The most important rule in retail is being relevant to customers. Amazon strategy to be unprofitable for a long time, has made him the most valuable company in the world. Amazon power is in their relentless search for constant improvements. They use their size and cheap capital to constantly add parts to their business and they act like a flywheel, that took some time to start turning, but is now crashing everything in front of it. Like Jeff Bezos says – they are genuinely customer-centric, long-term oriented and they like to invent.
Amazon leadership principles:
- Customer obsession
- Invent and simplify
- Leaders are right, a lot
- Learn and be curious
- Hire and develop the best
- Insist on the highest standard
- Think big
- Bias for action
- Earn trust
- Dive deep
- Have backbone; disagree and commit
- Deliver results
Average retailer reinvests 1-2% of its revenue back to system, Amazon reinvest 6%. They use clever tax-planning to keep their money and were only profitable in 13 out of their 21 years.
Amazon is built on three pillars:
- Marketplace – they actually open their infrastructure to third-part sellers and by doing so achieve their claim of “earths biggest selection”. And not only that they take provision on sales, usually 15%, they also offer service called FBA (fulfilment by Amazon).
- Prime – Amazon membership scheme with 100 million users around the world. It is more than loyalty program, it is a life-style.
- AWS – Amazon Web Services – it is profitable part of business with margins around 25% and it is a market leader in public cloud.
Amazon is tech company first and retailer second. And they are looking for their entry into other industries, like media, finance.
Prime ecosystem is redefining loyalty for today’s modern shopper. Bezos describe it as “all-you-can-eat” express shipping. The Prime model is classic Amazon – customer-obsessed with a long-term view of success. Prime started as shipping added value for customer, but was improved with other perks, like digital content, exclusivity, it is actually access to life-style of convenience. They come for shipments and stay because of digital, that is how internal people describe customers of Prime.
When it comes to driving loyalty today, retailers must ditch the “more you shop, more you earn concept in favor of convenience, service and experience. With Prime, Amazon is spearheading this next evolution of loyalty – the battleground is quickly shifting from saving customers money to saving time, energy and effort. Retailers will drive loyalty through greater personalization and by delighting shoppers with instore perks. Loyalty card will become more digitally led. Price-oriented retailers, of course, are the exception here and will continue to drive loyalty by offering their shoppers exceptional value for money. In numbers Prime members spend 5x more than non-members, they do purchase 2,5x more and have 90% retention rate. Prime is also one of the areas where Amazon has growing potential, especially in international markets. It is possible that Amazon will earn 20 billion from Prime until 2020. But on other hand Prime also represent 60% of shipping costs to Amazon, so in order to utilize it properly, they will need to increase reach and price, but they can do that by continuing to offer great value to customer with additional digital upgrades.
Modern retail markets are overstored, there has been a titanic shift in shopping habits, mobile has turned retail on his head, people are spending less on stuff and more on experiences, and new, disruptive brick and mortal retailers – think fast fashion and discount grocery – are stealing share from established players. We are at the intersection of major technological, economic and societal change that are profoundly reshaping the retail sector.
Amazon is called killer of category killer, since it moved into categories that were once ruled by strong companies and effectively killed them. Category like music, books and similar. But it goes beyond that. Even big brick and mortal retailers found them self in problems, since it was clear that supermarket model with having everything customer wanted in one place, are slowly declining. Habits are changing so much, that people are actually going into shops multiple time a day. Convenience shopping is not anymore coupled with premium pricing. Being all things to all people is no longer an option. Actually, it is Amazon that is the closest to that approach because of its financial and logistic capabilities. For everyone else, it’s essential to have both a crystal-clear vision of your target customer and a truly differentiated proposition in order to stand out from the crowd.
Even spending patterns are changing. Consumers spend more on experience then on goods. With traveling, restaurants, leisure being main choices. Also, consumers are burdened with additional cost of investing into education more, especially millennium generation. Student debt in America is twice as high as it was 15 years ago. Another area of increased spending in healthcare.
Physical retail must evolve, but it will certainly not die. Pure e-commerce play will no longer be viable. Customer sees one retail and online to offline transition is coming. Amazon moving into brick and mortar and bringing technological changes and new approaches with it. Alibaba is looking at New Retail – the integration of online, offline, logistic and data across a single value chain. We are entering an omnichannel era. Today the majority of sales are digitally influenced.
