by Brad Stone
“In twelve hours, they went from millions of pieces [from Amazon] a day to a couple a day,” says Jones, who flew to Fernley to watch the fallout. The standoff lasted seventy-two hours and went unnoticed by customers and other outsiders. In Fernley, UPS representatives told Jones they knew Amazon couldn’t keep it up and predicted that FedEx would be overwhelmed. They were likely right. But before it came to that, UPS execs caved and gave Amazon discounted rates.
“Yes, we could have operated mostly without them,” Wilke says. “But it would have been very hard, very painful. They knew that. I didn’t want to leave them, I just wanted a fair price.” In the end, he got one, bringing home one of Amazon’s first bulk discounts and teaching the company an enduring lesson about the power of scale and the reality of Darwinian survival in the world of big business.
In 2003, Jeff Bezos came up with yet another way to frame his concept of Amazon. This time, it was for a group of buyers who were leading the company’s charge into the new hard-lines categories, a group of products that included hardware, sporting goods, and electronics. Amazon, Bezos said, was the unstore.
At the time, Bezos had selected jewelry as the company’s next big opportunity. It was a tempting target: the products were small, the prices were high, and shipping was relatively cheap. He tapped retail managers Eric Broussard and Randy Miller to lead the effort. As usual, the executives Bezos chose to head the product’s sales had no prior experience selling that product.
Though it seemed alluring, selling jewelry posed some challenges. Expensive baubles were difficult to display in full detail online; also, the products were valuable and tempting to pilfering workers in the company’s fulfillment centers. Another issue arose with pricing: The jewelry industry had a simplistic pricing model with generous margins. Retail markup was significant; stores doubled the wholesale cost (a practice known as keystone pricing) or even tripled it (known as triple-keystone pricing). Jewelry manufacturers and retailers clung tightly to that custom, which didn’t fit well with Bezos’s newly adamant resolve to offer the lowest prices anywhere.
The Amazon jewelry executives decided on an approach similar to the one the company had recently used for its cautious first foray into apparel. They would let other, more experienced retailers sell everything on the site via Amazon’s Marketplace, and Amazon would take a commission. Meanwhile, the company could watch and learn. “That was something we did quite well,” says Randy Miller. “If you don’t know anything about the business, launch it through the Marketplace, bring retailers in, watch what they do and what they sell, understand it, and then get into it.”
Bezos seemed amenable to that plan, at least at first. And then one day, in a meeting with the S Team and the hard-lines group, something set him off. They were discussing the margins in the jewelry business, and one of Randy Miller’s colleagues mentioned how the jewelry industry conducted business in the “traditional way.” “You’re not thinking about this right,” Bezos said, and he excused himself to get something from his office. He was gone a few minutes, then returned with a stack of photocopied documents and handed a page to everyone in the meeting. It had only one paragraph, about ten sentences long. It began with the words We are the “Unstore.”
The document, as Miller and other executives who were there remember it, defined how Bezos saw his own company—and explains why, even years later, so many businesses are unsettled by Amazon’s entrance into their markets.
Being an unstore meant, in Bezos’s view, that Amazon was not bound by the traditional rules of retail. It had limitless shelf space and personalized itself for every customer. It allowed negative reviews in addition to positive ones, and it placed used products directly next to new ones so that customers could make informed choices. In Bezos’s eyes, Amazon offered both everyday low prices and great customer service. It was Walmart and Nordstrom’s.
Being an unstore also meant that Amazon had to concern itself only with what was best for the customer. The conventions of the jewelry business allowed routine 100 or 200 percent markups, but, well, that just didn’t apply to Amazon.
In that meeting, Bezos decreed that Amazon was not in retail, and therefore did not have to kowtow to retail. He suggested that Amazon could ignore the conventions of pricing in the jewelry business and envisioned customers buying a bracelet on the site for $1,200 and then going to get an appraisal and finding out from the local jeweler that the item was actually worth $2,000. “I know you’re retailers and I hired you because you are retailers,” Bezos said. “But I want you to understand that from this day forward, you are not bound by the old rules.”
