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Is Amazon.com retail’s 800-pound gorilla or a crafty coyote?
Lately, Amazon panic has run rampant among mass retailers. It started when the digerati claimed that stores would be replaced by online shopping due to disruption. But exactly how much of a threat is Amazon? Is it an 800-pound gorilla or simply a crafty coyote?
Last year, one of our campaigns drove consumers to both Amazon and a traditional retailer (store and online). Surprisingly, the retailer’s online sales were roughly eight-times the sales of the product on Amazon. Brick & mortar sales were eighty-times Amazon’s.
That got me digging further into Amazon’s numbers. The company implies it is a $107 billion retailer. It’s not. Breaking down its 2015 numbers:
- Selling digital content (for Kindles and other devices): $22.47 billion
- Cloud services (AVS): $8 billion
- Fire and other devices: $9 billion – $20 billion (estimated)
- Miscellaneous other: $5 billion (estimated)
All this adds up to Amazon being a $50 billion to $65 billion worldwide retailer. While its revenue is a big chunk of change, a little 2015 perspective is useful:
- $486 billion: Walmart revenue
- $170 billion: Combined revenue of Sam’s Club and Costco
- $103 billion: Walgreens revenue
- $88 billion: Home Depot revenue
These retailers have been profitable for years. Yet Amazon’s rare profit comes primarily from non-retail services. For example, in Q2 of FY 2016, cloud services accounted for 67 percent of Amazon’s profit despite being less than 10 percent of its revenue.
So is Amazon a coyote or a gorilla? Not even a competition. Walmart is retail’s big gorilla. Amazon is a crafty coyote. Here are a few reasons why:
- Amazon does not dominate retail, except when retailers focus too much on it.
- Like a coyote, Amazon has a positive role to play in the eco-system. One positive is as a combination “shopping search engine” and “shopper Yelp!” Many people look up products and reviews on Amazon, then go buy in a store.
- Amazon scavenges some revenue using an online loophole (not charging state sales tax) to keep their prices low.
- Amazon is chasing a small portion of the market — average digital sales remain below 10 percent of retail — and, like a scavenger, it feeds quite well from it.
Discussion Questions
DISCUSSION QUESTIONS: Do you see Amazon.com as one of retail’s 800-pound gorillas or a member of the crafty coyote family? In what ways should retailers be concerned about Amazon? Are there areas where they give Amazon too much credit?
Poll
BrainTrust
Chris Petersen, PhD.
President, Integrated Marketing Solutions
Richard J. George, Ph.D.
Professor of Food Marketing, Haub School of Business, Saint Joseph's University
Amazon is both an 800-pound gorilla and a crafty coyote. More and more, consumers are going online to shop, research and buy, and they frequently start their searches at Amazon. Amazon is quick to innovate. Many of their tactics have become standard practice in retailing, both online and brick-and-mortar. And Amazon has over 54 million households that pay for Prime membership. Is Amazon the biggest retailer? No. But retailers ignore Amazon at their own peril.
It all depends upon the metrics and benchmarks. Doug Garnett focuses on the classic retail metric of revenue. Clearly Amazon has not reached 800-pound gorilla status on that metric. But as I travel the world, no entity dominates retail discussion and strategy more than Amazon. Amazon is a 1000-pound gorilla in the sense of worldwide retail disruption.
Amazon is more than a coyote surviving on segment scraps and the market fringes. Amazon’s strategy involves total domination of the supply chain from manufacturers to end-consumers. They are leasing planes and buying boats to bypass distributors and move goods internationally. They are buying old U.S. Post Office facilities to enable delivery within hours in cities. And they are selling this expertise and systems to Marketplace vendors who pay handsomely for using the ecosystem. In the sense of total value chain disruption, Amazon is the craftiest coyote that retailers have ever seen disrupt their marketplace.
We’ve been calling them the 800-pound gorilla for years. The huge thing in the corner you just don’t want to talk about, but if you don’t, it’s going to have you for lunch. Coyotes can’t do that.
Prime Day is a perfect example. How many decades have we looked at “summer sale!” signs and “clearance!” events to stimulate summer sales to no avail? And they nail it, first pitch. That’s one scary gorilla.
I guess I have to be different and say that when I think about Amazon, I think abut the Tortoise and the Hare. Because they were e-commerce first, they were able to build an IT infrastructure that is much more conducive to handling unified commerce and that made them omnichannel from the git-go.
