retailers still offer weak value propositions and may soon face a real reckoning. The macroeconomic pressures driving trading-down behavior won’t end anytime soon, while the rich continue to get richer. The disruptive forces that are pushing down prices and, particularly in cases like next-day and same-day delivery, driving up the cost of business will squeeze margins to the point of no return for many poorly positioned retailers. The power the consumer holds will not allow many just-good-enough retailers to sustain market share, much less ever achieve adequate financial returns.
It’s a good time to be a bankruptcy lawyer or liquidation firm because, unfortunately, more brands will go over the precipice. We see this slow death playing out every day. These troubled brands continue to run their one-size-fits-all ad campaigns and their “Super Saturday” sales. Their promotional signs call out longingly in hues of chartreuse and yellow. They stack merchandise high and hope to watch it fly. Their email campaigns consist mostly of batch, blast, and hope. They apparently continue to cling to the hope that a slightly better version of mediocre will turn out to be a winning strategy.
These brands act like they are still in business. They think that some customers still really care whether they stay or they go.
I see dead brands. And they don’t even know they’re dead.
CHAPTER 5
The Amazon Effect
“Your margin is my opportunity.”
—JEFF BEZOS
Because of Amazon’s size, growth, and disruptive impact, folks tend to get a few facts wrong about the company. First, Amazon is not the world’s biggest retailer—at least not yet. That position is still held by Walmart. Second, while Amazon’s online sales dwarf other competitors, it still has only about a 4 percent share of total US retail, with more than half of that derived from independent merchants selling through their platform, not their own direct sales to consumers. Amazon’s market share internationally is much smaller in most markets. In many cases it is growing rather quickly, yet it has formidable rivals such as China’s Alibaba and JD.com, India’s Flipkart, and Argentina’s Mercado Libre.
The main thing most people get wrong about Amazon is the belief that it makes a lot of money. Certain parts of Amazon have started to do well—most notably Amazon Web Services, which provides a cloud-based computing platform for a slew of industries, as well as its rapidly growing, cash-generating advertising business. However, the retail division has barely broken even for most of its history and didn’t start to regularly earn a profit in retail until just a few years ago. Even now their margins are often below industry averages, though sales growth remains robust.
Figure 5.1 Amazon’s Revenue versus Profit
Source: Vox; data from Amazon13
Moreover, when its continuing rise of fulfillment and shipping costs—which have been trending toward nearly 27 percent of sales—is taken into account, it’s hard to see how retail will become strongly profitable anytime soon.
Figure 5.2 The Growing Weight of Amazon’s Logistics Costs
Source: Statista14
There is no sense that Amazon—or Wall Street—is terribly concerned. Amazon has created an incomparable flywheel by offering unparalleled selection, fast and cheap delivery, and generally sharp product pricing. This has been great for consumers and investors, but particularly brutal (or impossible) for many competitors to profitably combat.
So Amazon finds itself in an enviable position on many fronts—and the main one is that investors continue to value growth over profitability. This allows Amazon to experiment with new concepts aggressively and invest in building long-term infrastructure, especially in product delivery.
Stop Blaming Amazon for All of Retail’s Woes
As stores close by the thousands, once-prosperous chains go bankrupt, and scores of malls are bulldozed or massively repurposed, it’s become common to lay the blame on the rise of e-commerce generally and on Amazon in particular. Given the rapid growth of online shopping and the fact that Amazon now controls some 40 percent of the e-commerce market, it’s easy to jump to that conclusion. Yet this argument has two huge problems.
First, as we have seen, some of the most disrupted sectors were in decline well before Amazon was a blip on the radar screen. The moderate department-store segment is a case in point. Amazon and other online-only players have only begun to have a material impact on these companies in the last few years.
Second, absolutely nothing prevented any of these retailers that have lost share to online retailers from developing their own similar e-commerce capabilities. In fact, a brand with really great digital capabilities combined with kick-ass brick-and-mortar assets that are well integrated should have important advantages in competing with online-only players. That is one of the main arguments of this book.
By way of illustration, I worked in senior roles for two retailers that began making significant e-commerce investments in the late ’90s and, as a result, captured more than their fair share of the growth in online shopping. The first, Sears, lost its way for other reasons, but for many years the company’s appliance and home improvement businesses were clear leaders in what we now call “omnichannel.” The Neiman Marcus Group, while it was relatively slow to integrate its cross-channel offerings and focus enough on acquiring younger customers, did make growing online shopping a priority more than two decades ago. For the most part the leading luxury department store in North America, despite selling in a very mature category with escalating competition, has held its share of the market, while at the same time delivering solid operating profitability. Online sales now represent nearly a third of its total revenues, and its best and most loyal customers regularly shop across all channels.
Many major national brands have yielded little or no share to Amazon and other pure-play competition. That’s not to mention the many local, regional, and specialty stores that have a laser-like focus on a particular customer segment, deliver superior customer service, and provide a unique product and/or service mix.
The real question for retailers is, do you let the shifts destroy you or do you turn them to your advantage?
Okay, Maybe Blame Them a Little
Still, there is no question that Amazon has wreaked havoc with many segments. It built its first phase of growth by targeting products that were easily understood online and that could be delivered digitally or relatively inexpensively by mail (books, music, games). The first wave, which was mostly complete more than ten years ago, decimated most of their direct brick-and-mortar competitors.
As Amazon expands into many more categories, including services, it grows ever closer to becoming the so-called everything store. While a few sizable categories, such as luxury fashion, are not well represented on Amazon, the company’s virtually endless aisles—through both its direct selling and its marketplace—give it relative assortment dominance over just about any retailer on the planet. Perhaps for this reason many people think Amazon’s market share is greater than it actually is. But the fact that, according to one study, nearly two-thirds of all online product searches originate at Amazon15 underscores the broadly held consumer belief that Amazon will likely have the product they want,