Key drivers in convergence of physical and digital retail are mobile technologies. Retailers are looking for a way to offer customers compelling online offer with online “search, browse and discovery” phase. On the other hand, when customers are drawn into stores, they want to have same frictionless and personalized experience as in online world. Blurring lines with use of VR and AR is even more present today. When we talk about fulfillment, online and offline are also merging with customer buying products online and returning and replacing them inside stores. Return rate has grown due to online from 10% to 30%, in apparel even 40%. One area of improvement is click and collect model, with customers coming to shops to pick up orders. So online and offline retail are no longer mutually exclusive. The most successful retailers will be those that, while recognizing the urgency for digital investment, are able to simultaneously reconfigure their stores with the ultimate view that these are assets and not liabilities. Bricks and mortar stores will play major role in shaping the future of retail as a more convenient, connected and customer-dictated industry.
E-commerce is more and more acknowledging often-unreported costs like:
- Shipping and handling fees for free and fast shipping.
- Increased returns and restocking costs and loss of margin.
- Higher corporate costs to support e-commerce division.
- Additional on-line marketing expenses.
- Incremental distribution and warehousing cost because of piece picking.
- Deleveraged store base and diluted store labor.
- Increased cost due to omnichannel capabilities.
- Inventory management issues.
But shipping costs are not the only problem. Customer acquisition costs are also growing in online model. Since competition in online world is bigger and bigger, and Google and Facebook are adjusting their algorithms to better support their add-revenue streams, offline attraction to customers can be cheaper. Amazon moved into brick and mortal already in 2011 with their fulfillment lockers in 2015 they opened first offline bookstore and in 2017 they acquire Whole Foods. But as Bezos said, they are going into offline if they can make differentiation and so they are bringing online technologies into real world. And there is another benefit of moving into offline, that is better handling of returns, which is one of the main pain points of online today.
Three categories are still slow in moving into online world: food, fashion and furniture. According to Credit Suisse there are 13 independent factors that relate to online grocery adoption and profitability:
- Broadband penetration
- Tablet and smartphone penetration
- Online share of retail spends
- Amazon penetration
- Startup/independent culture
- Urban driving infrastructure
- Metropolitan areas with more than 1 million inhabitants (conducive to in-store picking model)
- Metropolitan areas with more than 5 million inhabitants (conductive to centralized distribution)
- Car ownership
- Prevalence of double-income households
- Density of supermarket space
- Inclement seasonal weather
Amazon needs grocery stores to create halo effect for the online business through click & collect and same-day delivery, again reinforcing the need for seamless shopping experience across channels. Customer value proposition for online grocery is exploding: customers benefit from improved mobile phone interfaces, single sign-on, greater personalization and site navigation, automated lists, recipe inspiration, delivery passes, voice-activated shopping, simplified replenishments, same-day delivery and alternatives to home delivery such as click & collect or automated lockers.
Webvan was a company that tried and failed grocery online shopping first. But it provided some healthy feedback about how not to get into this business for others. Amazon Fresh concept was built on this, started already in 2007 and run by some people from Webvan. But fresh online shopping is big challenge and economy of this model is still hard to achieve in proper way and to be accepted by customers. So, Amazon also offer non-fresh products, mainly thru subscribe & save program.
Some of new customer touch-points that Amazon introduced, both physical and digital:
- Dash Buttons: wi-fi connected one-click recording buttons place in shoppers’ homes.
- Dash replenishment service: device-driven replenishment scheme.
- Alexa: AI-powered virtual assistant.
- Dash Wand: handheld device that allows for barcode scanning and voice-activated reordering,
- Dash Virtual Buttons: one-click recording available on Amazon’s app and site.
Probably the most important introduction Amazon made into grocery online and offline market was his service Prime Now – almost 20.000 SKU across both grocery and general merchandise category, delivered in as short a window as one to two hours. With time becoming biggest commodity for a lot of people, Amazon moved also other retailers to try to find solutions to offer not only proper product choice, but also convenience. Since some of them decided to do it through Amazon infrastructure, it is a good question for Amazon, where it will move, to be supermarket or market. Since buying Whole Food is a move into supermarket area, on the other hand if they really want to utilize infrastructure, they still need to partner with others.
16 June 2017 was a day retail changed forever. Amazon announce that they acquire Whole Foods Market and Walmart announce that it plans to make fourth acquisition in e-commerce in less than a year. Before Amazon was quietly testing two new formats Amazon Go and Amazon Fresh Pickup. Amazon end-game for this acquisition is to use Prime as main incentive for customers to go into stores. They will use frequency of grocery shopping to additionally get data from customers and lock them even tighter to whole Amazon portfolio. They will use technology to decrease instore friction in customer experience and will work hard to bring all new approaches, with special focus on automation of replenishment for some products and with movement of some category outside physical stores. Amazon pace of innovation may be relentless, but when it comes to implementation Amazon is notoriously methodical. They are testing concepts with patience and discarding the ones that don’t bring enough customer value. These changes brought movements in retail, since companies like Ocado and Instacart tried to use momentum to attract other retailers that didn’t have proper e-commerce infrastructure. What become threat to many was opportunity for others. Kroger acquire small stake in Ocado in order to prepare itself for e-commerce ready models. Some consolidation and merger of big players happened. Tesco and Carrefour announce joint buying agreement in 2018. Tesco dropped their Tesco Direct service since it was unable to compete with Amazon. Some of the retailer actually choose to cooperate with Amazon on their platform and so risking that Amazon will use their customer data for their own purposes. Although Amazon integration of Whole Foods is not without problems on a long run, they need to create coherent grocery strategy and probably they will move from Whole Food brand to Prime as their strongest value proposition.
