Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
According to Amazon's recent annual 10-K filing, the company leased and owned (most of their space is leased) about 288,419,000 square feet of space around the world at the end of 2018. Of this number, about 80% is used for "fulfillment, data centers, and other." Amazon doesn't break out this line item any further, but GeekWire reckons that a good 3/4 of their real estate is dedicated to their fulfillment warehouses.
Here's the full summary of their facilities (from the 10-K filing):
Given that fulfillment is such a large share of their properties, I am most interested in understanding the geography of their warehouses and how that impacts their core value proposition, which is largely all about convenience.
In April 2017, Jean-François Houde (of Cornell), Peter Newberry (of Penn State), and Katja Seim (of UPenn) published a paper on this very topic called, "Economies of Density in E-Commerce: A Study of Amazon’s Fulfillment Center Network." There's also this Knowledge@Wharton podcast on the paper if you're looking for a quicker listen or read.
In the early days of online retail, the decision of where to warehouse had meaningful tax implications. Because (in most cases in the US?) you only had to collect sales tax if you had a physical presence in the same location as your purchasers.
As that changed, it then made more sense to create a broader distribution network and minimize the distance between fulfillment center and purchaser. By 2016, Bloomberg estimated that nearly 78 million Americans lived in a zip code where Amazon offered free same-dame delivery. That number has obviously increased since.
And in the paper "Economies of Density", they discovered the following cost savings as a result of Amazon's growing fulfillment network:
We find that Amazon saves between $0.17 and $0.47 for every 100-mile reduction in the distance of shipping goods worth $30. In the context of its distribution network expansion, this estimate implies that Amazon has reduced its total shipping cost by over 50% and increased its profit margin by between 5 and 14% since 2006. Separately, we demonstrate that prices on Amazon have fallen by approximately 40% over the same period, suggesting that a significant share of the cost savings have been passed on to consumers.
The interesting question for real estate people and city builders -- which is brought up in the Knowledge@Wharton podcast but is difficult to answer -- is whether there are diminishing returns to this "economies of density" phenomenon. In other words, how dense does Amazon's fulfillment network want to be?
Welcome to 2019.
I am currently in transit and catching up on some internet reading and email on my way back to Toronto.
At this time of year it is, of course, common to reminisce (or lament) about what happened over the last year, as well prognosticate what may come.
Over the last few years, I have done a bit of that on the blog. But I clearly didn’t do that this year while in Brazil (and away from any semblance of a workspace).
So here’s what others have been writing and thinking about over the holidays:
- 2018’s tech trends and tribulations in 14 charts. Recode. Link
- 2018 was the year of the YIMBY. CityLab. Link
- A cool girl’s guide to Toronto. Vogue. Link
- Amazon’s annual Christmas press release. Link
- Best travel posts of 2018. Design Milk. Link
- Here’s (Almost) Everything Wall Street Expects in 2019. Bloomberg. Link
- Here’s what to expect in cybersecurity in 2019. TechCrunch. Link
- Naive to hope Toronto can change in 2019? That means we have work to do. Shawn Micallef. Link
- The 10 largest US venture rounds of 2019. TechCrunch. Link
- What is going to happen in 2019. Fred Wilson. Link
- Will a recession hit in 2019? Alan Murray. Link
- Year in search 2018. Google. Link
So I was wrong. Amazon didn’t pick Toronto for HQ2. It instead picked Crystal City, Virginia (Washington) and Long Island City, NY (New York City). More on that, here, in the NY Times. Confession: My prognostication was at least partially about trying to create a self-fulfilling prophecy.
In any event, it’s interesting to consider the locations that they did pick – as well as the fact that they ended up picking multiple cities. This was not part of their RFP. Though, many have convincingly argued that this process was over before it even began. HQ2 was always going to end up on the east coast, near one of Bezos’ homes.
Nevertheless, urbanists such as Aaron Renn took the announcement as a direct repudiation of the American heartland. He believed that Amazon would be far more cost conscious in their decision making and ultimately elect for a lower cost locale in the middle of the country. Instead, the coastal hegemony won out.
Joe Cortright of City Observatory correctly predicted that Amazon would, for a few reasons, parlay their HQ2 search into multiple smaller locations (HQ2, HQ3, and so on). One of the reasons for this is that it gives the company more leverage when it comes negotiating subsidies on a go-forward basis. If NYC doesn’t want our next round of hires, we’ll take them to Washington.
Looking at the locations, one of the first things I noticed is that both are just outside of their respective “downtowns” (across a body of water), as well as adjacent or on the way to an international airport. Crystal City is across the street from DCA and Long Island City is a 15 minute drive from LGA. Both are situated on top of higher order transit. Makes sense to me.
Now, who wants HQ4?
