Zappos Hands Over Warehousing to Amazon, Focusing All Attention on the Great Downtown Vegas Experiment

By Sarah Lacy , written on June 6, 2012

From The News Desk

When Amazon bought Zappos, CEO Tony Hsieh was clear with employees and customers that the company would continue to operate separately, and its all important culture would stay just as unique as it was pre-purchase.

For most people who have seen how acquisitions go down from the inside, this may have seemed like the same well-meaning messaging most companies use when they buy something with a strong sense of identity.

But those people don't know Hsieh, a man who prizes culture above nearly anything else. If you are one of the many who tour Zappos's offices every week, you've seen that that culture is just as distinct as it ever was. There are free lunches, everyone is happy, and different rows all make noises with different noisemakers when you walk past. It's sort of like a happy cult that wants you to have great shoes in the right size.

So it undoubtedly came as a shock to Zappos's thousands of employees just minutes ago, when they found out that the company is folding its existing warehouse operations into Amazon. In a blog post to employees, Hsieh described it as "bittersweet," but the right thing to do for the company.

Up until now, Zappos has operated out of two warehouses in Kentucky, and they were at capacity. It looked at about seven or eight options, including opening a third, contracting with Amazon to do the excess, or waiting out its leases and opening one huge facility down the road. Ultimately the common sense answer was to hand warehousing over to Amazon -- perhaps one of the best companies in the world at fulfillment and distribution.

All employees will be offered a job with Amazon, for at least the same base pay, and on average they'll get a 5 percent bump in pay. But in the short term, this is still an emotional move for a company that is incredibly tight, even over several states. Hsieh still remembers driving out to set those warehouses up in 2003, and several of the same people he hired back then still work at the warehouses today. "It's like sending someone off to college. We'll still stay in touch, but I'm not going to see them as much anymore," he says.

Amazon already has 69 warehouses around the world, as Hsieh pointed out in his post. He tried to extrapolate how many of them the company would have in ten years, if its current growth continued, but his lawyers made him remove it from his post. Instead he said this:

"In the next 10 years, if Amazon continues its rapid growth rate, they will be running over 69 gazillion warehouses across the entire universe (which, by my estimates, will collectively require over 1.21 gigawatts of energy to properly operate)."
(If you are wondering where 1.21 gigawatts of energy came from, it's a reference to "Back to the Future". Oh, Tony.)

Point being: Amazon has this covered.

So what changed other than capacity issues? Well, Zappos has big plans for Downtown Vegas. Huge, in fact. It is moving its headquarters from the suburbs to the former City Hall Downtown, and Hsieh is personally spending $350 million of his own money to make it the most connected, community-driven downtown in the country. Think of an elaborate corporate campus with a hair dresser, a food court, and a gym, and multiply that by 69 gazillion. Zappos's campus will be Downtown Vegas, and Hsieh is making sure it has everything his employees would need within walking distance.

In his apartment in the Ogden Downtown, there is a wall of post-it notes on which are written all the sorts of things a city would need. The first time Paul Carr saw them he asked if this was the five year plan, to which Hsieh said, "Oh, no this is all happening this year."

Most people who've heard of this plan think it's Hsieh's own attempt to create his own personal Sim City. But even though he's putting so much of his own money behind it, he sees it as core to Zappos's future, too. And by handing the Kentucky warehouses over to Amazon, he can focus all of the company's resources and attention on the grand Vegas experiment.

"For us culture is the number one priority," he says. The company's intense culture took a "quantum leap" in 2004 when Zappos moved from San Francisco to Vegas. "We had 90 employees and 70 moved," Hsieh says. "None of us knew anyone else, so we were forced to hang out with each other. We formed a really tight bond, and for new employees, there was always had something going on every night."

"Our move to Downtown will be the next quantum leap for our culture," he continues. "We're encouraging our employees to live Downtown and even get rid of their cars. It's like an adult version of college. It'll be normal to see each other 24/7. That will take our culture to the next level."

So to employees who are worried this may be a slippery slope of everyone getting folded into the Amazon borg, Hsieh says it's just the opposite. The move allows him to put all of his energy and resources into making this new Downtown campus the best it can possibly be.

I asked Hsieh earlier today if people at Amazon thought the plan was crazy.

"I don't want to speak for Amazon," he said.

"But in your interactions with them are they like 'Um, okay Tony....' or 'This is fascinating!'" I asked.

Hsieh laughed. "It depends on who you talk to, even within Zappos," he said. "I'll put it this way, they're letting us do it. My gut is, at the very least, they think it's worth the experiment."

Hsieh is joining us for PandoMonthly in September to talk more about the Vegas experiment.

(Many disclosures here: Hsieh is an investor in PandoDaily, and Paul Carr's company Not Safe For Work Corp. My husband is also the director of photography for The Downtown Project, and I spend roughly a week a month living inside Hsieh's grand experiment.)