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Amazon Pulls Plug On NYC HQ2 Plan; Volume Dips At Brick & Mortar Units

Less than a week after The Washington Post and New York Times published sourced stories that Amazon was reconsidering its decision to build part of its new secondary headquarters (HQ2) in New York City, the Seattle-based e-commerce distribution, retail and analytics firm confirmed that speculation.

The reason: according to the company it was opposition from politicians. “While polls show that 70 percent of New Yorkers support our plans and investment, a number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward with the project we and many others envisioned in Long Island City,” Amazon said on a website posting.

This seems like a huge cop out to me. Yes, there was vocal opposition from local political and consumer groups, but they still represented a minority. But perhaps the message of the minority was more salient than it was loud.

That message in a nutshell questioned whether the promise (yes, it was only ever a promise) of bringing 25,000 jobs to New York City was worth the trade-off of dealing with the level of disruption to the city’s transportation system while also adversely impacting the cost of housing in the area. Moreover, giving Amazon, a company with the largest market cap value in the U.S. -$800 billion – run by the richest man in the world $2.5 billion in tax credits and an additional $500 million in state construction subsidies, would seem to be highly unfair to the thousands of businesses that struggle under the expensive and over-regulated corporate environment that comes with operating a business in the Big Apple under a mayor who seems to have little concern for existing enterprises.

In the end, the City of New York should shoulder some of the blame for this reversal. The city’s infrastructure has been subpar for years; it’s a complex geography to smoothly navigate and the union presence in the metro New York market – unlike many other areas in the country – is fierce and dominant. But Amazon knew those shortcomings going in when it decided to make NYC one of two winners from a list of 238 cities they looked at.

Amazon said it would continue to build its co-secondary headquarters in Crystal City, VA and develop an Operations Center for Excellence in Nashville that will handle customer fulfillment, transportation and supply chain activities, but will not pursue a search for another HQ2 city at this time.

Even though I thought, on a balanced basis, this was a bad deal for New York City, I’m frankly surprised that Amazon caved so quickly. I guess if you poke a few holes in Godzilla, the big monster cowers and retreats.

In other Amazon news, the company recently released fourth quarter results, which surprisingly saw a dip in its brick and mortar stores’ performance. Not surprisingly though, the company’s overall sales and earnings were once again explosive as the Seattle-based juggernaut’s earnings jumped to $3 billion compared to profits of $1.9 billion in last year’s Q4. Overall sales rose an impressive 20 percent to $72.4 billion. However, revenue at its 476 Whole Foods Markets, nine Amazon go stores, 18 Amazon bookstores, three 4-Star outlets and 87 Amazon Pop-Up units decreased 3 percent year-over-year. While I can make a pretty good argument that Amazon hasn’t done much to improve WFM, it should be noted that it’s still early in the game (20 months) and just by linking “Prime” members’ deals with its largest brick and mortar segment, there’s future gold in that relationship. However, the true bigger picture is the incredible numbers that Amazon continues to post with its core online silo. Sales for the quarter were nearly $40 billion in that segment, a 13 percent increase over 2017. And for the full year, volume jumped 31 percent to $232.9 billion. That’s enough reason for Amazon CEO Jeff Bezos to smile.

Earlier this month, the Wall Street Journal reported that contrary to its effort to slash pricing which occurred shortly after Amazon acquired Whole Foods in June 2017, the Austin, TX-based merchant has been raising prices according to a market basket survey reported in the paper. To be fair, suppliers have been raising their prices across the board for the past nine months for several reasons. The impact of tariffs has played a role and so have increases in labor, freight and materials. We are in a period of moderate inflation in the food business and virtually all merchants have raised retails.

Of course, there’s a bit of eyewash here. Yes, Whole Foods made a big deal of slashing prices on about 50 items shortly after the Amazon deal was announced. But there was never an effort to cut prices across the board. However, in the 20 months of ownership, Amazon’s influence on WFM could be best seen with their Prime customers, where discounts are more readily available and Whole Foods’ marketing efforts are more aggressive.

And why not cater to your best customers who are paying $119 a year to gain those upgraded services? Currently there are more than 100 million Prime members with that number rising about 10 percent annually. Those membership fees create $12 billion in foundation money before the clock starts (to compare, Costco’s membership fees deliver about $2.6 billion to that company). With such a windfall created by what is arguably the planet’s greatest marketing program, you can afford to embrace the “whole paycheck” image while smiling all the way to the bank.