Amazon. To the customer the word is synonymous with low prices, unlimited assortment, and fast and free shipping. To retailers it is a constant reminder that the retail landscape has been forever changed and they need to adopt to keep pace or be left on the outside looking in.
But can it also stand for opportunity? An opportunity for retailers to redefine and reimagine their organizations to compete in today’s customer-centric environment. Can it be a rallying call? A mantra of sorts for retailers to remind themselves that while the old way of doing business is gone, it should not be forgotten. And that by embracing their strengths and fortifying their weaknesses they can survive and thrive in the modern marketplace.
The Game Has Changed
The meteoric rise of Amazon over the past 20 years from dotcom startup to e-commerce juggernaut has been well documented. Thanks to a dedication to a unique customer experience and a willingness to take big gambles and develop and implement disruptive technology, Amazon has solidified its position as the undisputed leader in the e-commerce space.
In fact, over the past 12 months Amazon has racked up more than $94 billion in online sales, which is nearly $40 billion more than the next nine retailers combined, according to data from eMarketer. While some retailers might be content to sit back and watch this river of cash flow in, Amazon knows the key to its success is remaining on the cutting-edge in both experience and technology.
“Amazon is fundamentally a technology company and retailers are routinely being asked to be technology companies,” says Lila Snyder, EVP and president, global e-commerce, Pitney Bowes. “But none of what retailers had to do before has gone away: merchandising, brand management, store ops, consumer experience, etc.”
The key to Amazon’s market-leading position is its ability to deliver a differentiated customer experience that is built around on-trend assortment, value, and lightning-fast fulfillment. To provide these three critical differentiators Amazon invests in its machine learning and artificial intelligence capabilities to help it anticipate demand and power its merchandising and supply-chain solutions. Unfortunately for the rest of the industry, the e-commerce leader is light years ahead of the competition in these next-gen proficiencies.
“The dirty secret in retail boardrooms is that retailers are still making decisions in spreadsheets and based on gut feel,” says former Amazon executive and Boomerang Commerce CEO Guru Hariharan. “If you contrast that with Amazon who is relentless about using technology and machine learning and setting it up for scale the situation is pretty stark.”
Retailers are not starved for data — they are collecting it at every turn — but many have yet to figure out how to best turn that flood of data into valuable insight. And how to put that insight into action to power their decision making and operational efficiencies. Until they do many will be
playing catchup with Amazon instead of charting their own course.
The Power of the Marketplace
Amazon’s greatest weapon might well be its third-party seller marketplace. It allows the retailer to offer an endless-aisle experience without incurring the associated inventory costs. Not only does the marketplace increase Amazon’s assortment, it is a major source of income and a powerful resource that can be used to syphon market share from the competition.
For holiday 2016 Amazon shipped 50% more items for its third-party vendors through its Fulfillment by Amazon service — and more than two billion throughout 2016. It has been reported that nearly half of its revenue has been generated through the marketplace, making the service not only a competitive advantage but a financial windfall.
“2016 was a record-breaking year in sales worldwide for sellers on Amazon,” says Peter Faricy, VP, Amazon Marketplace. “Sellers are choosing Amazon because we help them build and grow their businesses.”
With so much money up for grabs it is no wonder that traditional retailers like Best Buy,
Sears and Walmart have gotten in on the act, opening up their own third-party sales channels. Walmart, who has been making strides in its ongoing battle with Amazon for e-commerce supremacy, paid over $3 billion to acquire Jet.com last year primarily to
expand the reach and power of its
“We look at marketplaces as the new retail battle ground,” says Jenn Markey, VP marketing, 360pi. “Traditional retailers really need to figure out how to leverage the marketplace concept. And how to use them for competitive information. You can learn an awful lot on what products are trending by looking at what is listed on marketplaces. This is a relatively untapped area for competitive intelligence that most retailers would be wise to look into.”
In addition to the massive amounts of revenue and business intelligence Amazon collects through its marketplace there is another key advantage of the service: margin protection. Like most retailers, Amazon makes its greatest margin on new and exciting products that are unique. As a category matures, however, competition increases, prices are adjusted and margin reduces. When this price adjustment occurs Amazon begins to transfer many of those products to marketplace sellers, unloading lesser margin items and focusing its direct sales on higher profit SKUs.
