Amazon: The One Stop Shop
Online shopping changed the face of retail. A world where one would have to go to a physical store such as Walmart to find goods, increasingly online stores are being used more and more to buy everything from cabbage to toilets. Amazon, the largest online retailer by revenue, is now almost synonymous with the process even as brick and mortar competitors such as Walmart have their own e-retail websites. Amazon is undoubtedly a winner in the modern retail market, where online sales have encroached more and more on the brick and mortar one. And it is clear that Amazon is successful because of how it finds more ways to funnel people to its online marketplace.
One must ask how innovative Amazon really is. Amazon, unlike its brick and mortar competitors, does not have to run a store. This means it does not have to put a cashier at the front to run a store, it does not need to restock the store, or to give it a certain “flavor” like Whole Foods does. Finally, it does not have to distribute items across stores according to the demand for said items on a regional basis. This allows Amazon to pass on the savings it made from not running storefronts on to the customer. This is not new. Sears started out as a mail order company and later built its own stores.[1] Furthermore, Amazon’s policy of keeping its prices low- which built the expectation that Amazon’s prices are lower than its competition- mirrors the strategy used by Walmart and other discount retailers. At first glance Amazon’s strategy is not that new.
Amazon’s retail strategy is innovative because of how Amazon built on its one-stop shop narrative to sell more and more goods and act as an intermediary to sell even more goods. Amazon started as a book retailer, and then it expanded into selling other goods. It created relationships with retailers, small business owners, and individuals by allowing them to sell their goods through Amazon’s website. This allows Amazon to sell goods for even cheaper than it does on its own while still taking a cut from what it calls “3rd party sellers.” Furthermore, it used its book-selling expertise to sell eBooks. To expand its eBook collection, Amazon allows authors to self-publish their own eBooks and sell through Amazon.com. All of these methods allows Amazon to expand its number of products and services to convince people they can do all of their shopping through Amazon.
Amazon also invested heavily to become an original equipment manufacturer (OEM) to create the Kindle, a dedicated e-reading device that fed into a virtuous circle where Amazon sold media and media playing devices.[2] One can use these devices to play media and buy media as people used their Kindles to buy more books. Amazon continues this strategy by creating more such devices, such as the Kindle Fire and the Amazon Fire TV. This leads to more revenue through media sales that Amazon can reinvest into broadening its marketplace, creating more devices, and developing more services.
As a result, Amazon is the largest online retailer in the United States, followed by Apple and Walmart.[3] Nowadays Amazon is so prevalent that people go to stores such as Best Buy to “showroom” a product, or check out a good such as a television and then buying it online for a lower price. This strategy damaged Borders as people visited them to find books they like and then buying them cheaper on Amazon.[4] Amazon’s strategy worked so well that it sold $50bn worth of goods in North America in 2014.[5] By comparison the largest retailer in America, Walmart, made $12.2bn in fiscal 2014 globally off of its online sales, less than a sixth of Amazon’s total revenue in the same period and region. While it still makes most of its revenue through its physical stores, growth in that sector is slower than online sales, where Amazon is dominant.[6]
Overall, Amazon has done well by using its strength in online sales to expand into a large online retailer. While brick-and-mortar retail has not disappeared, around one tenth of U.S. shopping is now done online, and Amazon has about a tenth of that market. Given that online sales did not exist until two decades ago,[7] that is impressive. Amazon has shown itself to be a capable innovator for more than two decades, and it is set to do well for some time to come.
