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[19 comments]

Retailers Beware, Amazon is Coming

July 12, 2011

A Wall Street Journal article back in March discussed the market share threat that Best Buy faced from Amazon.com. A growing number of consumers had taken to going to Best Buy to test consumer electronics and then going online to get them at a cheaper price. As Greg Melich of ISI Group and others have pointed out before and since then, Best Buy appears to be in danger of turning into Amazon's "showroom."

It turns out that Best Buy is not the only chain that needs to be looking over its shoulder at Amazon. The e-tailer, according to William Blair & Co. analyst Mark Miller, is gaining ground in quite a few categories beyond just consumer electronics.

William Blair conducted a study of 2,400 items at 24 retailers (22 with stores) and compared them in terms of product selection and price to Amazon, according to a MarketWatch report. The results found that Amazon's prices on average were 11 percent cheaper than the competition. The price differential was even greater when factoring in free shipping on items priced over $20.

Interestingly, William Blair's research found that even if Amazon was collecting sales tax, which is wasn't in many instances, its price would still be cheaper.

Among the chains seen most at risk to Amazon were Bed Bath & Beyond, Best Buy, Dick's Sporting Goods, hhgregg, Kohl's, PetMed Express and Target.

"The price-comparison risk for hhgregg is a particularly high concern because of the high average ticket, and 84 percent of the overlapping items are available at lower prices," Mr. Miller told MarketWatch.

Walmart was seen at being only at a medium risk to Amazon, largely because it concentrates on sales of more lower-priced items than the other merchants.

FINANCIALS:     [NASDAQ:AMZN]

Discussion Questions:

Discussion Questions: What are Amazon.com's greatest strengths? As a retailer, what would your answer be to the competitive threat posed by Amazon?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

What is Amazon.com's trump card in the minds of consumers?

Comments:

I'm sure many will applaud how Amazon has been able to achieve such penetration but it is disastrous for more than just BB. As a significant anchor in various centers, if people stop shopping there, they stop shopping in a lot of businesses around BB. With no easy answers in sight, it's easy to see why so many BB execs have moved on in recent years.

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Bob Phibbs, President/CEO, The Retail Doctor

The threat from Amazon is real. Not only do they have cost advantages, but they also have unparalleled insight into shoppers' behavior, from searching to browsing and ultimately buying. Bricks and mortar retailers must take this threat seriously and compete as aggressively--and as intelligently--as possible. With proper analysis of their own shoppers' behavior, these retailers can develop product offerings, price points, and promotional offers that help them retain their best customers, increase loyalty, and succeed for the long term. An important caveat, however, is that this analysis must be available "at the point of decision"--when the merchant is building the plan, assessing current sales, and reacting to changes--either changes in the Amazon offering or changes in the shoppers' preferences and actions.

In this Amazon World the environment changes very rapidly, waiting for analysis and receiving that analysis in an offline, disconnected manner is no longer sufficient. The integration of shopper insights, merchandising, and marketing must be real and real time.

Derek Smith, Vice President, Retail Industry Marketing, DemandTec, Inc.

Amazon doesn't have to maintain physical inventory, physical stores or retail salespeople. It's all a huge advantage. Not to mention that they can source at a lower cost and have branding advantages.

The only effective way to counter this threat is to emphasize what Amazon can't do--provide a hands-on, physical experience of a product. That doesn't eliminate the "showroom" problem however, so it may be necessary to work out some after-market service and/or support programs that Amazon is likely not going to be willing to offer.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

Amazon's greatest strengths are numerous, though their greatest competitive advantage is being truly customer centric and the degree to which that has permeated the organization. The end result is a steadfastly loyal and growing (larger and more valuable) customer franchise.

The Amazon advantage starts with having a customer-obsesses (and really smart) CEO but it extends into their technology, data capabilities, user experience and merchandising.

For a long time now, we've been telling clients, as we've written here on RetailWire, that Amazon is going to be the biggest competitive threat for just about everyone in retail. They are consistently staying ahead and innovating around their customer value proposition and it's only going to get more difficult for more retailers.

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Phil Rubin, CEO, rDialogue

Selecting which of the survey poll responses was best is more difficult than writing a response to the question. Product selection gives Amazon an edge because of the wide variance from electronics to books to shoes. Convenience, certainly even though you might have to wait a few days rather than taking the purchase home that day. Pricing and sales tax is a no brainer, as is shipping.

