An odd digital disease has run rampant among mass retailers for the last couple of decades – let’s call it “Amazon Panic”. (Professor Mark Ritson calls advertising’s version of this digital disease “morbus digitalis”.)
Amazon Panic involves falling prey to digital theories because we’re told “physical things like stores will go away and be replaced by digital”. These theories are given extra momentum because of popular mythology around disruption. And for retail, Amazon becomes the panic point because they are the biggest mostly pureplay digital retailer. (Most other pureplay eCommerce has already failed due to bad economics or morphed into something else.)
Amazon.com is such a powerful distraction that a Time Magazine article recently called it the “800 pound gorilla”.
A Challenging Data Point. Last year, we mounted an advertising campaign for a product that drove consumers to Amazon as well as a traditional retailer. These were tagged commercials that directed consumers to either website. Surprisingly, given the media weight and the tags, sales at the retailer website were roughly 8x the sales on Amazon. In the stores far, far more were sold than on either.
So that started my team at Atomic studying the numbers – looking back at 20 years of Amazon Panic. What we find is both fascinating and quite clear: Amazon Panic is out of proportion.
Amazon’s True Size: We’re told that Amazon is a $107b retailer. They’re not. Amazon pushes that idea (and even such respected firms as Forrester have been sucked into it).
Yet only a portion of Amazon’s revenue can be considered revenue they “took away” from retailers. So we need a new term to get to Amazon’s true retail size: Retail Equivalent Revenue.
Let’s breakdown Amazon’s total revenue to get at their Retail Equivalent Revenue.
- Selling digital content (for Kindles and other devices): $22.47b
- Cloud services (AVS): $8.0b
- Fire and other devices: $9.0b – $20.0b (estimated)
- Miscellaneous other: $5.0b (estimated)
- Retail Equivalent Revenue: $50.0b – $65.0b (estimated)
Amazon is, then, a $50.0b to $65.0b worldwide retailer.
How Does This Fit the Bigger Retail Market? Of course, Amazon’s revenue is still a big chunk of change. But it’s critical to ignore the emotional impression numbers make. How does Amazon fit into the retail world?
Here are some worldwide numbers for perspective (from the most recently reported fiscal year):
- $486 billion: Walmart revenue.
- $234 billion: Apple Computer Revenue.
- $170 billion: Combined revenue of Sam’s Club and Costco.
- $103 billion: Walgreens revenue.
- $88 billion: Home Depot revenue.
- $50-$65 billion: Estimated Amazon Retail Equivalent Revenue.
- $53 billion: Apple Computer profit.
And here are some domestic US numbers from 2014/15 for more perspective:
- More than $4 Trillion: US retail market (excluding automotive) per US Census Bureau.
- $360 billion: Reported US market digital revenues (per US Census Bureau).
- $25-$35 billion: Estimated Amazon US Retail Equivalent Revenue.
But Didn’t Amazon Just Become Profitable? Each of the retailers I noted above is profitable on those revenues. And they have been for years. Only recently has Amazon started to post profits. But these profits aren’t coming from their retail business.
- Amazon buys retail revenue and “customer loyalty” at a loss today. They do this by expanding selection, attempting to increase convenience (like their buttons), or pursuing what is fundamentally a discount strategy. Even Amazon Prime is -so far- a money losing attempt to buy loyalty.
- Amazon is a category killer in books and music but can’t even leverage their natural advantage in book and music sales to make much of a difference.
- Amazon’s rare profit comes from non-retail services. In Q2 of FY 2016, cloud services, for example, which are less than 10% of their business revenue accounted for 67% of Amazon’s profit.
Amazon is Publicly Searching for a Better Model. Think about recent news from Amazon and you’ll detect a search for profits (I might call it a desperate search – but that could be taking it too far).
- Amazon is going brick & mortar. Amazon has one apparently successful book store and is opening others. One will be at Washington Square – my local mall in Tigard, Oregon. It will be interesting to see what they learn. But their choice to move offline matches what’s happening in other digital efforts. Pure online digital plays like VistaPrint are beginning to use off-line advertising to build their businesses. Why? Because they’ve tapped out what they can do digitally.
