Amazon’s $400 Billion Supply Chain Business

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Amazon’s $400 Billion Supply Chain Business

By Leela Rao-Kataria - 07/05/2016
Open any news site and you will see bleak outlook for many fashion and apparel companies.  Recent headlines include:  “Soft Sales at Uniqlo Hurt Fast Retailing Profit;” “Old Navy Downward Spiral Continues;” “American Apparel Announces More Lay-offs;” “PacSun files Chapter 11 Bankruptcy;” and “Victoria’s Secret is Cutting 200 Jobs as Part of Brand Restructuring.”  The average growth in retail is 2%, yet some companies are growing at 20-30%. It’s reasonable to assume there will be casualties in the retail landscape. 

What’s happening in the marketplace?
We are seeing a decline in physical foot store traffic. According to the Robin Report, declines have been steady for 17 months, with the last 6 months showing double digit decline, cannibalized by mobile and ecommerce.  We’re seeing a decline in department stores and chain and discount stores.  Many retailers are closing underperforming stores and making the remaining fleet more inviting and engaging for the customer.  The alternative is to better utilize store space like Target is doing.  Target recently announced it would increase the number of physical US stores that it uses as “mini warehouses” to fulfill online orders. CurrentlyTarget’s staff at 1,800 stores pick products sold online from the stores’ backroom inventory and pack them for delivery. Target CEO Brian Cornell said “it does add a level of complexity to the business” but understands this is necessary to accommodate Target’s ‘guest’ experience. 

Evolve with Consumers or Fall Out of Style
Changes in retail operations are driven by change in consumer behavior. There’s an increased rate of showrooming and comparison shopping. A plethora of apps like ShopSavvy and BuyVia were created just to help consumers get the cheapest priced product.  Think about it.  When was the last time that you saw something you liked, and purchased it without looking up product information, and checking on amazon to see what the price was there?  Probably about the same time you were deciding whether smart phones were really worth buying. 

This applies to advertising as well.  Traditional retailers leveraged TV commercials and magazines to drive emotional resonance with customers.  Seeing your favorite celebrity sporting a new jacket might have been enough to send you to the mall; now you’re more interested in seeing what your peers are wearing via social media and watching ads consumed via digital means like Facebook and Google.

The introduction of omnichannel brought greater ease of shopping from the comfort of one’s own home, a luxury turned necessity by demanding work schedules and active social lives.  The result is:

-More people shopping online or from their mobile phones and tablets from any location

-Strong preference for speed leveraging Amazon Prime or retailers that offer free and/or expedited shipping

-Curated subscription models  that reduce time and energy required to shop

-Personalization achieved on a whole new level either via product customization where the customer can influence product design, or via apps that match products to consumers’ sensibilities (like many cosmetic companies are doing to match makeup to skin tone, etc.)
It’s all about the customer. Those who find ways to better service consumers are winning.

Fierce Competition from an Industry Outsider
Retailers face a major threat from someone they never saw coming just five years ago: the behemoth Amazon. Amazon is forecast to overtake Macy’s as the #1 retailer in the United States by next year.  Amazon is looking to aggressively grow its fashion and apparel business (valued at $16 billion last year) to a whopping $52 billion by 2020, according to Scott Galloway, CEO and Founder of L2.  It was recently announced that Amazon launched seven private label brands and is encouraging other retailers to join its platform with promises not to undercut the retail price laid out by brands and retailers.  The upside of a retailer includes greater ease of buying and exchanges, and Prime offers free 2-day shipping and free returns. 

In addition, Amazon’s mastery of data science can help brands target shoppers via data mining.  However, the downside for luxury retailers is the cheaper look and feel they would have to adopt if they housed skus on Amazon’s mass platform.  Retailers who are already on-board include Calvin Klein, Kate Spade, Lacoste, Levi’s, and Nicole Miller.  Other big brands like Nike, Tory Burch and Rag & Bone have declined offers to sell their products on Amazon. 

Amazon continues to get stronger as consumers migrate towards e-commerce. From November to December of 2015, 42.7% of US online sales occurred on Amazon.  The retailer not only accounted for 51% of ecommerce growth in the US, but 24% of all growth across the US retail market.[1]  Amazon has developed a competitive advantage that enables it to better serve consumers in ways others cannot. And now its latest move has been taking over the supply chain world by storm. 

In 2013, amazon began a full-scale launch to construct its own supply chain infrastructure, enabling full visibility and ownership from production to final mile delivery.  “A successful move into and execution of Global Supply Chain by Amazon could create an entirely new $400 billion business for the world's largest e-commerce site,” claims Robert W. Baird analyst Colin Sebastian, one of many analysts who cite this number as the value of Amazon’s supply chain opportunity.

How do fashion and apparel retailers compete?
If you can’t beat them, join them.  What makes Amazon invincible is its ability to constantly disrupt business using technology innovations.  Retailers who are transforming their models and leveraging their core competencies and brand DNA are succeeding.  Take the Home Depot for example, whose strategy is to focus on specific categories in which they excel.  They are successful in home improvement and construction, where products tend to be large and heavy—a category in which Amazon isn’t competing.  In the company’s last earnings call, it reported that its online business had grown over 25% from prior year, consistent with Home Depot’s investment in technology infrastructure to support omnichannel fulfillment. 

Other retail winners are partaking in digital supply chain transformation to get ahead.  Forbes just cited Zara as a “winner through supply chain.”  Its mastery of online mechanisms to support back end fulfillment with a near-shoring business model is creating excellent results for the company with both sales and profits up by 15% at a time when most European competitors are in a downward slump.  Denim wholesaler and retailer Lucky Brand recently deployed five technology platforms within one year, using cloud-based technology to enable business transformation.  The greater inventory visibility is enabling next level consumer experience, starting with store expansions that utilized RFID technology and iPad selling.    

Inevitably, every fashion winner is playing to its own core competency, one that Amazon cannot touch.   Strategies tend to incorporate: connected systems, seamless collaboration, inventory fulfillment, and omnichannel capability.  Instead of being at the mercy of technology disruptions, retailers need to learn to harness and deploy them, if they plan to stay ahead of the competition and create true value in the marketplace.

-Leela Rao-Kataria, Retail Marketing Manager at GT Nexus, an Infor company


[1] Galloway, S. “Gang of Four”.  DLD Conference, January 18, 2016.  Web access:  https://www.youtube.com/watch?v=jfjg0kGQFBY