Keeping Up With Amazon
The past two decades have seen one company emerge out of a Seattle garage and trail-blaze itself into the second most valuable company today. Breaking all barriers in the retail and e-commerce sectors, this company has set and broken records in the global business empire and revolutionized the very concept of retail.
Jeff Bezos’ Amazon dominates every aspect of the retail and e-commerce industry, with over five hundred million products on offer. Moreover, Amazon leads the market as the most popular ‘go-to’ destination for online shopping right from fashion and accessories, furniture, electronics, sporting products, and even groceries.
Natalie Berg and Miya Knights, in their book Amazon: How the World’s Most Relentless Retailer will Continue to Revolutionize Commerce (2019) investigate the meteoric rise of Amazon, why and how the company dominates the markets, and what other retail companies can learn from their successful strategies and mechanisms. They delve into insider knowledge and industry data to show the evolution of retail in the digital age, the future of shopping, and what retailers need to do to succeed in a market that already seems saturated from A to Z with Amazon!
More Than Just A Retailer
Today, one thing is for sure, ‘If it exists, you can buy it on Amazon’.
Everything that one needs is just a click away. Amazon, today is more than just a retailer. It is a vendor that sells and handles a million products itself, it is a marketplace that third-party sellers use as a platform to sell their products, and it is adding more roles to its forte, perhaps even as we speak.
Amazon has moved in production, having over a hundred in-house brands ranging from fashion to coffee, has its own electronics (the super successful Kindle and Echo), as well as its own payment services, credit card options, cloud storage, and much more.
Why then, does Amazon need to expand its limits, especially when its retail division is already a resounding success?
Amazon’s foray into multiple businesses is based on a simple strategy. They follow the flywheel principle where customers are attracted by lower pricing and good service, which in turn leads to higher sales. Higher sales attract more third-party sellers, which results in more business and money for the company. Amazon further reinvests this money to further reduce prices and provide better service. The flywheel strategy, thus, helps build momentum and pushes Amazon towards higher levels of success.
Amazon feeds this flywheel strategy with innovation, thus broadening the boundaries of the traditional retail structure. Their foray into the entertainment sector with Amazon Prime and Video, and their storage and delivery solutions such as Fulfilment by Amazon (FBA) are great examples of innovation.
However, getting their flywheel to finally spin skyrocketing profits has taken them time. Amazon patiently trudged through the first eight years of losses; a high cost of the flywheel strategy, and relied on the goodwill and patience of investors to get to where they are today.
Dedication to Customers
Amazon believes in its dedication to its customers. They put their customers at the center of their business strategy with Customer Obsession – the first principle in their book of fourteen leadership principles.
This Customer Obsession is evident in their constant endeavors to make shopping more convenient, simpler, and faster with their new products and service strategies. In fact, they invest 6% of their annual profits into improving their online shopping experiences, six times more than the industry benchmark. In 2017, amazon invested about twenty million only on R&D.
This constant investment has made them a pioneer in ‘one-click’ shopping. They even had the patent to this process for many years, giving them a massive advantage over the competition. Additionally, their ‘two-day’ shipping strategy is today an e-commerce norm. When they introduced two-day shipping in 2005, they forced other online and traditional retailers such as Tesco and Walmart to keep up with their delivery speeds.
All these strategies stem from the fact that Amazon is dedicated to its customers. Any new product or service strategy they develop starts from understanding what their customers need and want. For example, for any new product or service meeting, Amazon employees present their ideas in the form of a mock press release, to be able to perceive the new product as customers would.
Today, product searches begin on Amazon itself. Thus they use the vast amount of customer data they possess to deliver products and services tailored to the needs and wants of their customers. These customer-centric innovations and strategies have made Amazon indispensable to many online shoppers, building a veritable loyal customer base.
The Amazon Prime Membership
Amazon Prime, Amazon’s own loyalty and rewards membership program works on the traditional concept of retail incentives. However, Amazon has based this system on their principles of customer obsession and taken it to the next level.
Since its launch in 2005, the Prime membership incentives and benefits have expanded far more than just providing free two-day shipping at $79 a year. Today, it includes a speedy, even same-day delivery of more than a hundred million products, special deals and offers, add-on services such as grocery, unlimited access to Prime Music and Video, all for a fee of $119 a year.