Amazon started selling jewelry in the spring of 2004; two-thirds of the selection came from its Marketplace and the other third came directly from Amazon. For months, Bezos was consumed by the design of the elegant wooden jewelry box that Amazon would use. “The box was everything to him,” says Randy Miller. “He wanted it to be as iconic as Tiffany’s.”
Amazon contracted with celebrity socialite Paris Hilton to sell her jewelry designs exclusively on the site, and the company spent considerable resources creating a tool to let customers design their own rings on the website. Amazon’s new staff jewelers would then craft the rings over an open flame on the mezzanine of the Lexington, Kentucky, fulfillment center. Additionally, Amazon introduced a feature called Diamond Search that let customers look for individual stones based on carat, shape, and color. And in a draconian tactic that further exposed his competitive streak, Bezos instructed Amazon’s communication staff to time public announcements in the jewelry category to coincide with the quarterly reports of Seattle-based rival Blue Nile, the leader in online jewelry sales.
Selling jewelry became a modestly profitable business for Amazon, according to employees who worked on the category, but the seeds clearly did not grow into the trees that Bezos had envisioned. Although Amazon’s watch business became robust, customers still wanted to go into actual stores to pick out engagement rings. After a while, the ring-designing tool and Diamond Search disappeared from the site. Amazon’s attention wandered to new battlefields, such as shoes and apparel. Employees who passed through jewelry later described a grueling experience, with shifting goals, rotating bosses, and endless disputes with suppliers who disliked Amazon’s pricing. Being an unstore was evidently not as easy as Bezos had thought. Amazon executives in the hard-lines business during these years had a running joke: “Why do you think they call them hard?”
* * *
As the hard-lines teams were bringing Amazon into new categories, with varying degrees of success, Jeff Wilke and his group had nearly completed their job morphing Amazon’s fulfillment process from a network of haphazardly constructed facilities into something that could more accurately be considered a system of polynomial equations. A customer might place an order for a half a dozen products, and the company’s software would quickly examine factors like the address of the customer, the location of the merchandise in the FCs, and the cutoff times for shipping at the various facilities around the country. Then it would take all those variables and calculate both the fastest and the least expensive way to ship the items.
The complete software rewrite of the logistics network was having its desired effect. Cost per unit (the overall expense of fulfilling the order of a particular item) fell, while ship times (how quickly merchandise ordered on the website was loaded onto a truck) shortened. A year after the Fernley meeting, the click-to-ship time for most items in the company’s FCs was as minimal as four hours, down from the three days it had taken when Wilke first started at the company. The standard for the rest of the e-commerce industry at the time was twelve hours.
Amazon’s ability to ship products efficiently and offer precise delivery times to customers gave the company a competitive edge over its rivals, particularly eBay, which avoided this part of the business altogether. Fulfillment was a lever that Bezos had invested in, and he started using it to guide strategy.
By 2002, the company wa
s offering customers the option, for an extra fee, of overnight, two-day, or three-day shipping. Wilke’s team called these fast-track or fast-lane orders and built a separate process around them. On the floor of the FCs, those items were accelerated through the Crisplant sorters and were the first to be delivered to the packers and the trucks waiting in the yard. The company refined this ability gradually, pushing the cutoff time for next-day delivery to forty-five minutes before the last trucks left its fulfillment centers. Expedited shipping was almost prohibitively expensive, for customers and for Amazon, but the website’s having the capability was to pay huge strategic dividends.
In 2004, an Amazon engineer named Charlie Ward used an employee-suggestion program called the Idea Tool to make a proposal. Super Saver Shipping, he reasoned, catered to price-conscious customers whose needs were not time sensitive—they were like the airline travelers who paid a lower rate because they stayed at their destinations over a Saturday night. Their orders got placed on the trucks whenever there was room for them, reducing the overall shipping cost. Why not create a service for the opposite type of customer, Ward suggested, a speedy shipping club for consumers whose needs were time sensitive and who weren’t price conscious? He suggested that it could work like a music club, with a monthly charge.
