How Do We Solve A Problem Like Amazon?

Amazon have announced their latest financial results and we‘ve decided to close our Winchester store and concentrate on our online shop. The two are not connected but it’s easy to see from the figures why some people point the finger at Amazon for the success of online retailing and the closure of shops.

In 2012 your Amazon book purchases, Kindle downloads and the rest contributed to a worldwide revenue of $61,090,000,000. That’s just over $61 billion, if you have trouble with all those noughts. Turnover has increased by something like 45% on the previous year’s $48.08 billion.

So is Amazon set to take over the world of retailing as Britain’s high street shuts up shop? Will someone or something yet defeat it? Or does Amazon, like the Roman and British Empires in the past, contain the seeds of its own destruction?

More than any other online retailer, Amazon established the internet as a trustworthy convenient way to shop. Even though the rise in online retailing has played a part in destroying the high street, it’s too easy to put all the blame on Amazon or even the internet. Online sales are still small (around 13% in the UK), albeit big enough in some sectors to kill profits. Speaking for my shop, I don’t think too many people were checking out our handmade designer products and then buying them online.

There are many other factors that have affected the high street and my own shop. Number one is the economic downturn- people just aren‘t spending like they used to. Out-of-town shopping and department store-like supermarkets were bogiemen long before Amazon. Expensive parking in towns has driven customers into their  arms. I believe that one of the reasons why Winchester High Street is doing relatively well is the lack of competition from a Meadowhall style centre.

Then there’s the abysmal failure of those responsible to respond to shops’ difficulties by offering better rates, rents and bank loans.

Let’s also remember it was iTunes and film streaming rather than Amazon that busted Blockbuster. Even bookshops, most often quoted as victims of Amazon, were already damaged by the abandonment of price fixing which allowed supermarkets to sell all the profitable popular books at knock down discounts.

Nevertheless the ease of purchasing online and the low prices have taken a significant chunk of business from certain kinds of retailing. And Amazon has been the champion in the use of both of these weapons.

Some high street shops may be suffering from Amazon’s power but trading in the shiny new online environment isn’t a lot better. It’s true overheads are a lot lower but so are margins, thanks to low prices. Your Life Your Style will be trading solely on the internet in future, apart from a pop-up shop at Christmas. Like all the other little fish selling online, we can’t ignore Amazon swimming around like a massive pike in a small pond.

I don’t blame Amazon for its encouragement of low- at times lossmaking- prices. It simply recognised that customers searching for the lowest price would drive the rise of online shopping. However low prices are a problem for online retailers, including Amazon itself, and you could argue it’s a problem of its own making.

It may be that Amazon will fail because of that very business model that has made it the giant it is today. Low prices meant that last year its operating profit (what was left after costs) on the $61 billion dollar sales was $676 million. After deductions of interest payments and tax (don‘t act so surprised, they do pay tax somewhere), the net loss- that’s right, loss- was $39 million. Even the operating profit they made in the Christmas quarter was only two cents for every dollar taken. Compare that with the profits Apple or John Lewis make and you can see why it’s not all plain sailing on the Amazon tanker.

So, is there a David out there that might exploit this Goliath‘s weaknesses and what we would lose if we didn‘t have Amazon?

Straightaway we need to remind ourselves that at least one online retailer has already grasped the concept of what is unique about the web better than Amazon. Step forward Apple iTunes, a brilliant idea for selling a product that has no physical substance and therefore no fulfilment costs. Amazon has come late to this game with their Kindle e-books.

National retailers like John Lewis or Sainsburys also have a potential edge with their marriage of shop and online. Customers can use the shop as showroom but buy online (rather than using Waterstones as a showroom then buying from Amazon) or utilise the excellent click and collect. There is still a huge percentage more shoppers visiting shops than buying online which means Amazon are limited by having no showrooms. You might wonder what will happen to Amazon book sales, apart from bestsellers, if Waterstones closes and we can’t check out the books before buying online.

Some retailers make a success of selling own brand products because they have a monopoly. Next, White Stuff and even Marks and Spencer (if only M&S had products people want to buy) are examples of retailers who can set their own prices. Again Amazon lose out because they only sell goods in competition with other retailers.

Independent shops like Your Life Your Style do not have the advantage of either a national chain of outlets or exclusive products, but as I said previously the online competition is not so great for niche products- overheads are the reason for us leaving the high street and taking our chances selling purely online.

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Amazon tore up the retailing rule book that said competing on price can only end in tears because you end up with no profit. The key to success in the pre-internet days was to compete on quality, service and marketing. The trouble was, back in the nineties, people were reluctant to change their buying habits to this new fangled internet. Offering low prices was probably the best way to get people to switch to buying online.

The Amazon website is a wonderful warehouse but the emphasis is always on the cheapest price. Service is excellent but the clinical photos and bullet point descriptions do little to put across the value of the products. This works when it comes to selling a light bulb or something the customer already knows he or she wants but is no help when you need an uncertain purchaser to make an emotional connection with a product. John Lewis or even our own website do a much better job at persuading someone to buy a product. Its the difference between a description of a teddy bear’s size, colour and materials and a story of a child getting a bear, cuddling it and it becoming her friend. Or a picture of a wine glass and a photo of a dinner party with people chatting and drinking from the glasses.

From the early days of e-commerce, Amazon’s tactics have been the same. The company announced from the start that they would lose money for years while they built up their online business. As a result, they led the way, first as a cut-price bookseller who caught all other booksellers unawares. Then it widened its range of products, before moving into e-books which offer a better profit margin. Its best idea has been to invite other merchants to sell on its site. The virtually cost-free commission it earns from these traders may prove Amazon’s salvation.

If Amazon were to go, I would most miss the company’s tremendous commitment to innovations that make online shopping easier and more attractive to the customer from One-click shopping to rating the products to e-books.

Not that I would bet against Amazon winning the battle for the wallets of online shoppers. Nor it seems would investors who sent Amazon shares up when the results were announced.

Author: Paul Lewis

After a short stint as a journalist, I have spent most of my working life in marketing and retailing. I love theatre and have been lucky enough to work in theatre marketing for many years. I provide small businesses and arts organisations with holistic marketing at an economic price through my company Seven Experience Ltd

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