Getting Lost in the Jungle: Amazon’s Role as a Frenemy with the Retail Industry
For many, the world of retail can often feel like a jungle. If you are a retailer wandering in, you might get lost or, even worse, consumed by a bigger predator that lurks behind the sprawling landscape.
“I grew up studying the Amazon jungle, it’s a dangerous place. There are predators, and all of the symbolisms,” said Bob Cole, owner of Philadelphia-based electronics retailer World Wide Stereo. “My relationship with Amazon is like the jungle. I grew up in the jungle so I don’t know any better. I know there are things that are trying to take me out, so I’m not afraid of the jungle.”
Cole, like many modern-day retailers, utilizes the e-commerce giant for its logistics and infrastructure, but its services are relatively new to the industry.
Jeff Bezos founded Amazon a short 22 years ago, but has seen it grow from a simple online bookseller into the premier e-commerce company dominating every industry today. The $107.1 billion in online sales that Amazon pulled in in 2015 nearly doubles that of the next nine companies who sold goods online—combined.
Amazon managed to reach these historic levels despite launching during the height of the dot-com era, which saw numerous companies like Pets.com, Geocities, eToys.com, and Webvan all bottom out after that bubble ultimately burst.
That consistent growth ultimately makes Amazon the biggest competitor for retailers big and small, leaving everyone, from industry giants like Walmart, Target and Best Buy to local independents, fighting for their scraps. As brick and mortar struggles to entice customers to shop in-store, a disruptive Amazon sees its online sales continue to surge.
“As it applies to retailers that are strictly competitors with Amazon, I would say Amazon is nothing short of being a terror for these retailers,” said Doug Stephens, a retail industry futurist, and author of the upcoming book, Reengineering Retail: The Future of Selling in a Post-Digital World. “If you look at the market capitalization of companies like Walmart, which used to be absolutely astonishing, they now take a back seat to Amazon.”
Despite its colloquial status as a money-making factory, the Amazon story is surprisingly humble. After the company went public in 1997, it consistently turned in annual reports that showed net profits in the red. Wall Street remained patient as the company promised the short-term losses were the result of major investments that would have long-term payoffs.
The true revenue driver for Amazon is its ability to occupy the same space as retailers while never committing to the traditional model. Its various other services, such as Amazon Web Services (AWS), Amazon Prime memberships, and the Amazon third-party Marketplace, have solidified both its rapid growth, and its spot at the top of the food chain.
“They are a formidable and significant competitor,” said Stephens. “Part of what makes them so dangerous is that they don’t think like a retailer. They think like an innovative company, a tech company, a data company. Yes, they happen to sell things, but they don’t think like a retailer.
“There’s no amount of conventional retail calculus you can use to fight back against Amazon because they don’t play by the same rules,” added Stephens.
AWS grew into a major cloud computing business that pulled in nearly $10 billion in 2015. Amazon’s roughly 65 million U.S. Prime members enjoy a plethora of benefits, and have proven over and over again to be among the most active shoppers on Amazon, spending four times as much per year as non-Prime members. They’re also incredibly loyal, renewing at an insanely high 91 percent after the first year—a number that only goes up (96 percent) after Year Two.
Now 15 years old, Amazon Marketplace allows other retailers to use Amazon’s services to reach an audience of millions of online shoppers. In 2015, around half of all products sold on Amazon were sold by third-party sellers.
It’s this same Marketplace, though, that breeds the most contention among retailers. True, by participating in the Amazon Marketplace, sellers get access to that massive audience, but there are certain rules that they must follow in order to actually succeed at playing the game.
For example, there’s the $1,500 fee for participating in the Amazon Marketplace and the requirement that sellers provide proof-of-purchase invoices—tactics designed to rid the marketplace of counterfeit dealers. But those measures also hinder the ability of small, legitimate retailers to participate.
“Amazon is complex,” said Stephens. “There are merchants that do extremely well with Amazon—they sell a tremendous amount of merchandise. But the problem with Amazon is that it is also tremendously predatory. So what is becoming apparent is they are obviously keeping track of things that are selling tremendously well on their website, and they’re doing a yeoman’s job of private labeling those very products that tend to do very well.”
World Wide Stereo’s Cole has seen these tactics work directly against his business.
“Three major brands of mine were taken away when Amazon went to the vendor and said, ‘If you gate these other sellers and sell directly to us, we’ll give you X,’ which could be points or promises of better velocity,” said Cole. “You have to be 100 percent aware of it all the time. I have to play a game—I can’t be too successful with a particular category.”
So why bend the knee? Cole said the decision wasn’t one that he made lightly. Rather, it was made out of necessity.
“They’re the dominant retailer in the country. It’s millions of dollars’ worth of business,” Cole said. “I would like to be [able to] say, ‘These guys are the anti-Christ’—which they are—and just not do business with them. But I can’t afford to do that. I mean, I could afford to do that if I wanted to lay off a whole bunch of people.”