That fall, employees showed enough enthusiasm for Ward’s proposal that it came to the attention of Bezos. Immediately enchanted by the idea, Bezos asked a group that included Vijay Ravindran, the director of Amazon’s ordering systems, to meet him on a Saturday in the boathouse behind his home in Medina. Bezos conveyed a sense of urgency as he began the meeting, saying that the shipping club was now top priority. “This is a big idea,” he told the gathered engineers. He asked Ravindran and Jeff Holden to put together a SWAT team of a dozen of their best people and told them he wanted the program ready by the next earnings announcement, in February—just weeks away.
Bezos met with the group, which included Charlie Ward and Dorothy Nicholls, who would later go on to become a longtime Kindle executive, weekly over the next two months. They devised the two-day shipping offer, exploiting the ability of Wilke’s group to accelerate the handling of individual items in its fulfillment centers. The team proposed several names for the new feature, including Super Saver Platinum, which Bezos rejected because he didn’t want people to see the service as a money-saving program. Bing Gordon, Amazon board member and partner at Kleiner Perkins, claims he came up with the name Prime, though some members of the team believe the name was chosen because fast-track pallets were in prime positions in fulfillment centers. Focus groups were brought into Amazon’s offices to test the Prime sign-up process. The volunteers found the process confusing, so Holden proposed using a large orange button with the words Create my Prime account right inside the button.
Selecting the fee for the service was a challenge; there were no clear financial models because no one knew how many customers would join or how joining would affect their purchasing habits. The group considered several prices, including $49 and $99. Bezos decided on $79 per year, saying it needed to be large enough to matter to consumers but small enough that they would be willing to try it out. “It was never about the seventy-nine dollars. It was really about changing people’s mentality so they wouldn’t shop anywhere else,” says Ravindran, who later became chief digital officer for the Washington Post.
Bezos was adamant about the February launch date. When the Prime team reported that they needed more time, Bezos delayed the earnings announcement by a week. The team members finished mapping out the details for the service at three o’clock in the morning on the day of the deadline. It was a complex undertaking, but it was achievable because so many of the elements of the program already existed. Wilke’s organization had created a system for the expedited picking, packing, and shipping of prioritized items within the FCs. The company’s European operation had built a subscription-membership tool for its nascent DVD-by-mail business (a Netflix clone) in Germany and the United Kingdom, and that service, though rudimentary, was quickly improved and pushed into production in the United States to support Prime. “It was almost like Prime was already there, and we were putting the finishing touches on it,” Holden says.
In many ways, the introduction of Amazon Prime was an act of faith. The company had little concrete idea how the program would affect orders or customers’ likelihood to shop in other categories beyond media. If each expedited shipment cost the company $8, and if a shipping-club member placed twenty orders a year, it would cost the company $160 in shipping, far above the $79 fee. The service was expensive to run, and there was no clear way to break even. “We made this decision even though every single financial analysis said we were completely crazy to give two-day shipping for free,” says Diego Piacentini.
But Bezos was going on gut and experience. He knew that Super Saver Shipping had changed customers’ behavior, motivating them to place bigger orders and shop in new categories. He also knew from 1-Click ordering that when friction was removed from online shopping, customers spent more. That accelerated the company’s fabled flywheel—the virtuous cycle. When customers spent more, Amazon’s volumes increased, so it could lower shipping costs and negotiate new deals with vendors. That saved the company money, which would help pay for Prime and lead back to lower prices.
