Editor’s Note: There is a growing list of factors that, when considered on a cumulative basis, could spell trouble for Amazon's future in retail. Do we think that the Amazon kingdom is going to fall? Absolutely not. But we are aware of history, and dynasties tend to run their course. Could we be entering a cycle where Amazon might have to work just a tad harder to preserve its dominance over retail? That is a distinct possibility. We assembled a list of concerns here and asked three global experts to weigh in with their opinions.
Updated: December 26, 2019, 2:16 PM
The current state of retail
Competition is healthy. Just about everyone would agree with that statement. Consolidating power in too few hands is not healthy. That’s another statement supported by just about everyone except the party who holds the power.
Amazon clearly holds the power in retail and, following Jeff Bezos’ Day 1 approach to business, is consolidating its power each day.
Amazon accounts for anywhere between 37-47% of online commerce in 2019 according to new figures released by eMarketer. The difference between the two numbers is based on whether you want to count sales by independent merchants. Either way, Amazon sales are equivalent to about 4-5% of total retail spending in the U.S.
In Great Britain, Amazon has outpaced Marks and Spencer Group as the most-shopped clothing retailer, according to an HSBC survey. Similar examples could be cited in countries around the world leading to the same conclusion, Amazon is the hands-down leader in retail and poses a threat to every other retailer in existence today.
That statement is not meant to be dramatic, as it is easily documented. The impact of Amazon on consumer shopping habits and the closing of “thousands of small apparel stores” offers one example of Amazon’s impact on the retail industry.
Brands find it irresistible to sell their goods through Amazon. Gaining access to Amazon’s massive customer audience is an unmatched opportunity. Brand managers instinctively understand the risks associated with selling through Amazon, and like the old mantra of “you can’t get fired by hiring IBM”, today’s retail executive might get fired if they try to sell without Amazon.
What do retailers fear and which brands are making bold moves?
The risks in the business relationship between Amazon and retailers start with this short list:
- There is risk of loss of the direct customer relationship. DTC retailers openly talk about how customers won on Amazon are considered “rented”. Many are trying to shake up today’s standard model by employing tactics to get people to visit and purchase on their own websites.
- Amazon has a growing private label business. Success with private label brands means more control and higher margins. Even though Amazon states that its private label products account for just 1 percent of its total retail sales, the absolute sales dollars are significant.
- Selling through Amazon means the richest part of the customer dataset belongs to Amazon. That data can be used to win market share from the very retailers it now supports. It’s a delicate relationship with no guaranties, therefore the persona of Amazon as “Frenemy” has been adopted by most retail partners.
If you need to substantiate the suspicion, look no further than the EU, which opened a “formal antitrust investigation to assess whether Amazon's use of sensitive data from independent retailers who sell on its marketplace is in breach of EU competition rules.”
For a variety of competitive reasons including sensitive issues surrounding the business relationship, Nike recently announced that it would no longer sell its products on Amazon. Nike issued three main reasons:
- A desire to focus on developing more direct, personal customer relationships
- A goal to create a customer experience that sparks emotional equity between customer and brand
- The alleged presence of unauthorized sellers and counterfeit merchandise on the Amazon Marketplace
The decision for brands to merchandise their products through Amazon, whether using a wholesale relationship or in the marketplace is complicated. Most likely, only brands with significant star-power and cult-like status – for example Nike – can muster the courage to say “no” to Amazon.
Why suggest that Amazon's rule over retail could ever be successfully threatened?
We assembled a list of factors that, when considered on a cumulative basis, could spell trouble for Amazon. We posed these questions to three knowledgeable industry sources who shared perspectives and light on what the future may hold for Amazon.
#1 - Is the fate of retailers entirely in the hands of Amazon and how can retailers influence their future prospects?
Nicole Wilhelm shared the opinion, “Amazon will continue to extend its market influence by entry into new sectors, but I don’t believe that Retail will be purely dominated by the company. Retailers (DTC, brick & mortar, and/or e-comm) need to change their offer and service concept which means adding value for customers for shopping at their premises or online.”
(Wilhelm) believes this shift is already taking place, for example, “in the fashion industry where retailers change their store concepts in order to serve customers better, associate delivered service in-store is improving, and customers are recognized (e.g. through loyalty programs). Articles can be shopped online and picked up in store (and returned), and warehousing is being improved which means that more orders can be fulfilled quickly even if the right size is not available in store. The focus should be to give a seamless customer experience throughout all channels and use the explicit advantages of each channel based on customer demand.”
