From their strongholds on the American West Coast, companies like Google, Facebook, Apple and Amazon have used the Great Recession as an opportunity to think big, invest and take the world by storm with their products and services. All four of these firms’ success is obviously and irrevocably linked to technology. But one of these companies — Amazon — is a tech company that is firmly rooted in the age-old industry of retail, in the quotidian business of getting the products from the people who make them to the people who want them. And because of this — and Amazon’s ceaseless innovation — it is perhaps the most disruptive company of the four, and it’s poised to integrate itself in Americans’ lives in ways that no other company is capable of.
Amazon is already a behemoth of American business. It’s the 56th largest company in America by market capitalization. It’s the 15th biggest retailer in America by revenue and by far the largest Internet retailer. And in a country that seems already dominated by e-commerce, the company has a lot of room to grow. After stripping out things like gasoline sales that can’t migrate to the Web, Raymond James analyst Aaron Kessler estimates that e-commerce represents roughly 12% of retail sales overall, and that that figure could double in the next 10 years. And Amazon is not just growing along with Internet retailing. It’s actually gaining market share in that category — by growing at three times the rate of e-commerce overall.
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And the stock market seems to think that Amazon will continue its headlong march toward retail hegemony. Amazon’s stock is priced at a whopping 180 times its earnings — far more than Facebook, Google or Apple, suggesting that investors believe its earnings have a lot of room to grow. So where will this growth come from — and what, if anything, will stop this behemoth?
Re-establishing the Retail Relationship
Back when mom-and-pop retailers ruled the land, one-on-one relationships between purveyors and customers were easy to foster. Business owners knew their customers well — understood their tastes, how they shopped and what they needed. As chain stores began to dominate, however, this one-on-one relationship was lost. There was no way for people running a national retail operation to understand their customers on such an individual basis.
But Amazon changed that. According to Greg Girard, an analyst for IDC Retail Insights, Amazon’s greatest strength is that “its customer relationships are inherently one-to-one, more akin to what telecoms and banks have with their customers.” While brick-and-mortar stores are black boxes — customer behavior inside the store is effectively invisible to managers — Amazon is able to collect endlessly useful information about shoppers and use it to sell more stuff by targeting customers through e-mail and the website itself. Says Girard:
“Whenever a customer buys something from Amazon or logs in without buying something, Amazon is collecting all kinds of information about that person. There’s a lot of data that can be mined about how they peruse the website, what they put in the cart, what they abandon and how the customer actually goes about searching for a product.”
This relationship, and what Amazon can do with it, is invaluable and puts Amazon in a prime position to turn the growing role of e-commerce into revenue growth for itself.
The Kindle Universe
But Amazon was also quick to realize that e-commerce would migrate from traditional computers to mobile. Amazon’s development of first the Kindle and then the Kindle Fire was a series of daring and imaginative coups. For an Internet bookseller to bet the farm on making the kind of hardware that would be more likely to come from Microsoft or Apple is a testament to founder and CEO Jeff Bezos’ vision, and to his resolve.
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But the development of the Kindle and the Kindle Fire isn’t just a quixotic attempt to poke its tech rivals in the eye. Bezos realized that these products were necessary to maintain Amazon’s strong presence in the digital-media business. While books, movies and music don’t account for nearly as much of Amazon’s revenue as they once did, they still account for 37% of it — and a high-margin slice of it at that. Kessler estimates that in the long run, upwards of 90% of all media sales will be digital, and if Amazon wants to maintain those revenues, it had to get into the tablet game, where it could much more easily divert sales to its own website and away from competitors like Apple.
The Infrastructure of Commerce
Amazon’s most daring gambit, and the one that may position the company for the kind of earnings growth that the stock market expects, is its foray into business-to-business services. In recent years, Amazon has ramped up its “cloud computing” services, or its business of leasing out of server space in its large data centers around the world so that small businesses don’t have to risk such up-front capital investment. It has also greatly expanded its third-party marketplace, where merchants all over the world can set up their own virtual stores on Amazon.com and sell their products alongside Amazon’s — all the while leveraging Amazon’s large customer base and credit-card-processing services.
In fact, retailers who use Amazon’s third-party marketplace now account for 35% to 40% of all units that Amazon sells per year. Amazon takes a healthy commission off each sale it makes — making third-party sales a higher-margin venture than its core retail business — without having the risk of developing those products or holding the inventory. And the sellers get the advantage of Amazon’s vast distribution network and built-in customer base. Amazon’s reach into third-party businesses has become so great that the Financial Times wrote last week:
“This has lifted Amazon’s economic influence beyond its tech peers Apple, Google and Facebook and taken it into the realm of network businesses such as stock exchanges, power grid operators, credit-card processors and shipping lines.”
This new development has exponentially extended Amazon’s retail-industry influence in ways that a company like Walmart — whose revenues far outstrip Amazon’s — could never dream of.
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Can Anything Stop Amazon?
Of course, there are land mines in the path to Walmartesque hegemony. It was reported this week that Amazon is making a strong push to offer same-day delivery for many of its products. According to Slate, such an initiative would “destroy local retail.” But as Amazon invests in the kind of infrastructure necessary to reach this level of service, its own fixed costs will increase, and this is a dangerous tightrope for Amazon to walk if it wants to continue to undercut its competitors on price.
In addition, as Amazon invests to give customers the kind of instant gratification that until now only brick-and-mortar retail could provide, traditional retailers are investing heavily to achieve the kind of selection and convenience that Amazon provides. Firms like Macy’s and Nordstrom are investing hundreds of millions of dollars over the next few years to beef up their e-commerce operations and integrate their in-store and online inventories.
Indeed, traditional retailers do not see their obsolescence as inevitable and are doing all they can to leverage their main strength: their brick-and-mortar stores. And there is reason to believe that many will have success with this strategy. Consumers still want the social experience of in-store shopping. They want knowledgeable and attentive service, and they want to test, touch and try on products before they buy them. So while Amazon’s strengths are manifold, the competition is fierce — and not giving up. Amazon will probably not continue to grow its revenues at 50% a year, but whatever the future of retail is, Amazon will surely play a huge role.
This is the second in a series of articles on the future of retailing. You can read the first installment here.
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