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Soap Opera: Amazon Moves In With P&G E-Commerce Giant Sets Up Shop Inside Warehouses of Suppliers WSJ - Updated Oct. 14, 2013 10:52 p.m. ET

TUNKHANNOCK, Pa.—Atop a hill at the

end of a road called P&G Warehouse Way sits

a warehouse stocked with Pampers diapers,

Bounty paper towels and other items made

byProcter & Gamble Co. PG -1.45% It also

houses an ambitious experiment

byAmazon.com Inc. AMZN -1.38%

Each day, P&G loads products onto pallets

and passes them over to Amazon inside a

small, fenced-off area. Amazon employees

then package, label and ship the items directly

to the people who ordered them.

The e-commerce giant is quietly setting up

shop inside the warehouses of a number of

important suppliers as it works to open up the

next big frontier for Internet sales: everyday

products like toilet paper, diapers and

shampoo.

The under-the-tent arrangement is one

Amazon's competitors don't currently enjoy,

and it offers a rare glimpse at how the

company is trying to stay ahead of rivals

including discount chains, club stores and

grocers.

Logistics have long been crucial to success in

retail. Years ago, Wal-Mart Stores Inc.WMT -

0.42% set up a system that lets suppliers

monitor what needs to be replenished.

Amazon instead is going out to its suppliers

with a program it calls Vendor Flex. By

piggybacking on their warehouses and

distribution networks, Amazon is able to

reduce its own costs of moving and storing

goods, better compete on price with Wal-Mart

and club stores like Costco Wholesale Corp.,

and cut the time it takes to get items to

doorsteps.

A few of Amazon's rivals have caught wind of

the arrangement and aren't happy about it.

"Retailers don't like things that benefit their

competitor but not them," said Anne

Zybowski, vice president of retail insights at

consulting firm Kantar Retail.

Yannis Skoufalos, P&G's global product

supply officer, said the company values its

relationships with all its customers and works

closely with many retailers to help reduce

costs in their supply chains and meet their

unique needs. For example, P&G works with

warehouse clubs to keep its products in stock

without taking up too much storage space

inside the stores.

Household staples have traditionally been

considered too bulky or cheap to justify the

cost of shipping. Americans currently buy just

2% of such goods online, retail analysts

estimate. Yet even that sliver of business was

worth $16 billion in 2012, according to

Nielsen Holdings NV, and the research firm

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believes online sales will grow by 25% a year

to $32 billion in 2015.

Enlarge Image 

 

Consumer-products makers selling through Amazon like the idea of locking shoppers into their brands with the subscription program, and in some cases help fund the discounts. AFP/Getty Images

More efficient distribution and changing

consumer habits are unlocking the market. If

online sales of consumer packaged goods

could rise to the 6% share the Internet claims

of retail overall, Amazon could generate an

extra $10 billion in revenue selling nonfood

consumer goods, up from less than $2 billion

currently, estimates Mark Mahaney, an

Internet stocks analyst at RBC Capital

Markets in San Francisco.

"This is one of the biggest growth areas for

Amazon," Mr. Mahaney said.

"We continue to innovate on behalf of our

customers to offer fast delivery, low prices,

and vast selection," an Amazon spokeswoman

said.

The company signaled its interest in selling

consumer staples online with its $500 million

acquisition in 2011 of Quidsi Inc., the owner

of Diapers.com and Soap.com that

subsequently added sites selling toys and pet

supplies, among other things.

P&G began sharing warehouse space with

Amazon around three years ago and has

expanded the practice. Amazon is now inside

at least seven P&G distribution centers world-

wide, including spots in Japan and Germany,

said a person familiar with the matter.

The economics of the arrangement benefit

both sides. For Amazon, co-location reduces

the cost of storing bulky items like diapers and

toilet paper and frees up space for the Web

retailer to stock higher-margin goods in its

own distribution centers. The location in

northeastern Pennsylvania is 5 miles from one

of P&G's largest plants, which makes diapers,

paper towels and toilet paper, and within a

day's drive of major cities in the U.S.

Northeast and Canada. The warehouse also

stocks other P&G products from pet food to

razors to shampoo.

P&G, meanwhile, saves on the transportation

costs that it would have incurred trucking

products to Amazon's regional distribution

centers. Plus, it gets Amazon's help in

boosting online sales, a priority for many in

the industry.

Amazon is already inside or in talks to enter

the warehouses of companies including

Seventh Generation Inc., Kimberly

Clark Corp. KMB -0.42% and Georgia Pacific

Corp., people familiar with the matter said.

Seventh Generation said it is in talks with

Amazon to ship its diapers, baby wipes and

cleaning products directly from its

warehouses. Chief Executive John Replogle

said more than 20% of the Burlington, Vt.,

company's sales come via the Internet—a

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percent that has doubled from five years ago,

he said.

"This is the fastest-growing part of our

business," Mr. Replogle said.

Kimberly Clark and Georgia Pacific declined

to comment.

Amazon—which posted $61 billion in sales in

2012, up 27% from a year earlier—has a

service called Subscribe & Save to tap into

that area of growth. With items like vitamins,

cereal and toilet paper, Amazon automatically

ships them to customer's doorsteps on a

regular schedule. Shoppers that buy at least

five eligible items per shipment get a 15%

discount.

Consumer-products makers selling through

Amazon like the idea of locking shoppers into

their brands with the subscription program,

and in some cases help fund the discounts.

Clorox Co., whose Brita water filters, Burt's

Bees skin-care products, and namesake

disinfecting wipes are increasingly sold

online, often via Amazon, is expecting

companywide sales from e-commerce to hit

$200 million in 2020, up from $75 million in

the fiscal year ended in June.

A.G. Lafley, P&G's recently returned CEO,

has identified e-commerce as one of the

biggest opportunities for the Cincinnati-based

company, which is trying to accelerate sales in

an economic environment where growth is

hard to find. P&G doesn't disclose what

percentage of its sales come via the Internet,

but the growth is faster than other retail

channels, notes Bernstein Research analyst Ali

Dibadj. P&G's Pampers and Luvs diapers,

Duracell batteries, Gillette razor cartridges and

Braun shavers are among the items that

consumers are increasingly buying online,

company executives say.

In recent years, P&G's online sales of diapers

have grown sharply. The company's goal is to

get consumers who buy diapers online to add

more of its products like skin cream and

laundry detergent to their orders as well.

P&G has long honed its ability to sell products

in physical stores with shrewd in-store

marketing and packaging designs. But it is a

neophyte in the world of online sales and

could use Amazon's help.

"They need to figure out what they can do to

influence online sales," said Mr. Dibadj. "This

is a whole new world for P&G."

—Greg Bensinger contributed to this article.