[1] “Sears Settles in Chicago,” Sears, September 13, 2015, http://www.searsarchives.com/history/history1887.htm
[2] Mark W. Johnson, “Amazon’s Smart Innovation Strategy,” Bloomberg Business, April 12, 2010, September 13, 2015, http://www.businessweek.com/innovate/content/apr2010/id20100412_520351.htm
[3] Hiroko Tabuchi, “Walmart, Lagging in Online Sales, Is Strengthening E-Commerce,” New York Times, June 5 2015, September 13, 2015, http://www.nytimes.com/2015/06/06/business/walmart-lagging-in-online-sales-is-strengthening-e-commerce.html?_r=0
[4] Yuki Noguchi, “Why Borders Failed While Barnes & Noble Survived,” NPR, July 19, 2011, September 13, 2015, http://www.npr.org/2011/07/19/138514209/why-borders-failed-while-barnes-and-noble-survived
[5] “Amazon 2014 Annual Report,” P27
[6] Hiroko Tabuchi, “Walmart, Lagging in Online Sales, Is Strengthening E-Commerce”
[7] Monty Henry, “Total Offline Retail Sales VS Internet Sales,” LinkedIn, September 16, 2014, September 12, 2015, https://www.linkedin.com/pulse/20140916161816-1767830-total-offline-retail-sales-vs-internet-sales
Walmart has been doing a lot of work to drive people to their website and get them to order from there as opposed to Amazon. Right now Amazon still seems to be winning in that department, but what will be interesting to watch is how things may shift if people become more used to going to Walmart.com. Most Americans shop at Walmart as is and their EDLP pricing strategy is unparalleled. What I am interested to see is if this will negatively effect Amazon since now consumers will have a similar experience on the Walmart website, but then will also have the added flexibility that brick-and-mortar stores provide. At the same time, as Amazon continues to role out same day delivery and faster and faster delivery times, it may not be as big of a competitive threat because whatever you order at Amazon could be at your door within a few hours anyway. It will certainly be interesting to see where this all goes.
Thanks CC24! I do not know 100% what will happen with Walmart. I am a little biased because I have never been inside a Walmart before and the places I lived in- such as Boston and DC- were more likely to have negative publicity around Walmart than a physical Walmart. I gather there are a number of Americans (and non-Americans) who are in a similar position, and Walmart will have to find a way to get to us (and convince us Walmart.com is a good place to shop).
Branding will play a big role; there are studies that show that Best Buy’s prices are actually competitive against Amazon’s, which has a similar “always low prices” reputation to Walmart (http://www.cio.com/article/2979398/consumer-technology/surprise-best-buy-prices-often-on-par-with-amazon.html). Just as people “know” that Apple devices are malware free (a myth for decades; see https://nakedsecurity.sophos.com/2011/10/03/mac-malware-history/ for an outdated list), reputation will play a big part. We will see.
Thanks for the interesting content, Alexander! There is no doubt that Amazon has been one of the most innovative company over the last decade. While the past points to Amazon’s success in the digital arena, I struggle with how successful it will be going forward and whether we will look at Amazon as a digital success, say 10 years from now.
Amazon’s success was part fueled (atleast to a small extent) by the reluctance of the brick and mortar discount stores (like Walmart) to focus on the online space in a fear of cannibalizing their in-store sales. However, that is now changing with brick and mortar stores seeing stagnant growth and ecommerce growing at 10%+ levels even in a weak macro economic environment.
Retail companies with physical stores are now de-prioritizing stores expansion and instead pumping dollars into their online platforms. In store mobile is another big focus of players like Walmart, where they intend to leverage discounting coupons to engage consumers in their existing stores. The idea is to shift to the era of omnichannel – the biggest buzz word in retail these days. The idea is to enable consumers to access inventory, shop, have delivered goods through a combination of these channels. Retail stores are investing into delivery supply chains and have an added advantage over the pure play online retailers like Amazon. The large number of stores that Walmart already has in place will act as warehouses for Walmart’s online channel. Given the high density of Walmart stores and employees and their relative ‘closeness’ to a customer, the delivery times will be quicker.
Also, the additional areas that Amazon is getting into currently like Video and Music are not areas where there is low competition and they will enjoy near monopoly in the market like their traditional core platform. New segments like Fashion are yet to be proven and will be more difficult than their traditional segments because of customer preferences.
Overall, I believe Amazon’s growth story has inspired the traditional retailers to invest in the ecommerce space. Amazon is definitely better prepared than other players in the ecommerce space. But that can change as brick and mortar retailers start using their traditional baggage of high fixed costs from large store presence to their advantage as they plan to expand into the online space.