Amazon and the rise/shift in retail experience

It’s a been a minute since I last wrote but, recently we were given a case study on where could Amazon be headed under Andrew Jassy’s leadership and how does it affect traditional retailers , and I thought writing would be a good way to condense all the thoughts that I had. The premise of the case-study is the growth Amazon has seen in different products and services they offer since its inception in 1995. Today Amazon has overshadowed its competitors in the e-commerce space by capturing ~38% of the market share and 4.6% of the US retail space (offline + online). Though what becomes interesting to note here is that Amazon itself is trying to increase its offline presence, which was evident through the acquisition of Whole Foods in 2017, but also that a presence of ~5% in the US retail space does leave a lot of room for expansion. But then what does this mean for traditional retailers and how would retail experience change under the rise of Amazon?

Before jumping into any kind of inferences, breaking down the revenue into difference segment would give a clearer picture of what is the most profitable segment for the company and where is it looking to invest more for better future returns.

Business SegmentRevenue% share
Online Stores$163 B50.62%
Third-party selling services$63 B19.57%
Amazon Web Services$40 B12.42%
Subscription services$22 B6.83%
Physical stores$17 B5.28%
Other$17 B5.28%
Total Revenue$322 billion100.00%

Amazon’s Revenue 19-20

The first one in the above segment is online stores which accounts for more than 50% of the company’s overall revenue. This massive share which is accounted for by the small and medium scale businesses (SMB) grew from 3% in 2000 to 58% by 2019. According the 2019 shareholder report the no. of businesses surpassing 100,000 dollars on amazon has crossed 200,000 from 140,000 in 2017. This looks like a big win for SMB’s, but the larger picture shows how it benefits amazon. As the revenue for the SMB’s increases , so does their dependency for visibility on an e-commerce platform like Amazon and that they may choose to focus exclusively on this market place as opposed to their own sites. Then the report also mentioned that by using Fulfillment by Amazon, the sellers saw their exports double because the efficient logistics that Amazon has to offer.

The efficiency of the company increases as the company has consistently worked towards reducing friction in online buying process. The offerings that started with free delivery through prime membership have evolved laterally into movie streaming as well as subscription services to make repeat purchases easier. All of the aforementioned information could in-fact be summed up into a one line and , that is ,

” If you know what you want to buy, Amazon can source it from manufacturers and deliver it to you cheaper and faster than anyone else.”

Though this is the company’s USP, this is also where the offline retail stores stand a chance to compete. As knowing what to buy is where Amazon leverages it’s dominance.

Before I move on to how offline retail is changing to stay put in today’s retail space, it is also important to highlight what other sectors of the company have been doing. The Amazon Web Services which forms ~12% of the revenue, contribute more than 60% of the operating income. It’s the cash cow for the company but in recent quarters the growth rate has fallen to less than 40%. The competition in the space has been growing as Microsoft Azure saw a YoY of 68 % and Tencent also on those similar lines .

The physical stores which contribute ~6 % of the revenue , is where things get interesting. In 2017, Amazon acquired Whole-Foods which has 440 offline stores. The chain has a standardized supply chain ,comprehensive information management and implemented standard management. What would be important to note here is that Whole Foods has 440 frozen warehouses, which can cover 80% of the population in 10 miles. This coupled with retail stores with freezer cabinets, it can reach 95% of Prime users. This means that even without any additional technological progress, just relying on these new distribution points, the operating rate of fresh food delivery can go up several steps. This adds value to the existing prime membership as well as increases the food catalogue that the company offers through its website.

Now, since we have the premise in place, what does the dominance of Amazon mean for the physical retailers? And secondarily how could Amazon innovate in the coming years.

The past year and half of this year, has seen businesses struggling in the pandemic. The businesses that could ride out the uncertainty were businesses that either had very less physical assets(like Airbnb in the hospitality sector) or less inventory apart from the businesses which already came under the essentials. This becomes the key factor for the physical retailers hereon . As mentioned above Amazon leverages its position when you know exactly what you want to buy, but what if when you dont and want an experience curated for you without the hassle of deliveries. Usha International’s The Hab in Mumbai, sells an experience of stitching and tailoring along with selling fabric or Nordstrom Local is focused on expertise, discovery and experiences. At Local, consumers can meet with fashion stylists for advice, try out the clothes on display, have their detox juices and get their manis done. Everything but buy the clothes and walk out with the shopping bags. Instead, you order and get the goods sent home, as there is no inventory on offer at the store; or you can order online and pick up the order from the store. So you are selling an experience where the by-product is your product.

Nordstrom Local

Even though Amazon with its Kindle product provides an easy access to e-books, physical bookstores have still not become obsolete. Though the way they function wouldn’t suffice in the coming times. The bookstores also need to expand into allied services , where it no more remains a place of buying just books, but a place where one could discuss ideas. The inventory cost has to go down and the catalogue has to accommodate more choices as kindle with its e-book store is a plethora of choices. Harvard book store in the US, has started with print on demand , where the user can choose from the options the machine offers and get it printed there and then. Some of the book-stores in Calcutta have book stores which offer courses in publishing and book design. This diversifies revenue streams and adds more value to the user experience.

Essentially what becomes important for offline retail is curating an experience, which amazon doesn’t do, but also tying up with existing logistics companies to increase their user reach and reduce their delivery time. As in the letter to shareholder for 2020, Jeff Bezos writes ,

Customers complete 28% of the purchases on Amazon in under 3 minutes, and 50 % of the purchases in less than 15 minutes. A typical physical trip to the store takes about 1 hour, and that Amazon saves a couple of trips to physical store a week, saves more than 75 hours a year,”

Hence, when competing with time is where efficiency needs to go up. Best Buy, even in the world of Amazon holds a competitive edge because apart from teaching their consumers on the technicalities and installations of certain products, they ramped up their online deliveries and the pace at which they deliver.

Lastly, with the point that I started with , that in a post pandemic world, it has become easier to rent an asset than to buy one. It save the businesses on additional inventory costs but at the same time lets consumers experiment. The ideas of co-working spaces, or renting a place on Airbnb , or renting clothes or cars for certain occasions or rides are ideas that are taking hold in today’s world. Ownership doesn’t excite as much as the experience the company has to offer.

Sources:

Visualized: A Breakdown of Amazon’s Revenue Model (visualcapitalist.com)

In the Shadow of Amazon: Offline, Online and the Rise of Online-going-Offline Retail – Sajith Pai

2020 Letter to Shareholders (aboutamazon.com)

AWS Market Share in 2021 – Still the Leader? (kinsta.com)

https://www.ben-evans.com/benedictevans/2019/12/amazons-market-share19

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