that was a major player?

John Ghiroso (24:30):

Yeah, that's super interesting. I mean I certainly understand the, I think, the opportunity for social to impact commerce in a major way just because of how consumers behave and how they shop and browse and are influenced and make decisions, that just makes intuitive sense to me. I guess from a more practical perspective, the piece that I struggle with in terms of can they really break through and be a significant player in e-commerce is the operations and fulfillment piece. Because you know, that's ... that works. That's great if you're selling a product for 39.99 with a 60% margin that you ship direct to consumer and someone's willing to wait five days for it or, or whatever.

John Ghiroso (25:21):

But it's not going to work for toilet paper. It's not going to work for toasters. It's not going to work for probably 90% of purchases outside of those very like fashion oriented, kind of one off products. Do you think social ever breaks into kind of the more ... not even ... toilet papers and extreme example, but the more sort of just the average retail categories? I mean, do you think they can ever get there? [crosstalk 00:25:56]

Rick Watson (25:59):

No is I think the answer, unless we actually get to some kind of scenario that we have in China, where you have these sort of super apps, you know what I mean? Where everyone is in their social platform and chat rooms 24/7, and to just say.

John Ghiroso (26:20):

Yeah.

Rick Watson (26:20):

But even in that scenario, you're probably just going to text the Amazon bot and have it ship you a toilet thing. I even think Amazon could win in that world too because their supply chain will be better. I think the answer is no, and I think it's actually no for a good reason because you ... at least in the short term, you need to be where Amazon is not a little bit, kind of going back to like the Southwest Airlines strategies, like "Let's not try to be a long haul carrier internationally. Let's try to be the best we can be at the categories that make sense for our format." This is sort of a history of eBay a little bit, right?

Rick Watson (27:14):

They started out as collectibles and other stuff and then they ... then it was sort of refurb and then they tried to move into the mainstream fashion and other things and those things just failed miserably. It wasn't even funny. I think if, I don't care who you are, like if you're a Facebook, Instagram, you try to do the same thing, you'll fail the same way.

John Ghiroso (27:37):

Yeah, yeah. That I agree with that. That makes sense to me. I mean, I guess I've never questioned, could Facebook have a 10 or $20 billion e-commerce business, but I think when you get into like can they really compete with Amazon? Can they have 100 billion, $200 billion e-commerce business that, I find that very hard to kind of rectify, unless there's like a massive shift. Because at some point you're going to get into a situation where it's just the new showrooming, where you discover and research and learn about the product on social and then you just flip over to your Amazon app and buy it, which is a very, very easy thing to do is as it currently stands.

Rick Watson (28:20):

Right.

John Ghiroso (28:21):

I mean I think if you don't have some sort of differentiator exclusive or otherwise channel that just isn't well penetrated or represented by Amazon, I mean you're just going to have people hop over and it takes them three seconds but then you save 40 seconds by not having to deal with the Instagram interface or there's more confidence or whatever.

Rick Watson (28:44):

Where I think Facebook's opportunity is, is if you ... I mean look, if you're a new brand now and generally any commerce, Facebook's ad rates are still lower than most players, and usually the big comparison is Google, right? That's, to me, that's their big opportunity. If you figure, okay, converting from Facebook to all these brands, which you know, a lot of them are Shopify, not all of them, but if Facebook is able to keep some of those people on the platform that are ... everyone is trying to get them to leave anyway, then there's definitely ... maybe not in essentials and things like this, but I think there's more opportunity than people would otherwise think.

John Ghiroso (29:28):

Yeah. I agree with that. I mean I think we're probably on the extreme end of our perception of e-commerce a little bit. I have to check my own bias sometimes because I'm like, "Well of course Facebook's going to have a $20 billion business." I mean I don't even think that's the consensus. I'm obviously bullish on e-commerce is as I'm sure you are too.

Rick Watson (29:50):

Yeah. I think the big challenge that these search and advertising companies have is just that advertising, you're ... Every day you wake up and you look at your bank account and you ask your accountant like how much money did we print today? Because that's what they're doing. I mean they're just printing money every day based on things that they don't do. Commerce is so hard and I think there's just like vast underestimation and at some point I think if you're like the Google CFO or ... and you sort of hope it's not the Facebook CEO, it's like why the heck are we doing this? Like why would we ... why don't we just get back to what we know we're doing? I think those are some of the challenges you run into like trying to go into a completely different segment like this.

John Ghiroso (30:36):

Yeah, I completely agree with that. I think that's why Google's never figured it out because right now Google sells air. They sell nothing.

Rick Watson (30:44):

Right.

John Ghiroso (30:46):

They still bits, that's all it is. It's ephemeral. It has no actual cost. Either, the product itself or the distribution has virtually no cost where Amazon has massive costs and it's very low margin even at scale, which is why I've just thought is that really a business? I mean sure, the platform concept makes sense. I thought if anyone, this was like five years ago, I thought if anyone could really compete with Amazon, it would be Google if they could have really created like a true kind of platform. But again, the missing piece to me was always the physical infrastructure, which if you don't own that or have some other partner that has massive scale, none of the other stuff works. It's the pairing of that digital platform [crosstalk 00:31:38]

Rick Watson (31:38):

Yeah. These days the consumer is so, so convenience oriented that if you just introduce a little bit of friction, it's like, "Why am I here? Like I know I can go somewhere else and this'll be easier. You know, I'll go back to the store with the checkout that takes two seconds and that already has my data." It better be very compelling to you for some other reason. That usually takes years of an investment that a lot of people don't just don't have patience for.

