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Amazon’s Profits Are Actually Good News For Retailers

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Okay, let’s start with an acknowledgement. I know the title of this piece sounds ridiculous. Amazon just brought in profits of over $2 billion in a single quarter for the first time. How can that possibly be good news for retailers? It really can. I believe for the first time in years, retailers can now really control their own destiny. Why? Read on.

First, let’s dispel the folklore that everyone seems to accept without a whole lot of data to support it. From the article cited in the link above:

“It marked the third consecutive quarter that Amazon has topped $1 billion in profit, a remarkable feat for a company once known for investing so much in its business that it often lost money.” (Italics are mine)

I have never bought into the notion that Amazon wasn’t making money because it was reinvesting its profits. Why? Because I always believed that shipping charges were killing them. I have never seen a company ship that much air with their deliveries and make money. Not ever. But we’ve been over this ground before. Let’s move on to some other items.

  • Amazon has been aggressively outsourcing “Prime” to third parties. I do know that entry into this club (for which Amazon charges its marketplace sellers more money) is tough. Requirements are stringent. But I also know that their ability to monitor how those third party sellers are actually doing seems weak. Orders come late way more often than they used to. In fact, I try to assume a minimum of 3 day lead time when I order from Amazon now, and I don’t always get it that quickly. Amazon gets to avoid its shipping problems, but I think the missed dates really do open the door for retailers who have made the right tech investments. If you can get close, and keep your shipping costs down, you’ve got a shot at that business.
  • Price parity has pretty much been achieved. Our data tells us that retailers don’t quite believe it yet, but I have found, almost without exception, that most retailers are quite close, if not better than Amazon on price. Best Buy has a “lowest price guarantee.” Other retailers just have lower prices. The pool/spa and cosmeceutical industries come to mind. Other sellers have significantly lower prices than Amazon.
  • AWS (Amazon Web Services) remains the company’s biggest money maker. Another quote from the same article:

“"Amazon Web Services is basically the silver bullet for them for future growth,’ says Dan Morgan, senior portfolio manager at Synovus Trust.”

Now, think about that a minute. Does this mean the growth of Amazon’s retail business might be topping out? In fact, revenue did not grow as quickly as expected, so yes, it very well might.

The other thing about AWS is that retailers can follow Walmart’s lead (did I really just say that?) and expect their tech vendors to use another source for Cloud computing services. After all, as a former CIO, the Prime Day debacle doesn’t make me feel all warm and fuzzy about the company’s ability to scale up on demand.

Certainly, AWS will continue to make strides in other industries, but retailers do have other options. And I still have that niggle in my head about Prime Day. When push came to shove, their “ratchet up” technology just didn’t function correctly, and apparently they ended up with humans bringing new servers into the mix by hand. Meanwhile, shoppers were asking “Who let the dogs out?” (Amazon apparently displays a screen with dogs on it when it gets stuck).

A couple of years ago, while sitting on a panel at a RILA conference, someone asked me if Amazon could ever be stopped. I did reply, “Funny… when I first became an analyst, everyone was asking the same about Walmart. They don’t ask me that so much anymore.”

In fact, we may now be entering what I would call the “Post-Amazon World.” Much like the “Post-Walmart World” I talked about nearly a decade ago, it doesn’t mean Amazon is going away. And I’m not sure I want it to, in any case. Amazon has forced the industry to get better, smarter and more customer-friendly. It produces great video content, and I can find almost anything on their site. It has awakened us to new possibilities.

Retailers simply have to accept Amazon as a fact of life, just as they accept Walmart as a fact of life. The herd has been thinned, the weak have been winnowed, and those that remain are getting more creative, tech-savvy and customer-friendly than ever before.

Retailers really CAN compete with Amazon. Profits ALWAYS come at a cost. Amazon is paying the price for their profitability just as the rest of the industry has for years. Shave a little bit here, a little bit there, and eureka! Profits flow in.

It’s time to ask some key questions, and most of them are tech-related:

  • Are your assortments tight, and relevant?
  • Is your online presentation technology personalized enough to capture shoppers’ interests?
  • Is your content consistent and clear?
  • Are your stores clean and shoppable? Are your employees knowledgeable? Are they scheduled intelligently with technology or by using a white board?
  • Are your technology infrastructures ready for a surge in demand? Will customers have a satisfactory experience when they come to visit you?

If the answers to these questions are yes, and if your product is interesting, I’m predicting you’re going to have a great holiday season followed by some good years ahead. If the answer to some is “no,” it’s time to start planning for the future. You can do this. You may not produce video content, but you can be great retailers.

Counter-intuitive though it may sound, I think we’ve come through another industry storm, and I like your chances. For real.

 


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Articles & Opinions July 30, 2018
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