The practice, Cole said, is not unlike what smaller retailers have had to face in the past with big-box stores. “If we do really well with a product specialist, Best Buy will go to that vendor,” he said. “And the Walmart model is even more extreme. And Amazon is beyond Walmart. They want to put all of the little guys out of business.”
But there’s a difference with Amazon in that they give the little guy an opportunity to carve out a piece of the pie by participating in their marketplace.
“You just have to know the rules,” Cole said. “And you have to not take anything personally.”
The House Always Wins
The real secret to Amazon in is in the scope of subsidiaries they own.
With nearly 40 companies falling under their corporate umbrella, “Amazon has companies in every category, in every walk of life,” Stephens said. “Just the sheer breadth of the company, at a glance, is breathtaking. The idea that Jeff Bezos is sitting down at a craps table and putting a chip on every square. A lot of them won’t pay off, but a lot of them pay off 100-to-1, and that’s the way he plays.”
No single retailer understands that more than Best Buy. During its FY 2016, the electronics retailer commanded around $39.5 billion in sales, a number that Amazon nearly matched ($30.4 billion) during just the second quarter of 2016, which included its annual Prime Day event.
While Best Buy’s sales have been trending downward over the last four years, Amazon has seen net revenue gains of at least $13 billion per year since 2010.
This also gave Amazon the opportunity to invest in the physical space, launching a crop of bookstores and their upcoming Amazon Go convenience store, a checkout-less grocery store that once again rethinks traditional retail.
“I think it’s important to realize that these stores are now just physical entry points leading to the Amazon ecosystem, and what Amazon knows, and frankly what other retailers know, too, is that having a physical presence in the market actually raises your e-commerce sales,” Stephens said. “This isn’t Amazon saying, ‘Hmm, e-commerce isn’t going the way we thought it would be; we better get into the physical store.’ It’s them saying, ‘Physical stores are a portal into the online ecosystem.’”
No More Excuses
This is the world that retailers live in now—one where they’re constantly having to look over their shoulders to see if Amazon is lurking, ready to pounce on their business. For owners like Cole, the day-to-day of his job has been impacted immensely by the existence of Bezos’ company. “I watch their screen almost as much as I watch my own—their dashboard as much as my dashboard,” he said.
And while playing the e-commerce marketplace game with Amazon adds a new element of stress to the job, Cole said, it also allows him to remain close to “the enemy.”
“Amazon, you know, you know who they are,” Cole said. “They’re like Russia or China, as opposed to being ISIS. There’s some element of it that’s just fun, trying to outsmart them, trying to outsmart the other people.”
What’s clearer than ever, though, is that Amazon has positioned itself as a disruptor of all industries for years to come. The next victim in their path could be the leading apparel store in the United States. When asked about the possibility of Amazon overtaking their spot at the top of the chain, Macy’s CEO Terry Lundgren scoffed at the idea, suggesting that Amazon will have a wake-up call when seasonal returns start pouring in. But that attitude, Stephens said, is “just another example of a retailer just assuming that Amazon is going to look at the paradigms of retail and treat them the same way.”
Fundamentally, that’s where retailers’ mindsets must change.
“The call out to every retailer right now is stop doing that,” Stephens said. “Stop saying, ‘Yeah, but.’ Yes Amazon is growing but… There’s no ‘but.’ The only ‘but’ is that you might not survive it if you keep excusing or dismissing the things that they are doing.”
Editor’s Note: World Wide Stereo’s Bob Cole wished to clarify some of the comments he made in the article. He submitted the following:
“I would like to clarify my quote near the end of the article calling Amazon “evil” and comparing them to some foreign powers. What I meant to say was, ‘to ignore Amazon is akin to President Reagan not recognizing China with their 1 billion people at the time.’ You just can’t do that. Amazon, like China are simply part of the landscape. You have to live with them or move on. Like the tiger in the jungle (Amazon), you can’t expect them not to want to eat you or yours if you give them the opportunity. That’s just retail, online or otherwise. Though World Wide Stereo is a very mature business of ~40 years, our online business grew up at the same time as Amazon’s. Using the jungle analogy, we grew up with them so we don’t really know anything else. They don’t scare us just like Walmart and Best Buy don’t. They keep us strong.
“Amazon is a formidable competitor but they are also collaborators and we have learned a lot from them. They strengthen the herd, keeping us all sharp in so many ways. As an example, many sellers are holding price online because when they don’t, Amazon drops their price to meet or beat them and it disrupts the whole marketplace. Like the Art of War instructs, I like keeping enemies close, but I wouldn’t consider Amazon an enemy in the truest sense of the word. The biggest problem with Amazon is when our vendors start selling directly on or to Amazon which competes with those of us who actually sell the product and built the brand. Yes it’s not fair but really, it’s opportunistic and not a good long term strategy.. Amazon basically fulfills, they don’t sell. People will lose interest.
“Amazon is fierce and very good at what they do. They have my respect. We have to be smarter and better to survive and flourish in the ecommerce jungle and they are at top of the food chain. But there is no whining in retail – or in the jungle. You just move on.”