James Christensen opined, “The concept of "commerce" is important in any discussion about Amazon. Their mission is to serve customers what they want in the most convenient and expedient way. Jeff Bezos has stated, "The first and by far the most important focus is customer obsession as opposed to competitor obsession.” Because Amazon started on the internet, their commerce system involves customers, products, and payment — all blended together. Their goal is to win customers by adding whatever products customers want and make the buying experience easy to do.
“Amazon has created a brand that is centered on a digital relationship. If a consumer brand sees Amazon as a competitor, they are not looking at the situation correctly. They should be seeing Amazon as a channel and “thinking like Amazon” when it comes to the relationship when selling direct to customers. The real and more formidable future competitors to Amazon will be the ones that think like them, not those that focus just on products or act like traditional retailers.”
Phil Rubin shared, “Any retailer that would cede its fate to Amazon deserves fatality. Rather, leading retailers are increasingly focusing on their own customers, ironically, just as Bezos suggests in the quote Nicole is referring to, “If you're competitor-focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering.” We are seeing smart retailers investing more in proprietary customer insights (e.g., segmentation); and at the same time, our own research has shown that the gap in Amazon’s lead has narrowed as retailers better understand what winning takes in this age of Amazonian influence.
“Retail is still an experience and experiences mean more when people are involved. Indeed, people and how they represent a retailer and a brand, are unmatchable by many aspects of e- commerce, especially Amazon’s way.”
#2 - How will changing consumer shopping habits impact Amazon’s future in retail?
(Wilhelm) “It depends on the product or service. Standard products with limited need for consultation and no additional service requirement will remain a staple of Amazon. This satisfies the consumer desire for “convenience” above all. For products where an in-store service (e.g. fashion), higher quality goods, or local sourcing (e.g. fresh produce) makes the difference, I believe customers will continue to use retail stores. In Germany, we see a strong trend towards sourcing locally, especially in the fresh produce (grocer) industry. Consumers want to see where their products come from and avoid long supply chains. In the end it is all a matter of “time” and “regional” availability. But I believe there is a sweet spot here, where online retailers can adapt their concepts towards sustainable resourcing, and operation as well. Therefore, in my opinion, it was a great move from Amazon in the US to buy Whole Foods Market.”
(Christensen) “Everything Amazon seems to be doing maps to macro trends in consumer purchase behavior. I recently went to an Amazon GO store and found it to be a very easy way to grab quick food. Many of the products in the store are branded products and many are simply items like sandwiches, made locally. Amazon provided me with a highly convenient way to get what I want. They are not necessarily pushing any product on me, at least I did not notice it if they were. What they are doing is making a retail transaction into an e-commerce like transaction. The key is “checking in” when I come into the store, so they know who I am, can load products into my basket automatically, and then can take my payment.
“In theory this could work with any retail store in the future. This would become a commerce transaction done on Amazon, on an Amazon competitor, or on the brand itself — where the customer, the product, and the payment are all done in the cloud, and the location is just where the product is physically offered.”
(Rubin) “Amazon has clearly, according to our proprietary research (3 waves of quant studies and counting), influenced these consumer trends and while more merchants are evolving to address these changes, it is critical as a brand, as a retailer, and as a business to address these changes and similar opportunities within their unique business models, mission, brands, and customers. Hopefully, and imperatively, a retailer does this in a uniquely compelling way.
“Part of Amazon’s vulnerability reflects some of the “bigger/cheaper is better” that Wal-Mart suffered from a few years back. In what is about to be the third decade of the 21st century, consumers expect more, not just in terms of a better customer experience, but more in terms of a corporation’s commitment to community and its people.
“Last, Amazon is both a friend and an enemy of many. There is a fine line to walk given its various business units and especially how AWS funds much of Amazon’s growth. Between AWS, its advertising business, and its logistics business, it has a lot of competition, much of which supports retailers as customers. We see backlash and in fact, outright unwillingness on the part of some clients to go anywhere near AWS, for example. While this might be viewed as short-sighted, ultimately, it’s a risk for Amazon.”
#3 - Will there be a return to High Street / Main Street merchants?
(Wilhelm) “This was a topic discussed at length during the “Loyalty Surgery” conference in London recently. From a European perspective, I think High Street (meaning brick & mortar) will survive due to a strong cultural connection to “shop local”. People go outside to shop, they talk to store associates, and especially for older people, it is a way to socialize in their community. There is a trend in the Netherlands exemplified by supermarket chain Jumbo where they introduced dedicated cashier lines for chatting in order to engage conversations with customers. Even though some time is added to the checkout process, customers are enjoying the ability to socialize while shopping.”