With the right model in place they have been able to try new concepts, develop products that serve the customer and things that other retailers are too constrained to do.
Going back to the Tortoise and the Hare. At times Amazon has gotten a bit cocky about themselves, not caring that profit continues to elude them. That is how the slow but sure tortoise could win the race at any moment.
And that’s my 2 cents.
Amazon has characteristics of both. However, at the end of the day, I would place them at the top of the food chain. Think lion or great white shark. The company has changed the nature of all retailing in general and now is focusing on food retailing. Estimates are that while only 2 percent of CPG sales are currently online, online represents over 50 percent of projected growth in CPG sales culminating with 10 percent of CPG sales online by 2020. Center-store is particularly vulnerable to online.
Think back when the Walmart Supercenters became the primary threat to traditional food retailers. While many reacted by matching Walmart’s prices (to the demise of some) surviving retailers focused on offering a differential advantage relative to Walmart. The same thinking needs to take place today. First, traditional retailers need to embrace an omnichannel perspective. Remember, omnichannel is about customers not channels. The combination of click-and-collect with great in-store experiences is something that Amazon does not currently offer. Second, brick-and-mortar food retailers need to insure that their stores offer excitement and solutions to customer problems. Center-stores needs to transition long-term to be a smaller part of the footprint. However, in the meantime, retailers needs to give customers a reason to shop the center of the store, by providing occasion-based solutions, e.g., lunch aisle (snacks, spreads, energy bars) or a coffee aisle with fresh roasted coffee, coffee creamers in a small refrigerated case, chocolates, etc. Also, distinctive private-label is another weapon plus i-beacons, better product lighting and innovative products. Think the snack food aisle with the new customer-inspired products (flavors, sweet and salty, etc.).
If traditional retailers do not perceive Amazon, regardless of what animal name we associate with them, as a bona fide threat to their sales and profitability, then Amazon will continue to take share and profits from them. By the way, Amazon’s market capitalization is $316 billion, Walmart’s is $210 billion, Kroger’s is $33.1 billion and Safeway’s is $8.1 billion. Enough said!
The retail adage is “location, location, location.” If people go to Amazon first for anything, they are the big gorilla.
The magnitude of it struck me this week. I love Skippy Super Crunch. I buy it in the largest container I can. I was running out. So I simply went to my computer, to Amazon and bought a two-pack of a container of the largest size. Good price, also. I had it in two days. No big purchase ($14). No multiple items. Just peanut butter, that’s all.
But that didn’t seal the deal in my mind right away. A couple of days later my wife did the same thing with BonAmi. No big purchase ($5.49). No multiple items. Just BonAmi.
This is where “location, location, location” turns into “convenience, convenience, convenience.”
Whether Amazon is an 800-pound gorilla or a crafty coyote is one way to think about it but the reality is that its both, neither and a whole lot more. People and companies, retailers especially, have long underestimated Amazon and those that continue to do so will find growth a significant challenge. Just look at Nordstrom.
Most retailers, unless they have an exceptional customer experience that extends to the physical world (i.e., stores and other tangible points of distribution that are not purely digital) are going to lose to Amazon eventually. How many retailers do we know that are that good? Sadly, it’s a short list.
The gap in what Amazon is capable of — its reach, its ability to integrate a variety of offerings and most importantly, the wrapper of all this in a “customer-obsessed” culture that has been a driving force in its business for more than 20 years — and most retailers mean they must aggressively innovate or die.
Your note about Nordstrom is interesting. But instead of your conclusion, I would suggest that Nordstrom’s problem (just as Macy’s) is that they bought off on the idea that eCommerce is the future and were drawn there by Amazon obsession. Those two retailers are the poster child, in many ways, the poster children for my observations here.
Nordstrom’s latest numbers suggest they were wrong in their omnichannel bet. (Unfortunately, it looks like they’re doubling down on crazy ideas with their Tesla deal.) Seems to me that retailers must not believe a valid strategy is to play Amazon’s game if they’re to succeed.
In part, eCommerce is not a good money making idea — as shown in a recent HBR published study among many other analyses. The economics of eCommerce are very bad which is why Amazon can’t make money doing it.
Anyway, just doesn’t make sense to me to recommend that stores leave a profitable (if challenging and complicated) economic model to chase after what is clearly a bad economic model.