According to Amazon's recent annual 10-K filing, the company leased and owned (most of their space is leased) about 288,419,000 square feet of space around the world at the end of 2018. Of this number, about 80% is used for "fulfillment, data centers, and other." Amazon doesn't break out this line item any further, but GeekWire reckons that a good 3/4 of their real estate is dedicated to their fulfillment warehouses.
Here's the full summary of their facilities (from the 10-K filing):
Given that fulfillment is such a large share of their properties, I am most interested in understanding the geography of their warehouses and how that impacts their core value proposition, which is largely all about convenience.
In April 2017, Jean-François Houde (of Cornell), Peter Newberry (of Penn State), and Katja Seim (of UPenn) published a paper on this very topic called, "Economies of Density in E-Commerce: A Study of Amazon’s Fulfillment Center Network." There's also this Knowledge@Wharton podcast on the paper if you're looking for a quicker listen or read.
In the early days of online retail, the decision of where to warehouse had meaningful tax implications. Because (in most cases in the US?) you only had to collect sales tax if you had a physical presence in the same location as your purchasers.
As that changed, it then made more sense to create a broader distribution network and minimize the distance between fulfillment center and purchaser. By 2016, Bloomberg estimated that nearly 78 million Americans lived in a zip code where Amazon offered free same-dame delivery. That number has obviously increased since.
And in the paper "Economies of Density", they discovered the following cost savings as a result of Amazon's growing fulfillment network:
We find that Amazon saves between $0.17 and $0.47 for every 100-mile reduction in the distance of shipping goods worth $30. In the context of its distribution network expansion, this estimate implies that Amazon has reduced its total shipping cost by over 50% and increased its profit margin by between 5 and 14% since 2006. Separately, we demonstrate that prices on Amazon have fallen by approximately 40% over the same period, suggesting that a significant share of the cost savings have been passed on to consumers.
The interesting question for real estate people and city builders -- which is brought up in the Knowledge@Wharton podcast but is difficult to answer -- is whether there are diminishing returns to this "economies of density" phenomenon. In other words, how dense does Amazon's fulfillment network want to be?
Welcome to 2019.
I am currently in transit and catching up on some internet reading and email on my way back to Toronto.
At this time of year it is, of course, common to reminisce (or lament) about what happened over the last year, as well prognosticate what may come.
Over the last few years, I have done a bit of that on the blog. But I clearly didn’t do that this year while in Brazil (and away from any semblance of a workspace).
So here’s what others have been writing and thinking about over the holidays:
- 2018’s tech trends and tribulations in 14 charts. Recode. Link
- 2018 was the year of the YIMBY. CityLab. Link
- A cool girl’s guide to Toronto. Vogue. Link
- Amazon’s annual Christmas press release. Link
- Best travel posts of 2018. Design Milk. Link
- Here’s (Almost) Everything Wall Street Expects in 2019. Bloomberg. Link
- Here’s what to expect in cybersecurity in 2019. TechCrunch. Link
- Naive to hope Toronto can change in 2019? That means we have work to do. Shawn Micallef. Link
- The 10 largest US venture rounds of 2019. TechCrunch. Link
- What is going to happen in 2019. Fred Wilson. Link
- Will a recession hit in 2019? Alan Murray. Link
- Year in search 2018. Google. Link
So I was wrong. Amazon didn’t pick Toronto for HQ2. It instead picked Crystal City, Virginia (Washington) and Long Island City, NY (New York City). More on that, here, in the NY Times. Confession: My prognostication was at least partially about trying to create a self-fulfilling prophecy.
In any event, it’s interesting to consider the locations that they did pick – as well as the fact that they ended up picking multiple cities. This was not part of their RFP. Though, many have convincingly argued that this process was over before it even began. HQ2 was always going to end up on the east coast, near one of Bezos’ homes.
Nevertheless, urbanists such as Aaron Renn took the announcement as a direct repudiation of the American heartland. He believed that Amazon would be far more cost conscious in their decision making and ultimately elect for a lower cost locale in the middle of the country. Instead, the coastal hegemony won out.
Joe Cortright of City Observatory correctly predicted that Amazon would, for a few reasons, parlay their HQ2 search into multiple smaller locations (HQ2, HQ3, and so on). One of the reasons for this is that it gives the company more leverage when it comes negotiating subsidies on a go-forward basis. If NYC doesn’t want our next round of hires, we’ll take them to Washington.
Looking at the locations, one of the first things I noticed is that both are just outside of their respective “downtowns” (across a body of water), as well as adjacent or on the way to an international airport. Crystal City is across the street from DCA and Long Island City is a 15 minute drive from LGA. Both are situated on top of higher order transit. Makes sense to me.
Now, who wants HQ4?
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