3 Ways Kiva Will Help Amazon Keep Winning
Mar 26th 2012 10:15AM
Updated Mar 26th 2012 12:04PM
Amazon.com (NAS: AMZN) has long been straddling two worlds. With its tentacles stretching into every arena of digital media as well as cloud computing, the Kindle purveyor is often seen as a forward-thinking tech heavyweight on par with Google. But as a retail giant accused of bullying tactics and questionable labor practices, Amazon also bears much in common with Wal-Mart (NYS: WMT) , ruler of the brick-and-mortar realm.
The online retailer's recent $775 million acquisition of Kiva Systems is a perfect expression of this blend. Kiva makes wheeled robots that sit under warehouse shelves and move them around to speed the picking process. You can see how they work here. The company estimates the robots can speed productivity by up to three or four times, and Kiva's robots are already used at Amazon subsidiaries Zappos.com and Diapers.com.
The deal, which is expected to close in the second quarter of the year, seems likes a brilliant move for Amazon, and its stock climbed about 5% the day of the announcement. As the world's No. 1 online retailer, the company is renowned for its operating efficiencies and low prices, and the Kiva acquisition should only help to control costs. Warehouse expenses fell just shy of a lofty $4.6 billion last year. The company also faces increasing demand for shipping capacity from its third-party retailers, as units sold in that segment increased 65% in its latest quarter and now make up 36% of unit sales. Despite the slightly higher margins from third-party sellers, Amazon's already low margins have shrunk even more recently, dropping 2.3% last year, and they are projected to clock in at 1.6% in 2012. Amazon can use all the help it can get in keeping expenses down.
Amazon has cleverly built an economic moat through acquisitions of other e-tailing upstarts like Zappos and Quidsi, parent of Diapers.com and Soap.com, as well as through its own innovations, like Amazon Prime, which creates switching costs for customers. The Kiva acquisition looks to be the next piece in this puzzle. As a supplier of competing retailers such as Staples (NAS: SPLS) and Walgreens (NYS: WAG) , Kiva gives Amazon not only an additional revenue stream, but also bargaining power. Amazon has said it plans to continue supplying the robots to other retailers, but it can also tweak them for its own use, giving it an advantage over the competition. Amazon plans to add 17 new warehouses this year, bringing its grand total to 69.
While the acquisition seems like a smart move for efficiency reasons, it's also a win for the company's PR. Amazon has said the acquisition won't result in layoffs, as it still needs warehouse workers for many other functions, but in the long term it seems that the robots would have to cost human jobs. While Luddites may see technology eliminating labor as a bad thing, the rub is that those jobs are often miserable, and some compare to sweatshop labor, as a recent report in Mother Jones indicates. Amazon already got itself in hot water last year when an investigative report revealed that its workers at a Pennsylvania warehouse were suffering from heat exhaustion and an ER doctor had called authorities to report unsafe working conditions.
It seems like the company would be wise to avoid the image problems that have plagued Apple and its supplier Foxconn recently, and Wal-Mart over the years. For their customers, knowing that those low prices are coming from futuristic orange robots, rather than on the backs of hard-luck wage slaves, could be one step in the right direction.
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At the time this article was published Fool contributor Jeremy Bowman owns shares of Apple and Google but holds no other positions in the companies above. The Motley Fool owns shares of Google, Apple, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Apple, Wal-Mart Stores, Google, Amazon.com, and Staples. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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