Cheers…
Thanks for your comments Doug. My point about Nordstrom was less about eCommerce and more about how, across ALL channels but stores especially, it has failed to keep up with the customer promise that its brand and business was founded on. Macy’s too, for that matter (my first job after undergrad was going through their Executive Training Program and then working in store management).
Nordstrom had the chance to do so after launching Fashion Rewards in 2007 (we helped there) but never was able to commit to relationship marketing, ironically because that was “owned” internally by the direct division, which includes eCommerce!
I agree with you completely about the eCommerce channel, which is why retailers that are also or more store-based need to create a better experience for customers. Amazon has done that better than anyone in digital channels and it results in far fewer reasons to visit a Nordstrom door. One eCommerce strategy worth considering, especially for mono brand retailers, is to sell through rather than against AMZN. At least a mono brand retailer has the margins to do so.
Last weekend I visited a Pirch store for the first time and it blew me away. Far and away the most exciting retail store experience that I’ve seen in a long time and one that will be reasonably well insulated from AMZN!
Good points all around. My friends who are with manufacturers tell me they find it rare that a retailer they’re selling to has a clear vision for how they are merchandizing the store. Instead, they talk at length about the detail of electronic executions – but still not with any clear vision.
I’ll have to search out a Pirch. Seems to me the fundamentals remain that stores are about products and the shopping experience surrounding those products. Since that’s the massive bulk of retail revenue (over 90%), making those experiences better & better is the critical issue. ECommerce might fit nicely with solving that – but the point would be to use it to create more powerful store results.
Interestingly, that HBR article I noted found when retailers pull consumers from online into the store they become quite profitable and when retailers pull consumers from stores to ecommerce they become less profitable.
It all creates quite a set of strategic quandaries…but putting the store forefront seems the primary starting point.
Cheers…
Crafty Coyote is the POV from here. Three orders on Amazon Prime already this week from my household. These are sales that in the past would come from Target, Home Depot, J.C. Penney, Costco, etc. Now they come from Amazon.
This retail sales “disintermediation” is here to stay. Amazon is now part of the fabric of global retail, and their ability to leverage data and analytics and manage the technology to help grow the business remains second to none in retail.
At nearly a half-trillion dollars in annual sales Walmart is still king. CEO Doug McMillon’s very public “transformational” strategy is all about growing Walmart’s business within Amazon’s wheelhouse: the “digitally-connected” customer, etc. Maybe that tells an Amazon crafty coyote story right there.
Amazon is both and other critters. Keep in mind, Bezos seems to have aimed for a rocket that can lift off, deploy a second stage and return to earth for reuse.
Like any successful competitor, all retailers need to understand how Amazon is taking share. Retails need to understand what is in Amazon’s selling model that relevantly differentiates it for the shopper.
Retailers need to guard against the natural tendency to react to observations and not listen to the shopper. There in lies the “ditch to ditch” which afflicts most retail. They ape the external observations and neglect those core values the shopper finds preferable.
Life isn’t binary and neither is retail.
Alternatively, we like to say “retail ain’t for sissies!”
I would say more like a giraffe, because a giraffe is the animal with the longest tail and it can see above the trees.
Amazon has used the advantage of starting its commercial model from a clean slate without having to consider the amortization of past investments or the leverage of gains in brand equity. BUT it has also evolved very quickly by using analytics and constantly improving the customer experience within the limits of online capabilities.
A wolf to some, a dog to others — and a coyote to all. To consumers who will use every means to their benefit on their path to purchase, an 800-pound gorilla.
Amazon is a crafty coyote. Maybe. The numbers seem to prove this out. Retailers and retail commentators make it a gorilla. It makes good headlines.
I think we need to consider Amazon in ways that are outside traditional retail metrics — it simply is not just a retailer. Sure they move the merchandise, but it’s the movement, not the merchandise. Typical analysis looks at physical goods — trying to understand Amazon by stuffing it into the retail universe, but Amazon doesn’t limit itself to revenue from material goods. Consider the consumer-facing parts of the business: we buy things that are not physical. We are increasingly buying experience, and Amazon doesn’t shy away from experiments and expansion. This is the very real result of disruption.
So, if Walmart is really the gorilla, then Amazon potentially is the conquistador.
Amazon gets more press than Donald Trump, and brick-and-mortar stores better think about how they want to stay relevant as the center store is slowly dying. Between the big box stores, clubs, dollar stores and pharmacies, the grocery staples are priced down and dirty, and the days of making good gross margins on these items are gone forever. Add in Amazon to the equation and you have to re-engineer how you run your business or failure is inevitable.
