For the last year, retail businesses across the nation have been living in fear of the world’s largest online store, Amazon, opening in Australia.
But after a recent research trip to the United States – where I investigated retail trends in New York, Chicago, Los Angeles and San Diego – I can tell you now, the sky won’t fall when Amazon Australia opens its virtual doors.
There’s no denying Amazon is a big disruptor, but Australian retailers shouldn’t panic – predictions about the death of Australian retailing are grossly exaggerated.
In the US, Amazon accounts for less than 5% of retail sales. In Canada, which has a similar geographic delivery challenge to Australia, the share is more like 2%.
In fact, the global Amazon cult continues to thrive on the promise of profits that may never come – which is good news for enterprising Australian retailers.
In the September quarter Amazon turned over US$44billion but its only profit of US$347million came from its web services business – which provides servers, computing, storage, security and artificial intelligence services to start-ups and major corporates.
The irony is, that despite 100% of its profit coming from 10% of its business (Amazon Web Services), Amazon’s share price continues to trade at around US$1100 and it keeps absorbing more competitors.
So why are shareholders falling over themselves to invest?
The business plan that has been clearly stated by founder Jeff Bezos is market share first, and profit second.
Once you dominate the market you can raise prices and start making profits. So as long as shareholders continue to believe that this will be the end game, they will keep investing, and will have the ability to raise capital cheaply and pursue growth.
But the music has to stop sooner or later.
My advice? Instead of sitting around waiting for the inevitable, follow in the footsteps of some of Amazon’s largest US competitors to beat goliath at his own game…
1. Convenience is key
When it comes to shopping in the 21st century, convenience is essential, which is why Walmart – the ultimate bricks and mortar retailer with 5000 “fulfilment” stores across the USA – are now competing with Amazon by offering Buy Online Pick Up In Store (BOPIS), which allows customers to order online and pick up their package at a giant in-store vending machine.
With just two delivery centres in Australia initially – Sydney and Melbourne – Amazon won’t be able to compete with this level of convenience if it is offered up by another major supermarket chain.
2. Delivering the goods
A major aspect of convenience is timeliness, with shopping becoming more about instant fulfilment – customers want to receive their purchases now, not in a week or two.
Getting a physical product to someone’s home or office at a cost effective price continues to be the major hurdle for online retailers, and Amazon is no exception.
Amazon Prime, the $99 subscription service introduced in the US last year offered a guaranteed two-day delivery, but Amazon made a $US2.4 billion loss on shipping expenses.
Even though it offered lots of extras like Amazon Music, free Kindle books, and free Amazon movie streaming, 82% of customers said they wouldn’t pay for the service unless it guaranteed a quick delivery.
So how can Australian online and bricks and mortar retailers compete?
By offering instant satisfaction – through the provision of quick and convenient take-home options in-store, or fast delivery options online by basing warehouses in key states.
3. Personalised service
The retail basics haven’t changed – customers still want personal attentive service.
A great example of this from the US is Best Buy, an online retailer of electronics and appliances. To compete with Amazon they started the Geek Squad – a home delivery service that provides a “squad of geeks” to help you set it up your TVs and computers at home, and ongoing advice and support.
They make your purchase easier, they answer your questions, and build a sense of community that converts to loyalty and repeat sales.
Australian bricks and mortar stores with highly trained and attentive staff, that have good product knowledge, and provide a sense of community, will always compete with the impersonal Amazon platform.
4. Fresh is best
Amazon has struggled to deliver a fresh food and grocery service due to the high costs associated with refrigerated transport.
In fact, their Amazon Fresh food delivery service, which cost an extra US$14.99 a month on top of Amazon Prime, has now closed down in a number of suburbs in nine US states.
Amazon decided it needed more physical fulfilment centres where customers could experience the brand. So earlier this year they purchased the up-market grocery chain Wholefoods for $US13.7 billion.
They are certainly beautiful stores and Amazon is now using them as a cross-retail platform for their other products… but the prices are high which means it’s not for everyone, and certainly won’t be a mass money spinner for Amazon.
5. Provide an experience
Retailers and property developers are starting to fight back, making bricks and mortar shopping more experiential.
While in the US, I visited a fantastic complex in Beverley Hills called Century City Walk that offers movies theatres, bowling alleys, and restaurants as well as retail. It’s open until late in the evening and provides a total recreation offer.
There is also a trend toward “open malls” in the US, where people are encouraged to move past store fronts in an open space with great public amenities – the return of the High Street.
Even Amazon is learning that customers are still seeking a physical shopping experience, which is why it has opened a number of bookshops throughout the US where customers can buy the book right there and then, or order it for delivery later – the most recent being a store in Columbus Square, New York.
In Australia we are already seeing this experiential focus in mixed-use developments – office blocks, apartments, retail spaces, leisure and entertainment all in the same complex… with lots of parking. Chadstone in Melbourne is a good example. It’s more than just shopping it’s a social and cultural experience.
The end game is that there will certainly be fewer bricks and mortar stores, but that’s not a bad thing – for retailers, that means less underperforming assets and a greater focus on providing products and experiences that work.