Amazon said to launch Pantry to take on Costco and Sam's

Amazon is the eyes of the CPG business. Aivars Lode avantce

Amazon said to launch Pantry to take on Costco, Sam's

Alistair Barr, USA TODAY 4:56 p.m. EST December 13, 2013

Pantry is set to launch in 2014 and will let Amazon Prime members buy consumer packages goods that will be shipping in a set sized box with a maximum weight limit, sources say.

SAN FRANCISCO — Amazon.com is working on a new business called Pantry that will help it expand further into the giant consumer package goods market and take on warehouse club stores Costco and Wal-Mart's Sam's Club, according to three people familiar with the effort.

Pantry, which is run by Billy Hegeman, a senior manager in vendor management and consumables at Amazon, is currently set to launch in 2014, the people said on condition of anonymity. They did not want to be identified because Amazon's plans are still private.

Amazon spokesman Scott Stanzel declined to comment Thursday afternoon.

The service will be targeted at existing members of Amazon's Prime shipping program. It will launch with about 2,000 products typically found in the center of grocery stores, such as cleaning supplies, kitchen paper rolls, canned goods like pet food, dry grocery items like cereal and some beverages.

Amazon will let Prime shoppers put as many of these items into a set sized box, up to a specific weight limit. If the products fit and they don't exceed the maximum weight, Amazon will ship the box for a small fee.

Pantry will put Amazon into much closer competition with Costco and Sam's Club, which specialize in selling a limited number of items in huge volume at very low prices, according to retail industry experts.

"Amazon has the clubs in their cross hairs," said Keith Anderson, who leads RetailNet Group's Digital Advisory practice."This will be a potential issue for Costco."

Warehouse club members tend to be higher income households with kids — the type of shoppers that have huge lifetime value to retailers.

The demographics of an Amazon shopper are similar to the club store shopper and Amazon wants to appeal to that audience, one of the people familiar with the effort explained.

The consumer packaged goods, or CPG, market is worth about $850 billion a year in the U.S., but most of that spending still happens in physical grocery stores. This gives Amazon a big new sector to grow into, if it can successfully tackle some of the problems inherent in shipping big boxes of cereal and heavy cans to people's homes.

Bernstein Research recently estimated that the CPG opportunity for e-commerce companies is worth about $470 billion a year. Amazon can profitably capture at least $222 billion of such spending per year, according to the firm. Amazon's total revenue was just over $61 billion in 2012.

"We expect Amazon to take advantage of its strong relationship with Prime users, its existing infrastructure, and its leading online channel to continue to grow aggressively in CPG," Carlos Kirjner and other analysts at Bernstein wrote in a recent note to investors.

Amazon and other e-commerce companies have struggled to break into the packaged goods market so far because of the high cost of shipping online orders. The cost of a pack of Coke cans, for instance, is about the same as it costs Amazon to ship the item.

Encouraging consumers to put multiple items into a single box increases revenue from each order, potentially helping Amazon cover the shipping cost.

Amazon has designated at least four fulfillment centers to store Pantry inventory and process orders, according to two people familiar with the program.

Amazon can use its extended network of fulfillment centers "to enable better shipping economics than the current .com business," said Tom Furphy of Consumer Equity Partners. "So they'll be able to carry heavier and/or less expensive items than they have been able to previously."

Four Industry Giants Tout Success of Match-Back Model

Companies are looking for ways to backfill empty capacity. Aivars Lode avantce

Four Industry Giants Tout Success of Match-Back Model

Bill Mongelluzzo, Senior Editor | Oct 23, 2013 2:00PM EDT

It sounds elementary: An exporter in an interior location needs empty containers. Importers in the same region unload containers every day and ship them back empty to a seaport. Why not truck the empty boxes a short distance to the exporter’s facility, load them with freight and ship the containers by rail to a West or East Coast port?

Maersk Line sees import steering, or match-backs, as a golden opportunity to use its costly equipment more efficiently. BNSF Railway believes match-backs are perfect for driving U.S. exports to overseas markets, especially in Asia. Home Depot imports hundreds of container loads of home improvement merchandise to the St. Louis area, and Archer Daniels Midland exports a large volume of agricultural products from the Midwest to Asia.

Attendees at The Journal of Commerce’s Inland Distribution Conference in Kansas City last month learned that when carriers and cargo interests that control as much freight as those companies do are able to coordinate their supply chain needs, every participant is a winner.

“Everyone benefits when waste is taken out of the system,” said Craig Mygatt, Maersk’s senior vice president of inland operations.