“We have studied this and as a category matures Amazon begins to transfer more and more of those things to the marketplace,” Markey says. “For example, Amazon carries approximately 64 million products in the home and kitchen category. That number stays relatively static. But over the past year marketplace sellers have increased their offerings by 54% in the category while Amazon itself decreased its assortment by 24%.”
If You Can’t Beat Them, Join Them
The runaway success of Amazon’s marketplace has not gone unnoticed by the competition ― especially when their products are offered by Amazon’s third-party sellers at price points
lower than their own.
The Art of Shaving is a specialty retailer that sells male shaving and grooming products. Its assortment is tailored to its clientele and its high-end shaving supplies were supposed to be unique to the brand, but they began to be offered by third-party sellers on Amazon’s marketplace. Rather than compete with Amazon and lose vital sales revenue in the process, The Art of Shaving decided to partner with the e-commerce giant instead.
“You almost have to go to Amazon,” says Ralph Niebles, VP, IT, The Art of Shaving. “If our product is up there and it is competing against us we might as well just own it ourselves. When you find your product on Amazon sometimes it is deeply discounted. By partnering with Amazon we are able to control pricing and eliminate the third-party competition.”
While retailers like The Art of Shaving are joining forces with Amazon to protect their product line, others are building unique assortments specifically for the marketplace. Carter’s designed its Simple Joy line to be sold exclusively on Amazon. It’s the retailer’s first product line that was designed solely for the digital experience and the Amazon prime customer.
Although Carter’s is on a streak of 28 years of consecutive sales growth it has not been immune to the downturn many mall-based retailers have endured. The loss of foot traffic in stores has prompting the retailer to make a greater commitment to not only its own e-commerce offerings, but its partnership with Amazon.
“Our goal is to grow share and we think that being a partner with Amazon is an important thing for the company,” says Michael Casey, chairman and CEO, Carter’s. “We’ve modeled this new business after the successful launches of our exclusive brands developed for Target and Walmart. With this launch, we believe Carter’s has strengthened its position as the largest supplier of young children’s apparel.”
Leverage Your Assets
While partnering with Amazon is an effective strategy to bolster the bottom line and protect margin, competing with the online giant is still the goal. Traditional retailers have a vital asset at their disposal that can help level the playing field and
allow them to meet shopper demand:
Amazon’s ability to quickly and affordably fulfill orders has forever changed the retail landscape, and left traditional retailers scrambling for ways to match the pure-play’s supply-chain prowess. By leveraging their physical footprint as mini distribution centers, omnichannel retailers can meet shopper demand closer to need and lessen the last mile of fulfillment.
“With Amazon you are competing on cost and speed,” says Snyder. “The best way to do both is to get the product closer to the consumer. Amazon has done it at scale with their fulfillment network and retailers can replicate it but it requires a different way of working. Order management, warehouse management, inventory visibility and store operations all have to be working together seamlessly. Many retailers are doing ship-from-store now, but not yet in an optimized way.”
Thirty-three percent of retailers currently have ship-from-store capabilities, with another 11% planning to offer the service in the next 12 months, according to RIS News’ “14th Annual Store Systems Study.” While ship-from-store can potentially level the playing field it requires an intricate coordination of previously disparate systems and a real-time, accurate view of inventory that many retailers have yet to master.
“In order to seamlessly fulfill from the store retailers need to be sure they have the product in stock and know where it is,” says Tom Bianculli, CTO, Zebra “Typically inventory accuracy at the store level is in the 60% to 70% range. Compare that to a warehouse where they have 99% inventory accuracy and the challenge is clear.”
While the average retailer does not yet have the item-level visibility required to fulfill from the store at scale, new advancements in inventory tracking thanks to RFID coupled with unified commerce systems is making near 100% inventory visibility within reach. Retailers are investing heavily in the space, with 46% naming inventory visibility a top store priority for 2017, according to the RIS News report.
“Three years ago the idea of fulfilling an e-commerce order from a store wasn’t really an option,” Bianculli says. “Disparate systems, lack of inventory accuracy and logistical issues made it impossible. Fast forward to today and we have gone from not plausible to happening. Some people skinned their knees trying to do it, but now it has become a core strategy of almost every brick-and-mortar retailer that we speak to. They are all talking about how to drive their inventory accuracy up to a level that allows them to consistently deliver from the store and meet shopper expectations.”
