When Amazon sneezes, retailers get a cold. Amazon’s a titan — that much is clear — but is Amazon an ally or an enemy when it comes to the retail industry?
We asked the experts and then we polled our readers. Did you write in with an opinion? See if you made it into print.
Sucharita Mulpuru, VP and principal analyst of eBusiness at Forrester
Most retailers need to be very, very wary of Amazon for three key reasons.
First, Amazon is winning by under-pricing. Several investment banking reports, such as Wells-Fargo and William Blair & Co.) have been released with extensive market basket analyses that show the same thing — that Amazon has lower prices on baskets of goods than bricks-and-mortar competitors like Wal-mart. That is no easy feat and the fact that the company can execute such pricing while still being profitable is perhaps the most concerning fact of all as anyone with commoditized products risks customers asking for price matches.
Second, profit pools drive the business. Amazon has discovered that several of its businesses (i.e. on-site marketplaces and advertising) are extremely profitable. In fact, they’re so profitable that they subsidize the losses from Amazon’s extremely expensive business of rapidly delivering packages to consumers’ homes. Amazon’s marketplace in particular ensures that Amazon will have the resources to under-price competitors into perpetuity.
Third, Amazon has a habit of reckless “enemizing.” While Amazon is beloved by shoppers, its relationships with its business partners are not so harmonious. Many companies have abandoned the Amazon Marketplace amidst concerns that Amazon was using information about bestsellers to source their own products. Years ago, Amazon engaged in a contentious lawsuit with Toys R Us over exactly that issue. Amazon managed the Toys R Us website but then also carried — and often underpriced — the same products. For years, the company held a steadfast stance to fight the collection of online sale taxes, and it has alienated virtually every publishing house in a quest to determine its own pricing for e-books, a pricing structure that all but promises to drive Barnes & Noble out of business.
In the same way that the last few decades were the decades of Wal-mart and Costco, the next decade will invariably be the decade of Amazon. Since the profit pools enable Amazon to pay its bills while also engaging expensive customer acquisition and retention strategies, it will be unstoppable. Woe to the retailers partnering or competing with them.
Jim Lucas, Global director of retail insights and strategy at Draftfcb
Asking “is Amazon an ally of the retail industry?” is like asking the proverbial question: “Is the glass half full or half empty?” Bill Cosby’s answer was probably one of the best: “It depends on whether you’re pouring or drinking.”
That said, Amazon is a “frenemy” to the retail industry — better for some than others.
In an era in which retail sales have been less than stellar, Amazon has been on fire.
Because of lower overhead (no stores), Amazon has a price advantage vis-à-vis retailers such as Wal-mart, Target and Best Buy. Moreover, as a result of how sales taxes are collected, or not collected by states, it also reaps a price advantage. The sales Amazon lures away from brick-and-mortars actually take some of the margin out of the business, likely reducing sales tax revenue as well.
Amazon has delivered on lower prices and passed that onto consumers. Studies by William Blair & Co. and KeyBanc Capital Markets indicate prices at Amazon are about 9 to 11% lower than Wal-mart, depending on category and in-store versus online. Amazon beat Target.com’s prices by 14%, serving 137 million customers each week.
“Showrooming” represents an elephant in the room. According to a holiday study conducted by Pew Research Center in 2011, 25% of mobile owners used their phones to make price comparisons and 24% used their phones to look up online reviews. Most importantly, 19% of those who did price comparisons on an in-store product eventually bought online.
While brick-and-mortar is shouldering the burden of cost for showrooms, a small but significant portion of it is going to online retailers. Again, hard to see retailers clicking the “like” button — but shoppers, on the other hand, “like” it because it’s more transparent and helps ensure a good price.
Traditional retailers such as Wal-mart, Target and Best Buy have countered showrooming in their own ways. Wal-mart has pushed Walmart.com, a site-to-store “endless aisle” program and Target has used mobile discounts and asked for exclusive products from manufacturers.
Interestingly, Amazon has served as a catalyst to ensure that retailers are more aligned with shoppers’ needs, which in turns is improving their efficiency.
In the final analysis, Amazon is definitely a “frenemy” to the retail industry.
Direct Marketing News Decision
Amazon is an ally of Amazon. It has no reason to be an ally to the retail industry, as the company ships products directly to consumers from its own warehouses. Amazon is loyal to the retail industry just as it was a friend to Borders and Barnes & Noble. Consider how that turned out.
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