Amazon has been quietly building their own brand of private label. They are using size and digital landscape to do smart promotions. In USA private brand wasn’t as strong as in Europe, where private label can reach up to 50% sometimes. America loved brands, they moved to private label only in recessions, but in 2009 after the recession things changes. Buying habits change. People stayed with smart buying, mobile intrusion and information accessibility enabled shoppers with price transparency and ability to check every products pricing. Meanwhile, a combination of media fragmentation and supermarket consolidation resulted in a shift in power away from national brands. Also, Millennials came of age and their non-brand approach enabled retailer to offer them high margin categories like organics and meal kits. Amazon is using digital landscape to get advertising revenue and promote their own brand and the most important tool they have in hand is customers reviews. Another category where Amazon is building their presence quickly and has introduced several private labels is fashion. They are already strong in transactional item like socks and T-shirts but will fight for fashion part of business too.
Technology is creating “on-my-terms” shopper. Digitalization of society is bringing additional dimensions of fun experience and informed consumers in retail. Convenience, immediacy, transparency and relevancy are demanded from consumers. Amazon continues to use technology development in artificial intelligence and voice as two strong areas for their differentiation. As they wrote in 2010 annual report, they use high-performance transaction systems, complex rendering and object caching, workflow and queuing systems, business intelligence and data analytics, machine learning and pattern recognition, neural networks and probalistic decision making and other techniques and they upgrade them with customer centricity. With AWS they first cover their demand for robust retail infrastructure and then make it into business, a very profitable one. Now three pillars AWS as a cost base, Prime for customer acquisition and retention strategy and sales growth based on their own sale and sale of partners on their infrastructure, were ready.
Technology is the driver of Amazon quest for frictionless shopping. Technology is doing that by:
- Ubiquitous connectivity;
- pervasive interfaces and
- autonomous computing.
Another innovation that actually help Amazon removed friction in shopping was one-click order, where Amazon actually got patent in 1999 for 1-click technology. Today they actually upgraded it with no-click technology with firs Dash Buttons inside consumers home for reordering and now with Dash Wand, devices to be used for voice lead, barcode scanning ordering.
Some of the innovations like AWS, Prime, Prime Now, Prime Day, its marketplace and merchant services, 1-click patent, Pay with Amazon, Dash Button and Dash Wand have from new shopping experience to market. They included one-hour delivery and automated replenishment. But voice assistance and AI related improvements really put Amazon as frontrunner of development. It was AI that helped Amazon with their supply infrastructure, it improved power of their search and recommendation engines, that are probably the strongest tools in Amazon portfolio. With help of massive computing power from their AWS in data crunching activities Amazon can simply utilize their investment into autonomous computing.
One area where they are using their AI abilities is their search and recommendation engines. They have matched it with language and voice recognition and develop it into powerful tool. Second area is their supply chain, that is nicely represented in their Amazon Go concept.
Even though Amazon use of AI has brought them advantage and move other retailers to follow and start to adjust their business models, you need to have a clear picture about what AI can do now. It cannot predict future yet, it analyses reams and reams of intricate behavioral and circumstantial data to identify patterns and trends. So offline retailers if they want to compete with online monsters like Amazon, should also start treating data as their biggest assets.
Merging online with offline as next step in development of retail also brought so called ROBO approach. Research online and buy offline, since consumers want to check options online but still feel and look offline before buying. Amazon move into physical space is not so much for revenue generation as it is to create instore, mobile-enabled view of customer that become cornerstone of Amazon customer-centric proposition. They wanted to personalize every customer experience also offline. Marketer see now research phase of shopping experience as ZMOT – zero moment of truth. With search functions like near location, retailers can gain even more relevant data and improve customer experience.
Amazon may not yet have an extensive store network to match the physical network of its global grocery and general merchandise rivals, but in spite of Google’s efforts to level the playing field with features like Local Inventory Ads (that is payable for retailers) and SWIS, Amazon is still dominant when it comes to product search. One of important elements of search is visual search capabilities. Coupled with augmented reality they could bring some additional enhancement to marketing and merchandising both during online customer journey or offline.