In addition to ship-from-store, many retailers are also deploying buy-online, pickup in-store. The service allows retailers to meet shoppers need-it-now demands while eliminating the last-mile fulfillment costs that slice into profitability.
In April, Walmart launched a discount program on a select assortment of its online-only items that customers can purchase and receive preferential pricing if they pick the product up in-store. At launch around 10,000 SKUs were available for discounted in-store pick-up, but that number is expected to grow to more than a million products by the end of June.
“We’re creating price transparency to empower customers to shop smarter and choose what’s best for them,” says Marc Lore, president and CEO, Walmart U.S. By leveraging their fleet of trucks to ship product directly from fulfillment centers to its 4,700 stores Walmart can greatly reduce its shipping costs. “This means, quite simply, it costs less for us to ship to stores. So, our customers should share in those savings.”
Building the Experience
Amazon has conditioned customers to find what they need and quickly and easily have it delivered for free in as little as a day — or even hours in some markets. While deep-pocketed retailers are attempting to match Amazon’s fulfillment advantage, others are focusing on building a differentiated experience to carve out their piece of the market. In fact, 95% of retailers believe the in-store experience can differentiate their brand from online retailers, according to RIS/EKN’s “Third Annual Customer Engagement Study.”
It comes down to browse or buy. Those shoppers that know exactly what they are looking for will likely continue to make Amazon their retailer of choice. It is simply too easy to type in size 32x32 Dockers and place an order in a matter of seconds. However, if a customer is simply looking for a pair of pants, and doesn’t know the brand or style that will best fit their needs they are more likely to shop outside of Amazon.
To capture those browsing customers retailers need to ensure their assortment is tailored to their core shopper base and the store experience is seamless and inviting. As part of its Greatness Agenda — its stated goal to become the nation’s most engaging retailer — Kohl’s is tailoring its assortments to meet local demand while simultaneously reducing inventory levels.
Currently the retailer’s localization efforts are impacting about 85% of its assortment and is having a positive impact on sales. The tailored approach to its in-store inventory is designed to draw shoppers into the store to hopefully find and purchase items that are unique. Kohl’s localization efforts have the added benefit of lowering the retailer’s inventory commitment at the store level, which is key as the brand focuses on smaller footprint locations.
“The way they’re going to be smaller is to use technology to enable process inside the store more efficiently and fulfillment inside the store more efficiently,” says Kohl’s CEO Kevin Mansell. “And use our speed initiative and our sourcing strategies and our localization initiatives to be able to make better decisions on which brands and which categories are emphasized more in a smaller footprint. We’re really early here, last year was sort of the beginning, but this is a permanent long-term strategy for us to improve speed to market on our sourcing and technology to enable better utilization of our inventory across the whole portfolio.”
Another key tactic to drive traffic into stores and away from online rivals is providing a differentiated in-store experience, an experience that cannot be replicated online. ULTA for example has a thriving in-store salon business that draws shoppers into the store and helped the cosmetics retailer grow in-store comps by 13.4% in 2016.
“We continue to evolve our marketing strategy by utilizing our CRM and loyalty programs to simplify offers to attract new guests to the salon, while still driving great value and great experience,” says ULTA CEO Mary Dillon.
Whether its tailored assortments, unique services, highly informed associates or unique and exciting digital enhancements, retailers need to up their in-store game to make their physical locations
Amazon has clearly had an indelible impact on shoppers’ expectations. Consumers now expect fast, easy and convenient ways to shop and are making purchasing decisions based on retailers’ abilities to provide these critical capabilities.
To compete with the online goliath, omnichannel retailers must concentrate on what they do best and not fall into the trap of trying to outdo Amazon — a losing proposition if there ever was one. While fast, free shipping might be out of reach for many retailers, they can differentiate with an engaging experience, but unfortunately that will only take retailers so far. There is still a level of service retailers have to meet to survive today.
“Amazon has raised the bar on certain elements of customer service and you can’t be too far behind,” says Snyder. “Once the service level gap gets too wide between Amazon and the competition that is when customers will say I love the experience but it is not worth it.”
While the word Amazon has become synonymous with easy shopping there is still plenty of opportunity for savvy retailers to position themselves as worthwhile experience-based options. By taking a few pages from Amazon’s playbook and leveraging their brick-and-mortar assets, omnichannel retailers can contend in the Amazon Age and help shape the future of retail.