Jeff Bezos has just become world’s second richest person in the world, thanks to Amazon’s recent stock surge propelled by the company’s plan to purchase Middle East online retailer Souq.com. There are essentially two inorganic ways to expand an already large company: vertically and horizontally. The Souq acquisition is a horizontal expansion into other geographic locations. What’s left to do is to expand vertically. Amazon is poised to do just that. According to a Bloomberg report, Amazon is courting some of the world’s biggest brands to ship their products directly to online shoppers and bypass retailers like WalMart, Target, and Costco. This is a nice growth market for Amazon.
How worried should the big-box stores be? The more streamlined the logistics to get products to the consumers, the more likely companies would find cost savings. Far from its previous life as a bookseller, Amazon is now a logistics company, from the build-out of its network of warehouses to its own sorting facilities to, eventually, its own fleet of cargo planes. Amazon can then pass on the savings to the manufacturers and bypass brick and mortar retailers. What about the consumer shopping habits? Are people really willing to forego the pleasure of browsing in the stores? According to a 2016 Wall Street Journal survey, respondents are now making more than half of their purchases online. Granted, this was an online survey, so there might have been some data skewing towards online behavior. However, the trend of consumers moving their shopping away from brick-and-mortar store to online stores will only speed up. Just count the number of retail store that have announced closings or bankruptcies this year. The old-school fight over shelf space (every manufacturer wants to be at the eye-level of customers) is no longer needed. Such priority can now be replaced by a little button gadget called “Dash.” Amazon is changing the landscape of retail, severely reducing the channel power of the big-box retailers.
How does a retailer compete successfully in this environment? On the one hand, retailers must beef up not only their web commerce, but also their mobile commerce, whose growth is out-pacing that of web commerce since 2015. In growing their online and mobile shopping platform while offering the same reasons the customers go to their stores in the olden days, retailers can once again attract their core customers. On the other hand, retailers must rethink their relationships with manufacturers. Incentive alignment efforts would be the only way to stave off aggressive attacks by online-only retailers.
For the past few decades, WalMart, with arguably the largest retail footprint, enjoyed tremendous channel power over manufacturers. Even a CPG (consumer package goods) giant, P&G, created an inventory management system for both companies to collaborate. At that time, WalMart represented one third of P&G’s sales. This number is decreasing today. However, thanks to the $3.3 billion acquisition of Jet.com, WalMart has been able to stay competitive in the CPG market. Over the Thanksgiving weekend 2016, Jet.com’s e-commerce grew 300%. Jet.com is quickly catching up to Amazon’s sales volume. Additionally, with the acquisition of Shoebuy.com, a competing site to Amazon’s Zappos, WalMart is looking to chase after more of Amazon’s segments.
As for Target and other retailers, staying relevant for consumers would require more of an effort in playing up the attractiveness of its stores, ecommerce sites, and mobile apps. Additionally, they need to focus/invest more on their own white-label store brands of the same products, as these goods are typically more profitable. Studies have shown that customers who switch from name brand products to store brand for price reasons are more than likely to stick with the store brand products. One incentive for CPG companies on producing white-label brands for retailer stores is the huge savings resulted from the shift of advertising cost to the retailers.
Costco does not need to worry about Amazon’s recent attempt with CPG companies just yet, as Costco’s core customer base is quite different from that of Amazon’s consumer base. Costco’s Kirkland brand enjoys almost a cult-like following. It’s membership-only model and credit card rewards program also keeps its customers from defecting to Jet.com or Amazon.com and the like. Costco also has its own “web-exclusive deals.”
In the end, it is all about customer points of touch and the shopping experience. He who owns the customers owns the market. In addition to price points, Retailers, brick-and-mortar or otherwise, must identify their core customers and key elements that would keep them coming back. Purely competing on price points would only drive all profits away from the market.
Image credit: Time