The Amazon Effect: Retail’s Santa Clause or Grinch?
By Leela Rao-Kataria
The holidays are approaching quickly and consumers are getting anxious about gift shopping. The process is always complicated: think of great gifts, compare prices, select the exact style, version and color, and finally, choose the pick-up or delivery option that makes most sense. If you asked the average consumer what retailer simplifies the process of all of the above, the likely reply would be ‘Amazon.’ Amazon has become America’s online retailer poster child. Consumers not only shop for the severely discounted prices, but unlike low-price brick and mortar giant Wal-Mart, Amazon has been able to gain consumer trust as a premium brand for unparalleled delivery capability.
Generally, when consumers shop online they are provided an expected shipping date. However, few are very confident that the product will arrive in time. According to a GT Nexus global survey of 500 respondents, up to 70% of consumers said they had received a package late and the majority of respondents stated that on-time delivery was crucial. Amazon’s business has been built on alleviating this pain point and, as a result, has been rewarded with consumer loyalty. This very phenomenon is called the ‘Amazon Effect’: a consumer has a particular product in mind and immediately they want to do an Amazon search to find that same or similar product for less cost. The reality is that no one in e-commerce has their capabilities…yet.
Amazon’s History
In a world where e-commerce accounts for approximately 10% of all retail purchases, Amazon’s share of the online pie is growing exponentially. In 2010, total e-commerce revenue for North America was $170 billion, of which Amazon accounted for $18.7 billion. While online revenue grows at a rate of approximately 14% year over year, Amazon is growing almost three times faster.
By 2012 Amazon was the 12th largest retailer, and by 2017, it is expected to be the second largest retailer in the U.S.
Amazon has appeal as a one-stop-shop where consumers can buy everything and not waste time wading through store aisles. But there’s a show-rooming effect where consumers walking retail aisles will look for reviews of a product via Amazon, and in turn find that exact product offered cheaper through the Amazon website. This networked effect was a brilliant strategy, always luring consumers back who are often swayed by the cheaper prices and guaranteed delivery optons. As of today, Amazon Prime customers total 25 million in the U.S. alone. Even despite the membership price increase, Amazon saw almost zero decline from loyal subscribers.
Retailers are fighting back
Holiday shopping spend is expected to increase by 4.1% over last year. According to the National Retail Federation, sales are expected to reach $616.9 billion, which represents 19.2% of the industry’s $3.2 trillion in annual sales. This creates tremendous pressure for retailers, who know that a good season will overshadow any pitfalls this year. Similarly, a poor showing over the holidays will be near-fatal. With Amazon’s capabilities, this might seem even more daunting to retailers. But no one is sitting around idly. Retailers are working harder, now more than ever, to win back their share of the pie. Here are four major initiatives being deployed to combat the ‘Amazon effect’:
1.Increasing technology innovation: According to Forrester Analyst, Sucharita Mulpuru, big box retailers are working to catch up to Amazon. Wal-Mart has been picking up online market share and recently announced that it plans to invest almost half a billion dollars more this year into its technology spend to improve its online profile and user experience. Target offered offering significant discounted items prior to Black Friday, with no minimum to buy for free online shipping until December 20.
2.Offering in-store pick up: Amazon can’t address the ability to pick up across brick and mortar stores. Consumers are more and more interested in click and collect - ordering online and picking up in-store, especially around the crucial holiday time. Mulpuru states that 30 to50% of retailer’s online orders come via this service, and more than 40% of consumers have used in-store pick up options in general
3.Selling exclusive products: One reason that Amazon is so effective is that it offers mass-produced items at a discounted value. If retailers produce something unique, like Etsy, who sells hand-made and authentically designed items, Amazon will be unable to carry that assortment. That personalized product customization will be more and more sought after, as mass-produced items are less valued and customers seek unique and personalized pieces, especially for gift-giving.
4.Providing Value-Added Services: Retailers with brick and mortar presence need to distinguish themselves from Amazon by their ability to service the customer. Products can be bundled with a service that will give an added-value. For example, Claire’s includes free ear piercing services when you buy a pair of earrings. No e-commerce site will ever be able to provide a shopping experience like that.
Retail Innovation
The retail world is evolving faster each day. The only way to compete is to continue to adjust and innovate. This means finding new ways to procure, deliver and sell goods while finding innovative ways to engage the consumer. Future holiday seasons will not be about e-commerce versus brick and mortar models; rather, the future of retail will be about fluid business models based on agile infrastructure. Looking in-store, online and externally into warehouses and factories, the future will be about operating as a smart network that ties directly to consumers while connecting them to goods and data about those products.
Leela Rao, marketing manager, retail industry solutions, GT Nexus