Why does one group of retailers outperform the S&P 500 by 23% over the last 22 months, while a second group lags behind, beating the S&P by only 9% during a period of rapid escalation of retail stock prices? Jeff Bailey of Y-charts says that the critical difference is that the former group has relatively low exposure to Amazon. Jeff quotes work by William Blair & Co. analysts. Now that it has been positively quantified, what do you do if you are a retailer with a substantial overlap with what Amazon sells?
For retailers in Amazon’s cross-hairs, there really are two options: (1) find another business or (2) become a technology company. That is right: Retail is fast becoming a technology play. According to Census Bureau of the Department of Commerce, during the first quarter 2013 e-commerce increased 15.2 percent YOY while total retail sales increased only by 3.7 percent in the same period. While e-commerce was the original trigger in making retail a technology play (also the cause that Amazon exists!), the pressure has been up with smart phones, consumerization (of technology), and more recently the omni-channel trends led by an ever-more technology-savvy consumer.
1995: When Amazon went online, most of the conventional retailers continued to ignore the potential of (then unproven) online commerce resisting the change and giving the much-needed head-start to Amazon. I am sure, part of that complacency was due to the fact that Amazon was primarily an online bookstore, even though that changed relatively quickly when Amazon started zShops marketplace in 1999.
Today, Amazon offers millions of products spread over hundreds of retail categories through its marketplace competing head-on with most of the large department stores, apparel stores, and other retail. While other retailers struggle with forecasting the right trends and carry the risk of bringing unwanted merchandise every season, Amazon gets benefited from its thousands of merchants making those decisions and carrying that risk instead. That leaves Amazon to continue to perfect the technology and raise the bar on the three fronts that power Amazon retailing: (1) customer-facing innovations on their website, (2) one-stop service to their marketplace vendors from processing payments to actual fulfillment, and (3) enabling technology-driven fulfillment and logistics that ships your order within minutes and delivers it to your door within 2-days with their Prime service (and same-day in Seattle and soon at many more places if you are in any one of the metropolitan areas!).
So while conventional retailers ignored Amazon’s technology turf, Amazon has been busy building the capabilities of the conventional retailers fast and furious. Part of the reason Amazon does not oppose the internet sales tax any more is that their strategy is now much wider now than cost alone. In addition to being the cost-leader, their strategy now includes unlimited assortment (offered by their thousands of merchants), service (brokering a fair policy between the consumers and their marketplace merchants), and response (fulfillment/logistics through multitude of warehouses strategically located to cover most of their targeted consumers). Amazon has built processes, technology, and organizational capabilities that will allow it to continue competing effectively with conventional retail for years to come.
Do conventional retailers have a fair shot at being successful against this onslaught? I think technology can still level the playing field for retailers: The emerging omni-channel retailing may be the next wave that once again makes brick-and-mortar retail relevant. Of course, that is where I believe retailers need to become technology companies in addition to continuing their retail/merchant-focus. The convergence of stores and online channels presents the biggest opportunity for retailers in decades, however it is also a huge technology and organizational challenge to solve and only retailers that get it right will survive the next decade. Complete convergence of consumer-facing channels on the front and a similar convergence of operations on the back-end for managing demand, inventory, pricing, logistics, and fulfillment is what is required. This is as much a technology challenge as it is organizational.
Technologically, the biggest problem to solve is to create a single view across all channels, to create visibility of demand, supply, and profitability across channels, so that retailers can make intelligently informed decisions to manage demand. It is not a simple problem, but it can be solved and the retail pioneers are already at work creating processes and solutions to enable just such an integrated view. But the second challenge is bigger because it is organizational: Retailers need to create new organization structures that work across their current silos organized by channel. They need to think of a new set of metrics to define success in this new organization so that the new set of retail leaders look beyond their own personal fiefdoms to make the retailer successful and competitive. And there is no time to waste!
- Leaders in E-commerce
- Omni-Channel Omni-Complex
- Multi-channel Retailing: Are You Up To the Challenge?
- Is Technology Expendable?
© Vivek Sehgal, 2013, All Rights Reserved.