John Ghiroso (32:08):

Yeah, yeah, I agree. I heard Dave Clark speak from Amazon once and he said, back in the day when they were first launching, he said "We'd ship somebody a book, it would take like six days to get to their house and they would write us an email and say, 'This is the most incredible thing I've ever seen. It's like magic. Like I hit a button on my computer and then a thing just showed up at my house,'" and he says, "Now, if you miss a one hour ship window by like five minutes people were calling like freaking out because the product was late."

John Ghiroso (32:41):

Yeah, I mean, consumers are absolutely spoiled by the very, very incredible bar that's been set by Amazon and others. So I agree, I mean if you don't have ... I mean just the impact that we saw when Amazon shifted, not even nationwide, but just for a lot of urban areas, shifted from two day to one day shipping was a really significant impact on a lot of categories. This stuff, it matters, it matters to customers and as soon as you go from two day to one day, now one day is the standard you can't do one day, then no one wants to shop on your platform. Yeah, so it's a real competitive advantage that they've set up for themselves. Well good. This went a bunch of different directions, Rick. I thought it was super interesting. Are there anything else that you think our audience would want to know? Anything top of mind for you?

Rick Watson (33:38):

Yeah, I mean I think the other thing like on an Amazon shipping point of view, and I was just like thinking about this this morning just because Amazon shut down their sort of pilot of their independent shipping service, I think a lot of people make the mistake when they look at Amazon shipping, they were like, "Oh, how are they ever going to beat FedEx rates or beat these rates are that rates, or how are you going to build up this infrastructure for where FedEx has been a player for so long? I think people really underestimate Amazon at their own peril in almost anything. Look, they're already a major shipper, one of the biggest shippers in the US number one. Two, they know every more detail about the customer than probably South of anyone, but Facebook, you know what I mean? That's like two.

Rick Watson (34:33):

They also know the most profitable lane's better than anyone else and their shipping network is a bidded marketplace on the back end where you have to have amazing service and amazing rates just to get there. They know the inputs to the business and they use these carriers' networks so much that if they can improve their margin just a little bit on the back of their current business, they have so much leverage over the rest of the shipping business. Because if you just imagine the headline, if Amazon took 10% of their volume away from UPS, what would that do?

John Ghiroso (35:10):

Yeah, sure.

Rick Watson (35:11):

If you woke up and saw that headline, like their stock would decline 30% tomorrow, I mean 100%. Their leverage is so high and they can amortize the cost of the rates of every new customer that they acquire that's even not shipping Amazon parcels on the back of the lanes that they already have. Similar to that, they could just repeat this AWS philosophy obviously [crosstalk 00:35:38] as profitable what it is-

John Ghiroso (35:42):

But you overextend the capacity, right? Then you just sell it off like that's all you're doing.

Rick Watson (35:45):

Exactly.

John Ghiroso (35:46):

Yeah. What you're saying, and I totally agree with all that, what you're saying is this pilot's going to come back. It's just [crosstalk 00:35:53]

Rick Watson (35:52):

I think it's going to come back. The challenge is I think everyone knows it's going to come back and there's nothing that these guys, or I see doing that is going to stop them in the short term. What are they going to do in the next six months to blunt the force when Amazon opens back up.

John Ghiroso (36:12):

I mean, I don't honestly know what they could do in the next five years. I think it's easy to disparage companies that are competing with Amazon to go, "Oh well you know, Walmart should have figured this out 10 years ago or whoever Target whoever should have figured out how to compete with Amazon." Well, easier said than done. I mean, so what would you do? Because you have all these fixed costs and infrastructure and you have investors that are unwilling to give you a long leash in terms of making investments in the business, unlike what they're willing to do with Amazon, probably because the leadership.

John Ghiroso (36:57):

I mean there's just dynamics that what is FedEx, what does UPS do about this? They know it's coming. There's only so much you can do besides just kind of sit back and watch it happen. If they could lower their rates, they probably would. If they could expand infrastructure in a certain way, they probably would. Yeah, it's going to be very interesting to watch. I mean for me, I think Amazon being a major competitor to FedEx UPS is just simply inevitable.

John Ghiroso (37:29):

I mean I've believed that for a long time, just based on what I saw happen with AWS. To me, it's the next very obvious extension of that same model. Not to mention the fact that like people forget, I mean you remember, but Amazon used to run Target's and Toys "R" Us's entire e-commerce operation.

Rick Watson (37:48):

Yeah, totally.

John Ghiroso (37:51):

At the time, the consensus was that, "Oh well they could never compete with Toys "R" Us or they could never compete with Target because if that wasn't the consensus, it would have never been happening to begin with. The fact that they're partners now, just that doesn't mean much to me in terms of where this ultimately goes.

Rick Watson (38:09):

Yeah. Exactly. They're partners until they learn what your business does and then their margin is your opportunity as they say.

John Ghiroso (38:18):

Yep. Yep. Absolutely. Well Rick, this has been great. I mean, we'll have to do this again. I know there's probably a hundred other topics we could cover, but if people want to get in touch with you, if they want to learn more about your company and what you do, what's the best way to do that?

Rick Watson (38:37):

Yeah, there's a kind of two ways. One is I have a website, a rickwatson.io that people can find me on, or by email, it's rick@rickwatson.io.

John Ghiroso (38:51):

Very good. For anyone who isn't doing it already, follow Rick on LinkedIn. He puts out great thoughts on a regular basis. Rick, thanks again for being on.

Rick Watson (39:01):

Appreciate it a lot John.

John Ghiroso (39:02):

Thanks for listening to this conversation with Rick Watson, founder and CEO of RMW commerce consulting. Thanks again, Rick, for being on the show. For anyone who wants to subscribe, you can do that right now on YouTube or any of the other podcast channels you listen to. If you want, go in and leave us a rating and review, it helps a lot in the rankings. As always, we'll see you next time.