The Prime membership and foray into an entertainment have been a resounding success as well. Yet, curiously enough, the cost of the membership does not cover the actual cost of all the benefits that come with it. In fact, it doesn’t even cover the cost of express delivery. To actually cover all costs of incentives, they would have to increase the Prime Membership cost to $200 a year.
How do they sustain this model then?
Amazon believes in investing in the long-term future benefits and in the bigger picture. They know that their Prime customers are loyal to them because of the high-quality service, entertainment options, and convenience that comes with the prime membership. They also offer members their own ‘Prime Day’ of shopping.
Statistics in fact show that Prime members spend 5 times more than any of their other customers. Considering ‘Prime Day’ takes place in the summers when sales are low, it is a great strategy to rake in profits by offering special deals and discounts. In 2014, Prime day generated over $2.4 billion in sales.
The convenience of saving time and effort trumps the need to save money. Thus customers choose Amazon as their default for shopping. By 2018, Amazon had more than a hundred million Prime members the world over, and this number is surely on the rise.
Merging Online And Offline Shopping
The emergence of online shopping spelled doom for traditional retailers, with over twenty major retailers shutting stores and filing for bankruptcy in the past five years. However, contrary to this trend, Amazon began opening its physical stores such as the bookstore in Seattle in 2015, and the Amazon Go cashier-less supermarket pioneered in 2018. Why did Amazon invest in traditional, physical stores when online retail was clearly the booming future?
There are a few ‘no-negotiation’ factors where traditional retail is concerned.
- Some physical aspects of store shopping cannot be replicated, nor fulfilled by online shopping.
- Industries such as fashion and clothing, groceries, etc. work on the principle of touch, feel, and try out products.
- The instant gratification that one gets by walking out of a store with a newly purchased item – in other words, the retail therapy effect – doesn’t accompany online shopping.
- Online stores do not provide brands the visibility that comes with physical store shopping.
Amazon has the foresight to understand and provide solutions to some of these factors. They have been able to understand consumer habits in the new digital age.
Consider the following example. A person starts looking for a good pair of sports shoes online. Next, the person visits a physical store to try them on. Once the choice is made, the person uses his or her smartphone to research competitive prices in different online stores. If all the pre-requisites are checked, the person gets the right-sized shoe delivered to their home.
Amazon’s foresight thus has enabled them to understand the fact that online or offline purchase isn’t as important as providing customers with a seamless and frictionless experience that finally leaves them satisfied. They have understood the importance of the brick-and-mortar traditional grocery store and how providing blended shopping experiences to customers will be the future of retail. With this foresight, Amazon purchased the Whole Foods supermarkets chain.
Cementing The Future In Groceries
Online retailing began with bookselling because people trusted buying commodities like books over the Internet. Though people got more comfortable with the idea of buying more product categories through online retail, food and groceries were still a very tough segment to crack into. The offline grocery market was as tough to crack as well.
The real problems lie in hitting profit margins, and the added pressures on the supply chain of providing specialized storage and delivery. Nevertheless, since food is an essential commodity, payoffs are massive. It is for this reason that Amazon was keen to break into the grocery market that would not only firmly place them in the daily lives of customers, but also boost sales across the board. Amazon needed physical stores to compete in the grocery market.
Amazon purchased the US supermarket chain Whole Foods In 2017, at a time when experiments in online grocery ventures had received bland reactions from consumers. This decision left business experts baffled. Even though they had begun testing grocery delivery service, AmazonFresh in Seattle in 2007, and have since expanded to other US cities and in Europe, the success and uptake of this venture have been relatively slower.
Yet the decision to buy Whole Foods was a logical one. Firstly, they needed experience in handling perishables and organic goods, which the organic supermarket chain specializes in. Secondly, Amazon’s customer base is a loyal high-income one. Thirdly, having about 500 chains in the UK and US is not unmanageable for an experiment.
Over the next few years, their Whole foods venture will enable them to provide offline and online blending. Their Prime membership already plays an important part in this strategy, providing Prime members Whole Foods products delivered within two hours with cashback options.
They endeavour to make grocery shopping much simpler than before – globally!
