Remarkable Retail. Steve Dennis

way of illustration, I worked in senior roles for two retailers that began making significant e-commerce investments in the late ’90s and, as a result, captured more than their fair share of the growth in online shopping. The first, Sears, lost its way for other reasons, but for many years the company’s appliance and home improvement businesses were clear leaders in what we now call “omnichannel.” The Neiman Marcus Group, while it was relatively slow to integrate its cross-channel offerings and focus enough on acquiring younger customers, did make growing online shopping a priority more than two decades ago. For the most part the leading luxury department store in North America, despite selling in a very mature category with escalating competition, has held its share of the market, while at the same time delivering solid operating profitability. Online sales now represent nearly a third of its total revenues, and its best and most loyal customers regularly shop across all channels.

      Many major national brands have yielded little or no share to Amazon and other pure-play competition. That’s not to mention the many local, regional, and specialty stores that have a laser-like focus on a particular customer segment, deliver superior customer service, and provide a unique product and/or service mix.

      The real question for retailers is, do you let the shifts destroy you or do you turn them to your advantage?

       Okay, Maybe Blame Them a Little

      Still, there is no question that Amazon has wreaked havoc with many segments. It built its first phase of growth by targeting products that were easily understood online and that could be delivered digitally or relatively inexpensively by mail (books, music, games). The first wave, which was mostly complete more than ten years ago, decimated most of their direct brick-and-mortar competitors.

      As Amazon expands into many more categories, including services, it grows ever closer to becoming the so-called everything store. While a few sizable categories, such as luxury fashion, are not well represented on Amazon, the company’s virtually endless aisles—through both its direct selling and its marketplace—give it relative assortment dominance over just about any retailer on the planet. Perhaps for this reason many people think Amazon’s market share is greater than it actually is. But the fact that, according to one study, nearly two-thirds of all online product searches originate at Amazon¹⁵ underscores the broadly held consumer belief that Amazon will likely have the product they want, or at least will serve as a useful source for product and pricing information to aid in their shopping journey that may result in a transaction elsewhere.

      In many instances Amazon is also a price leader. While it doesn’t always offer the lowest price, it has a strong reputation for good value, and its sophisticated algorithms, as well as its ability to frequently absorb below-average industry gross margins, give it a major competitive edge. Also, as a well-established brand, it has trust advantages over the smaller, unknown, or even potentially fraudulent merchants that may show up in searches for the lowest price.

      Arguably, where Amazon has been the most disruptive is redefining the notion of convenience. Much of this stems from ever-shorter product delivery times. For many years a centerpiece of Amazon’s offering has been its Prime program, which has free two-day delivery as a core benefit. With more than 100 million Prime members in the United States alone, many shoppers have come to expect free and fast delivery as the de facto standard. And Amazon keeps raising the stakes, pushing to provide next-day delivery in many major markets, offering two-hour grocery delivery, and experimenting with other convenience-oriented options like placing Amazon pick-up lockers in Whole Foods and Kohl’s stores.

      The other aspect of Amazon’s fundamental redefinition of convenience is the shopping experience on the site itself. Supplementing its impressive assortment are powerful features like one-click ordering, subscription replenishment options, and a plethora of preference settings that make purchasing faster and easier.

      Any retailers that go head-to-head with Amazon will likely find it very difficult to compete on these dimensions. And even where they can, it is virtually impossible to do so profitably. That creates a major dilemma for many of them. Failure to be at parity with Amazon means ceding market share. Trying to achieve parity means tanking earnings.

       Understanding Buying vs. Shopping

      As dominant as Amazon has become in many areas, it’s important to understand that it has, as noted retail strategist Liam Neeson might put it, “a very particular set of skills.” This is best shown by examining the difference between “buying” and “shopping.”

      In this way of dissecting the retail world, “buying” is more task-driven or mission-focused. It’s mostly functional. The consumer already has a clear idea of what he or she wants and generally wants it quickly and at a decent price. Buying is more commodity-oriented and search typically plays a key role. Amazon—and e-commerce more broadly—does especially well here.

      “Shopping,” on the other hand, is more nuanced and complex, typically involving more exploration and browsing. Generally speaking, browsing on Amazon can be a frustrating experience. When shopping, rather than looking for a specific item, the consumer may be seeking a more complete solution or inspiration and often requires some form of advice. Shopping also tends to be more emotional, with a greater emphasis on the full experience rather than merely checking an item off a to-do list. The role of physical stores is dramatically more important in shopping than buying, and as a consequence Amazon and other sites that are dominantly or entirely e-commerce have a disproportionately lower share.

      So when we talk about Amazon’s retail dominance (and in general much of the hyper-growth in online retail), we need to remember that the vast majority of it is occurring in buying, not shopping.

       The De-Schlepping of Retail

      Within “buying” lies an important sub-sector where Amazon is very strong. At a 2018 industry conference, former J.Crew CEO Mickey Drexler asked the crowd, “Why schlep paper towels . . . why schlep dog food . . . why schlep a lot of things?”¹⁶ When we know exactly what we want sight unseen—and especially when that item is big, bulky, or frequently purchased—having somebody else deliver it is so much easier. This is particularly true if one is already a Prime member and the price of getting it shipped is zero.

      While Amazon is a big beneficiary of this phenomenon, newer brands, from Chewy.com (pet supplies) to Boxed to subscription razor services like Harry’s, Dollar Shave Club, and Billie are leaning into this opportunity. They either emphasize bulk delivery of products and bundles or seek to enroll customers in scheduled replenishment of frequently used products. They zoom in on a particular set of points in the buying process and eliminate the friction. Afraid of running out of essential items? No problem! Just subscribe to our service and that fear is gone. No room to lug large and unwieldy items in your car or on the bus? No worries! We’ll deliver it to your home or apartment.

       Let’s Get Physical

      Some experts believe that Amazon’s ability to sustain hyper-growth over the long term will be increasingly driven by a more aggressive investment in physical retail. What is becoming clear is that e-commerce growth, while still very robust, is beginning to slow, and Amazon’s stock price is strongly influenced by its growth story. Some leveling-off in Amazon’s online growth is inevitable, stemming from the fact that the product categories that are maturing most rapidly are among Amazon’s most highly penetrated segments, such as books, consumer electronics, and more commodity-like household items.

      As alluded to earlier, Amazon already has a substantial physical retail presence by virtue of its 2017 Whole Foods acquisition. But it continues to experiment aggressively with various brick-and-mortar concepts, including Amazon Books, Amazon Go, and Amazon 4-star stores. Amazon is rumored to be considering opening thousands of Amazon Go locations in the new few years, in addition to reported plans to become bigger in physical grocery store retailing by launching its own mass-market concept.

      Amazon has also been experimenting with and expanding various “click and collect” operations. At the end of 2019 it had more than 2,800 Amazon Lockers across 900 US cities.