Competing with Amazon.com may prove to be a difficult if not an impossible challenge. You are up against an extraordinary company led by an extraordinary leader.
“Your margin is my opportunity”, dares Jeff Bezos, the founder, chairman, and chief executive officer of Amazon.com. According to Jessica Stillman, contributing for INC. , Jeff sees a competitor’s love of margins and other financial ‘ratios’ as an opportunity for Amazon. Says Jeff: “The competitor will cling to them while he focuses on absolute dollar free cash flow and slices through them like a hot knife through butter.”
The migration of Amazon.com from a sole online retailer (Clicks Only) to physical locations (Bricks and Clicks stores) is perceived by many retailers, big and small, as a threat to their existence. However, incumbent retailers can learn much from how Amazon.com conducts their business. Amazon.com is now an omnichannel retail giant that makes the most of the opportunities that digital technology in the new economy offers – showing the way for others to follow.
George Parker has recently converted from an Amazon hater to an Amazon admirer. George writes in Business Insider: “But perhaps the thing that impresses me most about Amazon’s unconventionality is its ability to structure its business model in unexpected ways. Because of the massive volume of product it sells 24/7/365, Amazon maintains 80 enormous warehousing and fulfillment centers scattered around the known universe.” Amazon.com is an uncompromising competitor with an unconventional business model.
How on earth can retailers compete with that?
Where is Amazon.com coming from?
Amazon.com was founded during 1995 and started as a website selling only books. They started out as an online bookstore and grew patiently but significantly to be the world’s largest online retailer. Being one of the few companies that survived the “dot.com” crash during 2000, Amazon.com made their first yearly profit during 2003. Net profit came in at $35 million, or 8 cents per share, compared with a net loss of $149 million, or 39 cents per share, in 2002 (Quora.com).
NASDAQ reported Amazon’s net income for 2016 was an impressive $2.37 billion. This income was mainly coming from its online retail business. RetailDive recently reported that Amazon dominates online sales traffic with an equal or greater share of sales compared to all other e-commerce sites combined, when measured across 11 retail categories. Indeed better than all the rest.
What is Amazon doing now?
Amazon.com is on a buying spree in the Bricks and Mortar retail market. They’ve also came to realize that adding Bricks to Clicks is the future of retailing. Richard Kestenbaum, contributing for Forbes concurs: “Now even Amazon has recognized that online alone is not going to work. In order to succeed in grocery, there will have to be a symbiosis of online and physical stores.” There seems no stopping from Amazon buying Bricks and Mortar retailers.
Competing with Amazon.com is getting more difficult. The Seattle giant launched a radical assault by acquiring a brand-name high-end grocery chain with 456 stores in the U.S. (436), Canada (11), and the United Kingdom (9). Whole Foods also owns three distribution centers (Brad Thomas, Forbes).
So, Amazon is now becoming a true Bricks and Clicks retailer and you will most probably have to compete with it. What are Bricks and Clicks retailers up against when competing with Amazon?
Competing with Amazon.com – the last crusade or new horizons for retailers?
Amazon’s business model is a formidable one, with deep moats on multiple fronts that make it tough for competitors to gain ground. The only way to stop Amazon is to either beat AWS [free Amazon Web Services], which holds a commanding lead in the cloud platform market, or replicate Amazon’s multi-layered Prime strategy [offering tons of benefits on Prime memberships]; (Leo Sun, The Motley Fool).
Kavadias, Ladas and Loch, (2016) have identified six recurring features in the business models of companies (also Amazon.com) that were successful in transforming their industries:
- A more personalized product or service – many new models offer products or services that are better tailored than the dominant models to customers’ individual and immediate needs. Companies often leverage technology to achieve this at competitive prices.
- A closed-loop process – many models replace a linear consumption process (in which products are made, used, and then disposed of) with a closed loop, in which used products are recycled. This shift reduces overall resource costs.
- Asset sharing – some innovations succeed because they enable the sharing of costly assets, e.g. Uber shares assets with car owners. Maybe independent retailers can share assets across the supply chain – what about sharing warehouses, or delivery services?
- Usage-based pricing – some models charge customers when they use the product or service, rather than requiring them to buy something outright. The customers benefit because they incur costs only as offerings generate value. The company, on the other hand, benefits because the number of customers is likely to grow.
- A more collaborative ecosystem – some innovations are successful because a new technology improves collaboration with supply chain partners and helps allocate business risks more appropriately, making cost reductions possible.
- An agile and adaptive organization – innovators sometimes use technology to move away from traditional hierarchical models of decision making. In order to make decisions that better reflect market needs and allow real-time adaptation to changes in those needs. The result is often greater value for the customer at less cost to the company.
Independent or small retail chains need to “think outside the box”. Maybe you should pool your resources and thereby establishing a critical mass to counter the likes of Amazon.com. Also, your location and local knowledge may be a substantial niche – be the first to explore it!
Competing successfully with Amazon.com will probably be not viable for independent or small retail chains. Best is to learn Amazon successes and failures and use that knowledge to compete locally in a niche market.
1 Kavadias, S., Ladas, K. and Loch, C. 2016. The transformative business model, Harvard Business Review, 94(10):90-98.