Using Technology And Innovation For Better Service
Amazon’s understanding and use of technology to better their customer service experience is another feather in their successful cap. They have another principle of Invent and Simplify which already gives them a sound technological platform via robots, virtual reality, drones, AI, 3D Scanning, driverless cars, and much more.
This strategy that started in 2012 is already paying off well. They purchased Kiva Systems, the main supplier of their warehouse robots. While earlier, robots made up only 20% of their workforce, investments in Amazon-specific robots will ensure an increase in the automated workforce.
Other retailers are now trying to replicate the cashier-less Amazon Go’s ‘Just walk out’ system. Their Echo’s voice assistant Alexa is also a great example of their technological prowess in business strategy. In addition to these, their search and recommendation algorithms are constant updated to accommodate customer data. In 2017, recommended purchases amounted to about 35% of their product purchases.
Amazon also provides cloud storage systems via Amazon Web Services – developed for their own infrastructure. Companies such as Netflix, Nordstrom, as well as NASA, use AWS, pushing their profit margins to almost par with Starbucks.
Amazon has also seen its fair share of misses in technological innovations; however, it is their ability to learn from these failures that give them the edge. Their 2014 Amazon Fire phone is an example. Nevertheless, Amazon continues its juggernaut in retail with technology, innovation, and risks to ensure delivery and class customer experience.
Amazon’s Logistic Infrastructure
Amazon endeavors to keep meeting customer expectations with innovation. By pioneering one-click shopping and two-day delivery, as well as the launch of Prime Now in 2014, Amazon keeps raising the bar of meeting expectations and throwing challenges to other retailers. Prime Now promises a two-hour delivery of an increasing catalog of products in over 30 cities across, US, Europe, Japan, etc.
The efficacy of Prime Now can be seen in the following testimonial. A customer in England’s Manchester placed an order for a PlayStation, jewelry, and a women’s perfume at 10:00 PM on Christmas Eve, shortly after Prime Now was launched. The order was promptly delivered to the customer at 11:00 PM.
Amazon offers its customers a subscription offer on certain products available at reduced prices. While all these new strategic additions aim for a better customer experience, they pressurize the supply chain and strain their logistics.
The Amazon Fulfilment Centers or FC’s are warehouses that store products in bulk that get picked by either robots or workers. About half of the population of the United States lives within twenty miles of an FC. Moreover, the Sortation Centers pre-sort delivery packages for different carriers according to area codes. Smaller Prime Now Hubs manage storage for customers within metropolitan cities.
Amazon uses about twenty third-party carriers, including the U.S. Postal Service, and FedEx. In 2015, Amazon launched the Amazon Flex app, enabling independent contractors to deliver Amazon goods to nearby customers, an endeavor to try and manage a part of the delivery chain themselves.
In addition to all these logistic infrastructures, Amazon has Click & Collect – where customers can pick their delivery at participating nearby stores, Amazon Lockers that provide storage space, and drone delivery that augment Amazon’s fulfillment services.
Their endeavours to refining logistics and bring in innovation to ensure speedy delivery will keep them on the path of growth.
What Amazon Can’t Do
Amazon has changed the face of retail in the digital age completely. Their range, depth, and flexibility along with customer-centric innovation might seem like an overwhelming juggernaut to other businesses in the retail and commerce industry. However, it could be the Amazon-induced changing face of retail and commerce that could pave the way for other businesses to carve out a niche for them.
They need to tap into WACD, or ‘What Amazon Cant Do’.
Amazon is a pioneer in many aspects of retail and e-commerce, and the most convenient, fast-paced shopping platform. However, it does not provide customers with the fun experience that traditional shopping does. Moreover, the millennial generation of shoppers is more interested in an “experience” rather than just products. It is therefore essential that retailers understand this need and target their customers with a shopping experience that sets them apart.
The focus could therefore be providing an in-store experience of intermingling activities such as shopping, learning, coworking, etc. all under one roof. John Lewis, the UK department store retailer gives customers a unique experience of living inside a purpose-built apartment within the store. Apple, on the other hand, is emphasizing community programs and classes in their stores.
To put it honestly, these trends and changes were inevitable in the digital age. Amazon only accelerates the process and strives to pioneer many of the trends. Its ability to understand, capitalize and put into action what it learns about these trends make it the powerful success it is today.
Retailers that can understand WACD, or adapt, innovate or collaborate with Amazon will succeed in future.