Amazon – a retail ecosystem of 120 million products and counting set to overtake Walmart as the largest retailer in the world by 2025 by revenue. Competing against this behemoth on choice is unrealistic. The conundrum for many competitors is how to balance choice against the constant aim of lowering the cost per transaction. Adding choice will nearly always lead to added complexity. It is quite acceptable to have different business models – the key, though, is to manage that complexity and ensure costs do not spiral out of control. Increased investment in IT systems remains a must, but these bets need to be carefully placed.
So what does that leave?
We do not believe that trying to create an exact replica of Amazon is the right answer. However, copying their philosophy of ‘customer obsession‘ is an approach that can deliver success. We don‘t mean customer obsession that generates internal complexity. We do mean customer obsession that sets out to really understand your customers, supported by an infrastructure that can deliver your proposition and generate profit. With clarity about who your customers are and what your winning proposition is, you will be able to provide the right (narrow) range of great products and services targeting specific customer needs. With such a strategy, tailoring the operating model to fulfil customer requirements (including convenience and the right price) profitably is more achievable.
Where the necessity is to compete on convenience, retailers need to modify their operating model to enable the rapid designing and testing of new initiatives. To that end, data-driven A/B testing is an approach to adopt as standard.
Personalising the shopping experience, combining retail ‘theatre‘ and personal interactions in store and the convenience offered by online is a powerful weapon. Will customers prioritise experience over convenience or price, or is it possible to combine? We believe if you get your business AND operating model right, it is.
As a number of retailers have already demonstrated, there‘s an opportunity to offer subscription services for both commodity products such as mobile phones and premium content-based services like Tesco‘s Blinkbox. Gazing into the future, could, for example, detergents be combined with the purchase of a washing machine on a subscription model?
Suppliers will be similarly unnerved by Amazon‘s potential dominance of the marketplace – being the junior partner with an all-powerful future Amazon is not an enjoyable prospect. One can see that a competitive advantage for retailers is possibly working with a number of tier 1 suppliers in a win-win relationship where the supplier gets a preferential margin with a retailer who therefore has exclusive access to products Amazon doesn‘t list. In addition, utilising supplier capabilities such as R&D, marketing and category management, and entering a ‘true‘ collaborative relationship could represent a major defensive mechanism against Amazon.
Amazon will continue to be one of the largest business disruptors and will remain a serious competitive threat for many organisations, but will also create growth opportunities and inspiration for others.
We predict continued rapid growth for Amazon for many years to come but the journey will not be plain sailing. With the ever-increasing complexity of the organisation, the quest for profitability will remain challenging and the business will be required to constantly transform itself.
The initial fear, and in some cases even paralysis, of their competitors has largely been overcome and effective strategies are being put in place to co-exist alongside Amazon. That being said, understanding the Amazon operating model and constantly focussing on the customer will remain an imperative for every retailer. Those who do not transform to embrace this will be left behind and subsequently perish.