Amazon has positioned itself to be the "one-stop shop" for what we want or need. Personally, I am a fan.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Increase existing client loyalty and focus on customer service. Also, make sure stores are plugged into their local communities.

John Crossman, President, Crossman & Company

There are a bunch of different aspects to this analysis. The short answer is, I don't think online shopping will ever completely replace "taking a trip to the store." Once the brick and mortar retailer has the consumer in its presence, absolute price is only one consideration and is often trumped by impulse buying, in-store displays, and other factors. Even if Amazon can preserve their price advantage, brick and mortar stores can counter by changing their mix and service offerings to fill in the areas the online retailer can never address (i.e. The Geek Squad).

But the other aspect of this is "How should the brick and mortar retailer price its online catalog?" Should catalog prices mimic the "home store" prices or should they be standalone prices only available from the online store? I could argue either way, and I think it will be the individual retailer's decision on how much they are willing to undercut their physical stores. Some of this can be prevented by having some products only available online but no matter what the decision the retailer is going to need an online presence.

All this really leads to a question about the analysis. I did not notice whether the price comparison was between online prices or included in-store. It is quite possible that brick and mortar retailers operating in a high/low mode would have better prices than Amazon during their promotion period.

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Bill Bittner, Principal, BWH Consulting

Online shopping represents competition for every retailer, from the smallest to the largest, whether it comes from Amazon or small, niche online sellers.

In many cases, online shopping offers the advantages of convenience and price. In this sense, it satisfies the rational concerns of shoppers.

But humans are not entirely rational beings. There's more going on inside of us than mere rational calculation. Our senses feed our emotions in mysterious ways. Many of us actually LIKE to go into stores!

This is the advantage that traditional retailers have over their online competition. The very best retailers offer their customers much more than mere rational fulfillment. Through a carefully crafted shopping experience, they engage customers in a stimulating and satisfying way, that can't be duplicated in front of a computer monitor or a smart phone.

The problem for many retailers, especially the larger national chains, is that by necessity (they're trading in commodities and near-commodities) they've had to emphasize the rational considerations of price and convenience. The challenge is to find ways to re-engage customers on more than just a rational level, to make shopping in their stores a more stimulating and satisfying experience, rather than just another trip to pick up whatever is on sale.

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Ted Hurlbut, Principal, Hurlbut & Associates

Retailers need to leverage the assets that they have--a physical presence and intimate knowledge of the customer. This will require a fundamental change in how they think about their business.

They need to answer 2 questions:

What can I do in my physical store that Amazon can't? and:
What do I know about my customers needs and wants that no one else does?

Analysis of the vast quantity of customer data is going to allow a retailer to serve the customer like no one else.

David Blakelock, Retail Consulting, EMC Consulting

Amazon's greatest strength is customer service! It may lure you in with price but it's service after the sale that really makes the difference. If you have ever had a problem with a product ordered from or through Amazon, you know what I mean.

Ed Dennis, president, Dennis Enterprises

Amazon is a platform, its competitors are retailers. Oddly enough, the only retailer looking at things the same way is Sears. They may not win but they have the right "Amazonian" mindset.

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Carol Spieckerman, President, newmarketbuilders

I presented on "The Amazonification of Walmart" at the IIR Shopper Insights conference in 2007, at "Doing Business in Bentonville" in 2010 and quite a few other venues before and since. This quite old news will continue to be new news for some time to come, as the online tsunami assaults the shores of bricks-and-mortar retailing.

However, bricks-and-mortar retailing will survive and thrive because people are not bits-and-clicks, but flesh-and-blood, part of the bricks-and-mortar world. In a recent RetailWire post I distinguished among three types of purchases: chore/habituated; surprise/delight; frustrating/necessity.

Bricks and mortar will always have the upper hand in the surprise/delight arena, because of the physical experience, including social. If they can ever get past their deeply engrained "pile it high and let it fly" mental DNA, they MAY wise-up about chore/habituated. The frustrating/necessity will always be handled best online, EXCEPT for urgent, immediate needs--a permanent advantage of bricks-and-mortar.

I remember seeing a sign in a clients office many years ago, "I refuse to have a battle of wits with an unarmed opponent." Using this meme, I would say that online retailers will NOT refuse to have a battle with unarmed (mentally) bricks-and-mortar retailers. And the proper response of bricks-and-mortar retailers is NOT better online operations themselves. That is a necessary, but not sufficient, condition for the growing online competition.

