Is this the Amazon Century?
The e-commerce giant's dominance is about much more than the Whole Foods takeover, writes Lee Peterson at WD Partners.
Editor's note: The following is a guest post from Lee Peterson, executive vice president of brand, strategy and design at WD Partners, a global design and customer experience firm.
Early this year, Macy’s, the nation’s largest department store chain, announced it would cut 10,000 jobs and close 68 stores. One week later, Amazon said it would add 100,000 jobs in the U.S. The timing of these two announcements is not a coincidence, but inextricably linked and represents the two competing stories of retail’s future in America.
As Macy's closes out the final chapter in the story of 20th century retail, Amazon turns the page on a new era of retail — one that will define commerce in the 21st century. Macy’s is not the only retail casualty of this first chapter. This year, hundreds of retail stores will close and thousands of jobs will be lost, including at once-iconic retailers Sears Holdings, Radioshack and The Limited.
We have now entered the Amazon century. The company, once dismissed as a low-margin competitor, is not merely gaining share and profits, it is rendering once indomitable competitors almost entirely defenseless. Amazon has indeed become the everything store — the competitor every other retail brand must reckon with and measure performance by. Yet retailers have continually misunderstood Amazon’s ascendancy. Its presumed weakness — getting low-margin commodities into consumer homes efficiently — has become its singular competency.
The result of this singular focus is that Amazon might very well end up being the only low-margin commodity retailer left in the industry. The 20th Century belonged to the department store, a model of retail that shaped American culture and commerce for nearly a hundred years. As this commerce model loses relevance, and the category contracts without an obvious defense or viable way to expand again, it is becoming Amazon’s turn to dominate.
So, try and forget about the Whole Foods deal for a second and think about how Amazon managed to achieve so much in less than three decades. Amazon’s story has consistently been defined by focusing on four key strategies — patience, automation, control and ubiquity.
If the 21st century is the Amazon Century, how did we get here?
Patience pays off
In many ways, the Amazon story is characterized by something quite exceptional in the corporate world: patience.
Again and again, the online shopping giant and its investors showed a willingness to wait, delaying easy profits for the longer game, investing massive amounts of capital into innovation in a constant bid to gain market share from less patient competitors.
In fact, for nearly a decade after it was founded, Amazon posted annual losses. It wasn’t until January 2004 when the ecommerce pioneer hit a key milestone — posting a full-year profit. Even so, losses were part of the corporate story for the next decade. As recently as 2013, Amazon posted significant quarterly losses. The famous Jeff Bezos aphorism may be "Your margin is my opportunity," but this strategy meant taking risks. At least for the first two decades or so.
Then something started to change in 2015. With the threat of losses waning, consistent profits became the norm. Amazon has posted six quarters of profits in a row, a streak unheard of in its history. In 2016 alone, Amazon posted operating profits of $4.2 billion.
Upending retail through automation
In early December 2016, Amazon began beta-testing a convenience store, branding it Amazon Go. With a single location in Seattle, it has used its own employees to test the concept. The store operates without cashiers, and with very few workers. Shoppers simply take what they want from the shelf and items are billed directly to their Amazon accounts. The design eliminates labor costs from the shopping process.
Since the announcement, bricks-and-mortar competitors have scrambled to adapt — spending millions to retrofit existing store designs and eliminate cashiers. Sam’s Club has launched a Scan & Go app for shoppers to skip checkout, an app also being tested at some Walmart stores, too. Wendy’s has started rolling out automated kiosks in its six-thousand locations. McDonald’s is installing self-order kiosks; so is Johnny Rockets; and Panera, among others.
In addition to Amazon Go, the online shopping behemoth is moving aggressively into the grocery category, too, and plans to open pick up centers for its Amazon Fresh service. In December, The Wall Street Journal reported it might open as many as 2,000 stores in different formats. Some industry watchers have said some of these locations might operate with as few as three employees at a time.
In-house fulfillment lends control
Amazon grew relying on other companies for distribution and delivery, but it has invested billions building an independent infrastructure. Fulfillment centers are only the beginning of its company-controlled, worldwide logistics network. In the process, Amazon is creating a new kind of commerce system, one based almost entirely on control.
Amazon is building something unheard of in the history of modern commerce — a factory-to-doorstep delivery system. It is a system design from the ground up around a direct feedback loop connected to consumer demand. The next stage of Amazon’s ever-expanding logistics infrastructure isn’t merely ambitious, it fundamentally disrupts the way goods and services have traditionally found their way to consumers. Amazon wants to own and control the system entirely, instead of leaving its fate to others, a move that may eventually loosen its reliance on major shippers, and American workers as well. It is building a $1.5 billion, 2-million-square-foot air cargo hub in Northern Kentucky, which will reduce the company’s dependence on UPS and FedEx even further.
This system of control goes beyond shipping. Within Amazon’s extensive network of fulfillment centers, people work side by side with the company’s rapidly expanding fleet of orange robots. Amazon used 45,000 robots this past holiday season — a 50% increase over the year before. Controlling this factory-to-doorstop delivery system has allowed Amazon to do cheaply — and profitably — what many of its competitors are still losing money doing. In fact, according to one recent study, only 10% of 350 global retailers surveyed are making money on digital orders.
Leveraging a 24/7 strategy
Amazon wants to be everywhere, but most importantly where consumer demand starts: Inside the home. This 24/7 strategy is based on ubiquity.
The “always-on” Echo speaker is always listening, transmitting recorded commands to Amazon's computer servers, which interpret these requests and finalize orders. The promise of the Internet of Things has now found its home, inside consumer’s home — with over 5 million Echo’s sold since its launch more than two years ago.
As Amazon continues to make capital investments in brick-and-mortar retail, selling its Echo device and bookstores in Boston, Chicago, San Diego and Seattle, as well as pop-up locations at 30 malls nationwide, it has also created a way to inhabit the epicenter of consumer demand. Amazon isn’t merely thinking about this year’s sales, or questions of procurement and shelf space, but how to inhabit and be there during every stage and moment of a consumer’s life.