I won’t bore you with what I have said a million times before, but anyone who wants to stay in this business must focus on amazing perishable deals, along with signature custom deli and bakery offerings. The alternative is failure. So to my fellow independents out there, wake up soon before that 800-pound gorilla runs you over.
I like the Amazon coyote, and buy plenty through Amazon (my wife is an Amazon Prime customer). But they don’t replace retail nor do they diminish what I buy at retail by very much. My sense is they co-exist quite well right alongside retail. And manufacturers need their product carried both at retail and on Amazon.
But Amazon wants more than that — and, like a coyote, Amazon’s disrupting howls are more distracting than is warranted by the numbers. Watching Amazon sort out their way forward is interesting to watch. But Amazon doesn’t have a strong, profitable retail model. So retailers need to stop chasing Amazon (let Amazon be Amazon) and get their focus back to making their stores places consumers want to shop.
The distraction Amazon has provided has been damaging. Many retailers wasted years of strategic advancement by chasing Amazon. During that time they let languish the place where they can make the most money — stores. I think this problem ignoring stores may be the reason behind a recent retail traffic decline.
Here’s what I recommend (in broad terms):
While Amazon probably wants everyone to believe they are an 800-pound gorilla, I think they are more like a crafty coyote. Amazon has been notorious for beating their chest (like a gorilla) about how big they are and how much they sell in a given day, however, it appears that their retail marketplace sales of non-proprietary products are not as big as people think.
Just like many retail companies that are real estate companies disguised as retailers, Amazon is a digital/cloud company disguised as a retailer. With most of Amazon’s profits coming from non-retail services, their retail sales are essentially a loss leader. Now we know how they offer low prices and free shipping — they are focused on volume, not profit, for their retail sales.
Unfortunately, Amazon’s loss leader strategy is not good for retailers selling commodity products, as it is difficult to compete with Amazon on price. Retailers selling private label or exclusive products not available elsewhere are not concerned with Amazon, as they don’t compete directly.
Yes, Walmart is a big gorilla in retail. Still though, if you ask other retailers what their biggest fear is, they will say: “Amazon eating my lunch.” It is Amazon’s growth in the e-commerce realm that sends shudders down the spines of retailers.
The characterization of Amazon keeping their prices low through an online tax loophole is misleading. One of the reasons Amazon can win on price is that its Marketplace model ensures price competition. That leads to fair prices for consumers. The Marketplace model also allows Amazon to play in a broader portion of the landscape because it achieves the endless aisle. Amazon can capture the long-tail without any upfront risk.
In fact, the very existence of Amazon prompted Walmart to adopt the Marketplace model. The fact that Walmart would go head to head in this way shows that it sees Amazon as a gorilla already. Everyone would be smart to adopt this view.
Adrian – Appreciate the thoughts.
As I read your comment, what I concluded you’re really saying is that Amazon isn’t a gorilla in reality. But because we’ve all become highly focused on it, we’ve made it into a gorilla by allowing it to dominate discussions.
And, that’s what I’m pointing out. Walmart’s choice to adopt the Marketplace model is probably a strategic mistake – no one will win by playing Amazon’s game. The mere fact they adopted it doesn’t mean it works (corporations adopt a lot of things that don’t fundamentally work but put a few years into them before realizing that).
I’ll also suggest that Amazon’s financials show the Marketplace model isn’t creating economic health. Amazon’s retail business is a money loser. So while there are theories that would say it’s a good thing, it doesn’t look to me like it leads to reliable long term profit. And if it can’t lead to profit, then it’s not a good approach.
Cheers…
It must be pointed out that Amazon is not a global retailer … yet. Frankly, Amazon has barely scratched the surface in terms of entering countries globally and implementing the full extent of their marketplaces and services such as Prime, Prime Now, Amazon Fresh and Pantry, as well as their streaming services just to name a few. In other words, Amazon has massive growth opportunities in the coming years that will increase revenue and the value of the company. Simply put — Amazon is barely a teenager in terms of their lifespan. I don’t believe analysts truly have an idea of how large Amazon will be by the time Amazon reaches adulthood; probably in 15 years.
A very interesting and impactful article leaving a lot of room for retailers to compete with Amazon’s record breaking sales! Sharing another article for further discussion.