- Amazon Prime. My guess is the massive sign ups of Prime are being pitched to investors as “buying customers” that will monetize…some day. Personally, I doubt if they will ever monetize because of the fundamental economics of eCommerce costs.
- Amazon Product Order Buttons. I can’t really sort these out. Some articles place these as entire money losers for Amazon. In many ways, I think they’re a PR ploy. And to keep themselves in the headlines, Amazon announced more buttons recently.
So What’s the Final Answer? Coyote or Gorilla? In reality, this isn’t even a competition. Walmart is retail’s Gorilla. Amazon’s a crafty coyote.
- Amazon does not dominate retail – except to the extent retailers choose to lose their way and focus too much on Amazon. Amazon has built solid revenues but has done so without a profitable business model. They have been selling the promise of the future to their investors and the industry for two decades. But, I believe the future is finally upon them – the future is now – so the heat is on to generate profit, (we’re seeing it in tactics like eliminating list prices which seem targeted to increase margins).
- Entrenching their coyote role, Amazon scavenges some of their revenue using an online loophole – not charging state sales tax in order to keep their prices to consumers lower. This loophole won’t exist forever. In fact, states like Colorado have already begun closing it.
- Like most scavengers, Amazon is chasing a corner of the market and feeds quite well from it. But data is clear that digital sales are stuck below 10% of retail. Even Forrester, digital’s biggest cheerleader, can’t envision US online retail exceeding $500b total for 5 more years.
- Like a Coyote, Amazon has a positive role to play in the retail eco-system. In fact, one positive Amazon role is as a combination “shopping search engine” and “shopper Yelp!”. Many people look up products and reviews on Amazon then go buy in a store. Far fewer will walk away from a product that’s in front of them at retail in order to save 5% purchasing it at Amazon – even with free Prime delivery.
The Key to Mass Retail Strategy: Don’t Focus on Amazon.
Truth is that I like the Amazon coyote and buy plenty through Amazon (my wife is an Amazon Prime customer). But they don’t replace retail nor do they diminish what I buy at retail by very much. My sense is they co-exist quite well right alongside retail. And manufacturers need their product carried both at retail and on Amazon.
Amazon wants more than that – and, like a coyote, Amazon’s disrupting howls are more distracting than is warranted by the numbers. Watching Amazon sort out their way forward is interesting to watch. But Amazon doesn’t have a strong, profitable retail model. So retailers need to stop chasing Amazon (let Amazon be Amazon) and get their focus back to making their stores places consumers want to shop.
The distraction Amazon has provided has been damaging. Many retailers wasted years of strategic advancement by chasing Amazon. During that time they let languish the place where they can make the most money – stores. I think this problem ignoring stores may be the reason behind a recent retail traffic decline.
Here’s what I recommend (in broad terms):
- Consumers go to stores to shop. And they go to stores to buy products. The retailer’s job is to make their stores more effective at this.
- That means stores need to deliver an interesting mix of products, well displayed, well advertised, and with some deals to be discovered as a reward for the hunt.
- It also means that retailers need to attract consumers with innovative products along with the staples needed to draw regular visitors.
- Even better, when retailers build good store experiences, digital sales will follow naturally.
- And retailers should consider digital and online tech to be like an iceberg. Most of retail tech’s value doesn’t come where consumers see it in showy applications. It’s most useful behind the scenes – in areas like supply chain management, logistics, communication with store personnel, managing the store, etc…
And there’s tremendous news. Those retailers who stay focused and avoid distractions to build stronger stores also create the strongest long term strategic advantages.
UPDATE with AMAZON Q2 2016 RESULTS. Amazon recently released it’s Q2 results. As is typical of Amazon press releases, they touted amazing results without clear attribution of the details. The resulting headlines mostly wove a story that profit came from their electronic retail business. But the actual results don’t show that.
Half of their profit once again came from that 10% of revenues that are cloud services. The other half of their profit was lumped from a total category that includes retail but more importantly content sales and device sales. It is reasonable to assume content delivered most (or all) of that profit.
These latest results confirm again that Amazon has yet to create a profitable retail model.
Copyright 2016 – Doug Garnett – All Rights Reserved
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