Conference attendees also learned, however, that in a continent as vast as North America, where inbound freight moves to cities and outbound freight often is generated in rural areas, arranging match-backs can be a complex and costly endeavor. “The match-back of containers is more difficult in North America than anywhere else in the world,” said Ed Zaninelli, vice president of trans-Pacific westbound at Hong Kong-based ocean carrier OOCL.

One lesson that can be learned from the Maersk-BNSF-Home Depot-ADM model is that countless opportunities for match-backs exist at inland rail hubs across the country, and those opportunities will multiply as U.S. exports increase.

Another lesson to be learned, however, is that bringing all of the players together, coordinating the logistics of the transaction and providing visibility to the process is a complex endeavor requiring a lead company to take the initiative.

In this case, because Maersk owns the containers and has a direct relationship with the cargo interests, it took the initiative and convinced all the participants that match-backs would be a mutually beneficial arrangement. Supply chain collaboration made it work, Mygatt said.

BNSF added that every stakeholder plays a role in the match-back arrangement. “People talk about supply chain collaboration. This is a true example of it,” said Fred Malesa, BNSF’s vice president of international intermodal.

However, a myriad of obstacles can stand in the way of establishing a consistent match-back arrangement, Mygatt said. When agricultural products are involved, weather and crop yields can affect exports from year to year. The Midwest drought reduced exports in 2012, for example. In contrast, 2013 is shaping up as a good crop year that could produce a strong rebound in agricultural exports in the coming fall and winter months.

The seasonality and variability of agricultural production creates a transactional need for equipment, marked by slow months when exports are low, followed by a surge in equipment needs in the fall. Imports of many consumer items, by contrast, tend to generate a steady flow of inbound equipment, Mygatt noted.

Finding the right containers and chassis for exporters can be challenging. Imports generally move in 40-foot containers. Exports, being heavier, sometimes must move in 20-foot containers. The new chassis regime developing as ocean carriers cease to provide chassis also can create equipment availability issues for shippers

Timing is also crucial, Mygatt said. Exporters often face specific cutoff times for delivering their shipments to the railroad, so any delays during the import move or at the distribution warehouse can affect equipment availability for the exporter.

Nevertheless, if stakeholders share information electronically and carriers make use of equipment-tracking technology, Maersk believes opportunities for more match-backs are plentiful. Mygatt said about 40 percent of Maersk’s container moves involve empties, but he believes it’s possible to reduce the “empty miles” to 30 percent of its container moves.

Maersk also attempts to encourage match-back opportunities by steering imports to locations that present consistent export loads. For example, it may offer a more favorable through-rate to an inland destination that is within a short truck haul of an exporter’s facility, Mygatt said.

The match-back is made possible by providing visibility to the transaction so that the exporter sends its trucker to the importer’s facility when the container is ready, in effect triangulating the movement of a box that otherwise would have been moved four times. Eliminating one of the moves saves hundreds of dollars in trucking costs, he noted.

In the Home Depot-ADM case, BNSF works with Maersk and the other partners to coordinate the moves so the operation works smoothly and consistently, Malesa said. For BNSF, the ideal location for match-backs is at its major inland logistics hubs such as Chicago, Dallas and Kansas City. “They drive the most efficient equipment solution,” Malesa said.

BNSF, however, has more than two dozen rail facilities that generate consistent inbound containers and are within a relatively short truck haul from exporters. BNSF therefore looks for a variety of export cargoes, including agricultural products, paper, metals, chemicals, plastics and meat products, Malesa said.

BNSF’s commercial team starts the process by understanding the import flows from Asia, and matches the import moves with the equipment needs of exporters who ship their products to Asia.

Rapid expansion of oil and gas drilling in shale deposits across the country is creating new opportunities for match-backs. Minot, N.D., for example, recently has become an inbound destination for oil field equipment, supplies and materials, and that rural location is also within easy reach of grain exporters in North Dakota.

Railroads also can make smaller rail ramps work for match-backs as long as there is a core importer at the facility. Canadian National Railway carries imports for Menards, a home improvement retailer, and Ashley Furniture, to their distribution facilities in Wisconsin, and CN has established transloading operations to attract grain exports to the rail sites.

Jean-Jacques Ruest, executive vice president and chief marketing officer, said CN sees similar export opportunities at its rail ramps in Indianapolis and Decatur, Ill.

Eastern railroads also are entering the match-back arena with service to inland ports such as Greer, S.C.; Cordele, Ga.; and Front Royal, Va. Although the distances to those locations are much shorter than from the West Coast to Chicago or Kansas City, the eastern railroads are able to make their intermodal services work through density and efficiency.