The great Amazon headquarters beauty contest

The physical brick-and-mortar bookstores that Amazon has been opening over the past few years are perhaps the most carefully curated retail outlets in the world. Every book displayed has been chosen based on data Amazon has gleaned from its online store and Kindle users over the years. No piece of information has been too small to pluck from this stream of big data – from reader reviews, to the passages that are underlined in the online books, to how many hours it takes a Kindle book to be read. It is a mistake, in short, to consider Amazon a mere online retailer. At its heart it is a data company.

So why, then, did it feel the need to launch a very public search – a beauty contest if you will – among cities in North America to find the best location for its new headquarters? With the data and IT resources it has at its disposal it must surely know the answer to that already.

Comparing Apples and Amazons

It is a question that has been on the minds of economic development officials the world over, says Douglas van den Berghe, president and CEO of Investment Consulting Associates. “Europe and the rest of the world have been watching this display with some astonishment,” he says. “This very public competition Amazon is having cities put on is not the norm at all. It is difficult to imagine it happening elsewhere in the world.”

Amazon’s beauty contest is all the more astonishing when it is compared with another US tech giant’s search for a new headquarters. That would be Apple, which is also in the market for a new corporate location, although one would hardly know that from the lack of headlines that have been generated from its search. This approach is more the norm for corporates, although economic development officials have been surprised by the extent of the secrecy surrounding the search.

The level of secrecy aside – which is Apple’s hallmark for most corporate moves – it is a fact that companies usually have a strategic reason to expand or build a new headquarters and do not necessarily want to tip their hand more than they must. “They have a specific problem that they are trying to solve and they just want to focus on that,” says Christopher Steele, chief operating officer and North America president of Investment Consulting Associates.

An R&D facility site-selection process, for example, is always a more discreet search as it is a strategic investment, according to Mr van den Berghe. Also, he adds, sometimes companies tend to be more discreet when they close down one operation and relocate somewhere else.

A deeper meaning?

Perhaps the real question is not why these companies are using these respective approaches but rather how the approaches fit into the larger conversation about the role incentives play in site selection. Because ostentatiously that is what Amazon’s beauty contest is about: which city can deliver the best package to the notoriously cost-conscious company.

To be sure, there are some that argue there must be other reasons as well.

“There are those, and I count myself as one of them, who think it was [Amazon CEO] Jeff Bezos’ attempt to spur some kind of public dialogue on related issues such as transportation and labour availability,” says Mr Steele. Several regions – the Washington, DC area in particular – have responded to Amazon’s call by putting forth plans for infrastructure and transportation improvement that seemingly have nothing to do with the region being on Amazon’s short list.

The data the cities are providing is very valuable to Amazon, if not for this project then for future ones, or perhaps for other unknown reasons, Mr Steele suggests.

Incentives grab

Of course it could well be that Amazon is simply vying for the best possible deal and this is the manner it has chosen to get it. This is the opinion of Tom Stringer, who leads advisory firm BDO's national site selection and business incentives practice.

If that is the case the winning city could end up very disappointed. Mr Stringer is not so sure that the new headquarters will employ 50,000 workers as Amazon has claimed it would, or rather could, pointing out that in the request for proposal Amazon was not definitive in its headcount or capital investment commitment for the headquarters.

Yet states are tailoring their packages with definitive numbers in mind. Mr Stringer notes that a proposed incentive package offered by the state of Maryland offers substantial state income tax credits, sales tax exemptions and property tax credits for companies that fit the description of what Amazon wants to do.

“It’s when you look at the fine print in that legislation that you see it gives Amazon unprecedented wiggle room,” says Mr Stringer. “In addition to its own employees, Amazon would be able to count thousands of indirect jobs, such as third-party vendors, and still get the full benefit of the enormous incentive package.” How Maryland would feel if Amazon actually took advantage of these loopholes is unknown.

A distracting presence?

Such tactics, of course, have been slammed by economic development agencies in recent years. There has been a shift in thinking about incentives – at least for the more typical type of project – namely, that using them as a lure does not pay off for either the company or the location.

Transformational projects, such as the one Amazon is proposing, appear to be the exception, however. “As the Amazon project came through, economic development agencies across North America spent weeks and a considerable part of their budget developing their proposals – even those communities that didn’t have a chance of landing the project,” says Mr Steele. “And you had site selectors who were distracted from what they should have been working on, their bread-and-butter projects – the manufacturing centres, the distribution centres, the back offices, the data centres – by this one shiny object.”

The irony is, if Amazon’s strategy works – that is, it secures a great package not to mention strategic data about the 20 top locations in North America – it will probably be emulated by other large companies around the world. Mr van den Berghe says: “That would be a step back for the economic development agencies that have worked so hard to move the conversation away from pure incentives.” Indeed, it is hard to see how else this story would unfold. “When a company the size and reach of Amazon comes calling, you answer,” says Mr Steele.