Amazon’s New Revenue Stream Could Also Solve Its Space Issues — If Retailers Buy In
Since the onset of the pandemic, Amazon has wielded enormous influence over the leasing market for distribution centers — first through its historic expansion, then through attempts to undo some of that growth.
Going forward, Amazon could be moving in a less disruptive fashion as it sorts out its oversized real estate footprint.
The company announced on Jan. 10 it will now offer the use of its logistics network to any retailers that sign up to use its Buy With Prime service. Depending on how popular that offering becomes, the formerly invite-only program could make profitable use of warehouse space it had considered excessive.
“The inventory for [Buy With Prime] products now has to be sitting in an Amazon warehouse, and it also means that Amazon has the ability to access that data to see what sells and doesn’t sell,” said Marc Wulfraat, founder and president of logistics consulting firm MWPVL.
“The real goal is to drive more revenue through the Amazon fulfillment center network in order to help offset the red ink on Amazon’s income statement.”
Whereas Amazon selling merchandise from other companies is a central function of its retail operation, Buy With Prime essentially offers the same service as third-party logistics providers, as well as point-of-sale support popularized by startups like Shopify. That support comes through the Buy With Prime button that appears as a checkout option on a participating retailer’s website for Amazon Prime members to use.
The combination of Amazon Prime’s convenience with the direct interaction a retailer gets from shoppers on its own website led to a 25% increase in purchases among visitors to sites that participated in the Buy With Prime pilot, Amazon said in a statement with the wide rollout’s announcement. An Amazon spokesperson directed questions to the company’s frequently asked questions page for the service and declined to comment further.
Amazon’s logistics retreat affected 30M SF, or 8% of its operational or planned warehouse space in 2022, according to data from MWPVL and analytics firm Green Street. The pace at which Amazon changed its plans slowed significantly in Q4, Green Street analyst Jessica Zheng told Bisnow in an email interview.
Perhaps because of that Q4 slowdown, or perhaps due to the sheer size of its remaining portfolio, opinions differ on what to make of the pace at which Amazon is rightsizing its portfolio.
“I would say they did this quite swiftly,” Zheng said of Amazon’s pullback.
Amazon has used two primary methods to reconcile its extra space: canceling or postponing not-yet-operational projects anywhere from the planning stage to the eve of opening and exiting older, smaller warehouses within well-covered urban markets. Both strategies have a finite number of applications, while reductions in other areas could be more costly or less feasible.
“The bulk of Amazon’s current planned downsizing may have largely been done,” Zheng said.
That leaves Amazon with up to 20% excess capacity in its network of U.S. warehouses, according to MWPVL data. To use that capacity by having competitors pay fees and hand over their data would be a win-win, as long as the other components of its logistics network — primarily transportation fleet and labor — can keep up.
“I bet that [Amazon CEO] Andy Jassy is saying, ‘Do anything you can to use that space and drive more revenue through the system,’” Wulfraat said.
Amazon’s initial justification for expanding so rapidly was a combination of its consumer demand projections and its drive to guarantee two-day delivery times for as many of those consumers as possible. A two-day timeline remains virtually impossible for the vast majority of retailers and third-party logistics providers, none of which has a logistics real estate network anywhere near the size of Amazon’s, Zheng, Wulfraat and Berger said.
“Amazon has all the big cities covered for next-day and two-day [shipping],” Wulfraat said. “Nobody else has that coverage, not even the big companies — short of Walmart and Target. But it doesn’t take dropping that far down the top 10 list before you’re down to [a retailer with] three centers across the country. And without cost-prohibitive air freight, you can’t do better than three to five days with that.”
The degree to which Amazon threw its weight around in 2020 and 2021 had meaningful effects on every part of the industrial sector, from raw availability to asking rents — it even disrupted the construction supply chain. Amazon's shadow loomed so large that industrial demand in the wake of its pullback has improved by some measures, buoyed in part by other retailers finally feeling they have a chance at desirable space, Zheng said.
Prologis, the largest industrial landlord in the world, still counts Amazon as its largest tenant by far, with the retailer paying 5% of its total rental income as of the end of last year, per its filings with the Securities and Exchange Commission. Even though news of Amazon pivoting its industrial strategy took a chunk out of Prologis’ stock market value, the company still anticipates being able to achieve 60% to 70% higher rents at its warehouses with expiring leases this year, Prologis Chief Financial Officer Tim Arndt said during its Q4 earnings call on Jan. 18.
Buy With Prime is unlikely to change the decision calculus for retailers on the hunt for warehouse space of their own because of the huge differences between running one’s own logistics network and using a 3PL of any sort, Zheng said.
But it could take market share away from other 3PLs on the strength of its network and delivery times — if those advantages are enough to overcome retail’s uneasy relationship with Amazon.
“With online retail, [it takes] one bad experience, and customers move on,” Berger said. “So maybe they’re giving up some stuff by giving Amazon their data, but Amazon may already be able to get it if they want. And Amazon gives such an advantage with its network. For many sellers, the trade-offs would be worth it.”
The struggle of retailers to effectively scale up their logistics networks has attracted the attention of more than just Amazon. Prologis has offered a service for assisting such networks called Essentials since late 2020 and has expanded the offerings under the Essentials banner in the past year, Arndt said on the company’s Q4 call.
“[Essentials] is something that they’re trying to expand, certainly, and that could potentially put them head-to-head with Amazon,” said Kyle Sanders, who tracks Prologis as a financial services analyst for Edward Jones.
Prologis will spend to keep growing Essentials this year, projecting a revenue increase of 70% in 2023 from what the program brought in last year. Between 15% and 20% of Prologis tenants use Essentials services in some capacity, with some even using Essentials at warehouses they lease from landlords other than Prologis, Arndt said.
Despite the optimism from Prologis on its earnings call, the fact that Essentials hasn’t become a bigger part of the company over two years after its launch could be a sign that a massive real estate footprint isn’t sufficient to break into the 3PL industry in a major way, Sanders said.
“They haven’t disclosed a lot of metrics, which means that one, it’s probably not a large part of their earnings, and two, it’s probably not going super well,” Sanders said.
Amazon has advantages that Prologis doesn’t, specifically in terms of efficiency at its warehouses and the data it has amassed on retail and logistics over the years, Berger said. But the history of Amazon, like that of most tech giants, is littered with new ideas and business lines that are touted at first, only to be tossed aside later.
“It’s a smart move,” Wulfraat said. “But the skeptic in me says, ‘If it’s that easy to stick a little widget on my site and work with Amazon, why haven’t I done so yet?’”
Regardless of how successful it ultimately becomes, Buy With Prime is already a usable service targeting an industry with real demand for it, putting it ahead of the game compared to other big tech ploys. But how much it will affect Amazon’s warehouse strategy — and thus the industrial real estate market — depends entirely on how widely it is adopted.
“I’m not sure it’s a rocket ship for the use of this extra space,” Wulfraat said. “Who knows what the future holds. I’m skeptical, [but] there’s so many positives about the program that could potentially make me a liar.”
CORRECTION, JAN. 25, 4:10 P.M. ET: A previous version of this article misstated Green Street analyst Jessica Zheng's name. This article has been updated.