“People will always want to go out shopping, so the question is what or who is
a main street merchant? Consumers will want to use Amazon or other “Super Apps”
that focus on consumer convenience. WeChat is already doing that in some ways
in Asia. I am familiar with this due to my work in mobile ordering. If a
store’s product is in the cloud along with consumer and payment information,
then the entire commerce transaction can be completed in the cloud via mobile
phones. If this happens, then retail stores become pick up sites, warehouses,
and show cases, where the traditional POS is irrelevant. In other words, all
commerce becomes e-commerce. If this happens, Amazon will continue to lead as
they already own many customers, but competitors can thrive by offering a
similar convenient experience that has a fully integrated digital relationship
with the consumer.”
(Rubin) “There are super challenges for many retailers here with respect to their physical businesses. Increasingly, a physical retail experience without an adequate digital extension is disadvantageous, if not ultimately a hard ceiling to performance. We live in a world where physical and digital experiences increasingly blend together. With only one, you have to be exceptional. Even Amazon is increasingly investing in physical retail such as Whole Foods and AmazonGo.”
#4 - Will concerns about data ownership cause more brands to break away from Amazon?
(Wilhelm) “Definitely! Brands and retailers realize they can only service customers appropriately if they know who they are. That’s why Customer Loyalty continues to be an important topic. A retailer’s distribution strategy will dictate how much customer knowledge is accumulated. The new wave of DTC retailers realize that future success will be based on the ability to recognize individual customers in all channels: online, offline, and on a mobile device.”
(Christensen) “I would argue Amazon is the first digital version of a department store, but the key difference is not having real estate closest to and convenient for the consumer, it is now who owns the digital customer and offers them convenient access to products. So yes, data ownership is key but there is data that is important for a product brand relationship and data that is important for the retail brand or commerce relationship. Following the department store analogy, many brands in the past had to decide to be in a department store or sell direct or do both. This was generally based on distribution costs and margins, while in todays digital world the decision is heavily based on data ownership.”
(Rubin) “Customer data and its corresponding value in terms of insights is a precious asset for business and retailers especially. The advantage Amazon has with its data is grounded in its ability to deliver a more relevant customer experience. Relevance Is The New Black and losing ownership of customer data should be non-negotiable for a retailer wanting to succeed over the long-term.”
#5 - Will concerns about working conditions at Amazon weaken its brand image with customers?
(Wilhelm) “In Germany for sure! We have a continuous discussion on the work environment for the warehousing/distribution center and delivery employees. Consumers are taking note of how companies treat their employees and their suppliers within the value chain, and these topics get more and more attention in the media.”
(Christensen) “Amazon has relied on delivery to upend traditional retail, but as more retailers and restaurants offer delivery, the act of delivery is becoming an industry in itself. Amazon, Doordash, Instacart, etc., are attracting all kinds of bad press on working conditions that must be sorted out. Amazon and other consumer facing brands that are directly in the delivery business do have an extra challenge in separating the retail brand from the delivery service.”
(Rubin) “Amazon has shown again and again that it is far from a model corporate citizen. That means something to Millennials and increasingly, to people of all generations. When the Business Roundtable and its leader, Jamie Dimon (CEO of JP Morgan Chase), redefine the purpose of a business, not just shareholders, that exerts further pressure on a company like Amazon.”
#6 - What about environmental concerns related to packaging waste?
(Wilhelm) “I believe this has become an important issue in Germany in recent years. To give an example, Zalando (3rd largest German e-commerce company) offers Fashion and Lifestyle products and is continuously under observation in Germany to adopt more environmentally friendly policies. It is part of their corporate strategy to neutralize their carbon footprint. Their customers have the option by paying a fee of 25¢ per order, to compensate CO2 emissions caused by packaging, transport, and delivery. I am sure that Gen Z and future generations will deepen their focus on sustainability and social responsibility.”
(Christensen) “Delivery has created considerable packaging waste, however, as current e-commerce operates from a warehouse model packaging is needed. The opportunity for digital commerce is to connect to local bricks and mortar, which will allow for more pick up and less packaging. Amazon’s purchase of Wholefoods is allowing them to move in this direction with Amazon pick up boxes on site. If digital channels work more efficiently with existing brick and mortar retailers, regardless of who the brand is, local pick up by consumers can help replace the waste created by warehousing and delivery services.”
(Rubin) “Again, Amazon is far from a model corporate citizen and has a long way to go in addressing not only packaging, but also its carbon footprint. As it builds out a logistics and delivery business, it does so largely without its own fleet and a reliance on leasing, renting, and using third parties for various portions of its fulfillment. These are just as environmentally irresponsible as packaging waste, much as same-/next-/two-day delivery is, in some or many instances, unnecessary and likewise environmentally detrimental.”