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Shopper Scientist LLC

Why do people shop at Amazon? Price, convenience and selection. Why do people shop at Best Buy? Price, selection, convenience, ability to touch and try products, and ability to have questions answered. Maybe some product mix is more appropriate for one format over another. Maybe some consumers prefer one format over another. Differentiation shopping experiences is critical for success in either case.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

Adapt or perish! Retailers of all types must be aware of and should be maximizing their efficiencies and competitive edge in order to gain both market share and profits. Anything less than this will only result in poor performance, poor profits and eventual business failure. The rules haven't changed, only the models. There are too many companies who are extremely inefficient and continue to plan by looking at past performance, instead of looking ahead to the future and flexing their strengths in order to overcome their weaknesses.

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Kai Clarke, President, Kowa Optimed, Inc.

Here's something to chew on:

SHLD is $42B growing at -5% and generates 85% of revenue from the US.

AMZN, the modern version of Sears, is $32B growing at 30% and generates 55% of revenue from the US.

Next year, AMZN will be larger than SHLD in total revenue.

Ah, but what about the US? Well, AMZN will pass SHLD domestic sales in 24 months.

If that doesn't cause you to soil your pants, not sure what will.

This is the new retail reality.

'retailecom'

Amazon's greatest strengths are ubiquity and customer intimacy. Most consumers know Amazon--and they expect Amazon to win on price. The one to three day lag in delivery, for most consumers shopping most categories, is acceptable. Ubiquity = convenience in this case.

The customer intimacy side of the equation is equally compelling. Programs like Amazon Prime and related item recommendations just make sense.

While most legacy bricks retailers can't compete with Amazon exclusively on price, they can still remain relevant. Linking the digital and in-store channels is a big opportunity for many retailers. Done right, the added convenience of local support + instant fulfillment may counter some of Amazon's cost advantage. And as many commenters have suggested, legacy bricks retailers can and should be more shopper-centric in how they interact with individual consumers. The data and loyalty programs are in place; they just need to be better leveraged.

Armen Najarian, Vice President, Corporate Marketing, DemandTec, an IBM Company

Over the last 10 years, regional mall owners have been doing all kinds of great things to improve their properties with entertainment (e.g. celebrity appearances, fashion shows, social media events, coupons) and high end restaurants to win increased traffic and thus new higher paying tenants.

At the same time, virtually every mall owner has completely ignored the growing debilitating effect of the Internet's online sales with statements like: "15% of not much is still not much."

Mall owners, in many cases, will continue to ignore the now obvious and hugely negative effects of online shoppers, but a few will at least begin to explore the 'Marketplace" option (essentially an Online Mall), while they still can.

1. Amazon's online sales continue to grow at 35% to 40% annually.

2. 40% of Amazon's sales are from Third Party Sellers on their "Marketplaces."

3. Walmart has declared they will surpass Amazon as an online retailer.

4. Walmart has begun their online "Project Titan" as an online "Marketplace" with Third Party Sellers.

5. eBay just spent $2.4 billion to buy GSI as their online "Marketplace" to rival Amazon and Walmart.

6. Virtually EVERY ONE of their MAJOR TENANTS are SCRAMBLING TO KEEP UP with Amazon, Walmart and eBay.

7. Collectively, online "Marketplaces" will supercharge the Internet's already burgeoning sales and profits beyond anything you've ever seen.

These "Marketplaces" are the malls' NEWEST competitors. What are they doing to protect themselves and their Bricks & Mortar properties against these Online sales "Marketplaces"?

Unfortunately, the answer is "Nothing."

Gail Nichols, Vice Chair & Co-founder, TheNowMall.com

Price, ease of shopping, selection are just a few of the advantages for Amazon. If B&M wants to compete, they better offer a deep online selection as well and be prepared to deliver to the customers residence within 5-7 days. Amazon will overtake the Walmarts of the world within 10 years....

'jfgr8ful'

What is amazing to me is the number of categories that are now being considered "digital goods"? When did books, movies, music, and games become digital not physical goods? Is pet food next? Mobile--even over PC web--is the most preferred shopping channel for "digital goods" for approximately 122 million consumers every month. Amazon's relentless focus on mobile (apps, kindle, tablet?) will certainly put further pressure on retailers.

Anne Frisbie, VP & Managing Director, North America, InMobi

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