Prime would eventually justify its existence. The service turned customers into Amazon addicts who gorged on the almost instant gratification of having purchases reliably appear two days after they ordered them. Signing up for Amazon Prime, Jason Kilar said at the time, “was like going from a dial-up to a broadband Internet connection.” The shipping club also keyed off a faintly irrational human impulse to maximize the benefits of a membership club one has already joined. With the punitive cost of expedited shipping, Amazon lost money on Prime membership, at first. But gradually Wilke’s organization got better at combining multiple items from a customer’s order into a single box, which saved money and helped drive down Amazon’s transportation costs by double-digit percentages each year.
Prime wouldn’t reveal itself to the world as a huge success for another few years, and originally it was unpopular inside Amazon. One technology executive griped to Vijay Ravindran that he feared Bezos would now believe that he could commandeer engineers and ram his favorite projects through the system. Other execs were wary because of Prime’s estimated losses. Almost alone, Bezos believed fervently in Prime, closely tracking sign-ups each day and intervening every time the retail group dropped promotions for the shipping club from the home page.
But even back in February of 2005, Bezos suspected he had a winner. At Amazon’s all-hands meeting that month at the usual location, the classic Moore Theater on Second Avenue, Vijay Ravindran presented Prime to the company, and afterward Bezos led everyone in a round of applause.
Prime opened up new doors, and the next year Amazon introduced a service called Fulfillment by Amazon, or FBA. The program allowed other merchants to have their products stored and shipped from Amazon’s fulfillment centers. As an added benefit, their products qualified for two-day shipping for Prime members, exposing the sellers to Amazon’s most active customers. For Wilke’s logistics group, it was a proud moment. “That is when it really hit home,” says Bert Wegner. “We had built such a good service that people were willing to pay us to use it.”
So when Bezos pulled Wilke out of an operating review in late 2006, Wilke wasn’t expecting to hear that that holiday season would be his last in the world of logistics. Bezos wanted Wilke to take over the entire North American retail division, and Wilke was charged with finding his own replacement. Wilke thought that Amazon’s progress in its FCs had plateaued, so instead of promoting from within the ranks of Amazon’s logistics executives, all of them molded, as he was, by the dogma of Six Sigma, Wilke went looking for someone with a fresh approach and additional international experience.
The search led him to Marc Onetto, a former General Electric executive with a thick French acc
ent and a gift for animated storytelling. Under Onetto’s watch, engineers once again rewrote elements of Amazon’s logistics software and devised a computer system, called Mechanical Sensei, that simulated all the orders coursing through Amazon’s fulfillment centers and predicted where new FCs would most productively be located. Onetto also shifted Amazon’s focus toward lean manufacturing, another management philosophy that emanated from Toyota and was directed at eliminating waste and making practical changes on the shop floor. Japanese consultants occasionally came to work with Amazon, and they were so unimpressed and derogatory that Amazon employees gave them a nickname: the insultants.
Though Amazon was intensely focused on its software and systems, there was another key element of its distribution system—the low-wage laborers who actually worked in it. As Amazon grew throughout the decade, it hired tens of thousands of temporary employees each holiday season and usually kept on about 10 to 15 percent of them permanently. These generally low-skilled workers, toiling for ten to twelve dollars an hour in places where there were few other good jobs, could find Amazon to be a somewhat cruel master. Theft was a constant problem, as the FCs were stocked with easily concealable goodies like DVDs and jewelry, so the company outfitted all of its FCs with metal detectors and security cameras and eventually contracted with an outside security firm to patrol the facilities. “They definitely viewed everyone as someone who could potentially steal from them,” says Randall Krause, an associate who worked at the Fernley FC in 2010. “I didn’t really take it personally because probably a lot of people actually were stealing.”
Amazon tried to combat employee delinquency by using a point system to track how workers performed their jobs. Arriving late cost an employee half a point; failing to show up altogether was three points. Even calling in sick cost a point. An employee who collected six such demerits was let go. “They laid out their expectations and if you didn’t meet them, they had people waiting to take your job,” says Krause. “They wouldn’t give you a second chance.”