Introducing Wi-Fi in stores is necessary for customer digital acquisition. Some customers are using if for internal communication with customers app. Some use Phillips VLC (visual lights communication) to send imbedded data directly to customer camera. Wi-fi can also be used to provide additional data for instore customer behavior. One of the technologies that can use inside wi-fi network of stores is ESL – electronic shelf labels. Research showed that managing label changes and signage can represent 1-4.99 percent of retailer revenue.
“While many established store-based retailers are facing the reality of slowing sales and being over spaced, other digital-first player have recognized the critical importance of gaining a physical presence. Stores help support the omnichannel proposition by providing extra flexibility in terms of order collection, returns, service and a physical environment to showcase the brand. So, retailers should bring pervasive tech interfaces, ubiquitous connectivity, and autonomous computing of digital and mobile to bear so the store can support every stage of the shopping journey, off- and online, from browse and search through to discovery and payments phases in ways that match the speed, accessibility and availability of online.
Stores for digital players play a different role from the primary role of the traditional store simply selling products. We believe that these players, with their strong skills and capabilities in technology, are the ones that will really push forward the vision of the digitally enabled and automated store of the future to enhance its role as a powerful, tangible engagement point within their wider customer ecosystems.”
Store of the future will offer digitally assisted sellers and probably they will offer voice-based customer inside store experience. Some of the retailers are testing this kind of service already, some of them even on Alexa platform.
Store of the future will need to move from products and transactions. Instead retailers must tap into community and leisure. Offering experience and presenting stores like social centers in consumers life. Since shopping with Amazon is still very utilitarian experience. And if retailers are looking for WACD – what Amazon can’t do – going beyond utilitarian is a way forward. Urbanization will also change how space and time are used. One of trends that could be seen is growth of co-working spaces and shrinking retail space can serve as potential expansion of co-working spaces bringing also additional people and potential upgrade of services to retail areas that could otherwise have problems with occupancy.
Retailers will have to measure success of physical stores alongside e-commerce, with KPIs such as brand impression, digital purchase intent, percentage of online orders fulfilled by the store, inspiration per square meter, return on friction, convenience of associates and customer experience.
But having in mind all customer-oriented activities, one of the biggest challenges is still fight for winning the final mile logistic. With click & collect approach either inside stores or through lockers in urban area, you are able to solve some specific last-mile fulfillment issues like theft, missed delivery or need for re-delivery.
When you are looking at complexity of last mile delivery, we can calculate it with multiplication of different stages option: order (5) x fulfill (8) x deliver (7) x receive (9) = 2.520
- Scanned or selected by customer instore
- Mobile – site/app
- Handsfree – voice
- Pick & pack (fulfill)
- Customer instore
- Instore by retailer for collection and shipping
- Dark store
- Hybrid store
- Centralized – FC/ Hybrid DC
- Wholesaler manufacturer
- Ship (deliver – last mile)
- Customer instore
- 3rdParty, on demand “drop ship”
- National/global Couriers
- National Parcel Post (local or express)
- Retailer Own – transportation fleet
- Retailer Own – store employees deliver
- Cross-border Facilitator
- Fulfill (Receive)
- Customer instore
- Instore click & collect desk
- Proximity retail
- Post office
- Non-store/public space
Amazon relentless fight for last mile success is represented by their fight for next-day or sometimes even within an hour delivery. Its AWS capabilities are cornerstone of this fulfillment system with their massive computing power and AI usage.
One of development of retail lead to growth of subscription business models and recurring revenue streams. If you want to be successful in subscription business, you need to find balance for retailer and consumer to both be happy.
Amazon last-mile infrastructure is more labor oriented, with more focus on pickers and by building smaller pick-up locations around urban areas, they are able to set up location within 20 miles of more than half Americans. For delivery they use Flex program and independent contractors.
They also build strong data center infrastructure to support their internal technology demand and to serve as base for their AWS business offering.
Drones are the next line in war to win last-mile logistic market.
For retailers to co-exist with Amazon they need to stick with these five basic principles:
- Curate: don’t try to out-Amazon Amazon
- Differentiate: go (way) beyond selling
- Innovate: think of your stores as assets and not liabilities
- Don’t go it alone
- Move quickly
Some of retailers will definitively disappear along the way, the ones that stay in digital transformation will be those who follow customers. But time is of the essence, since there will be no second chance for retailers that fail to adapt. As for Amazon, they will find them self under more scrutiny from governments, but as they are technology first company, their potential for service growth (AWS and ad revenue) is strong. Their challenge in retail will most likely come from other side of Pacific, from Asia.
In this book on page 183