Amazon: Retailers Gonna Retail
The narrative of Amazon’s total disruption of traditional retail and ultimate dominance is well-known. What if many of the recent changes reflect not a path to domination, but Amazon’s journey as a more traditional retailer?
An annotated twitter thread.
Retail has always been generational. Retail success stories are a graveyard of iconic brand names. Just brutal in how they roll over every generation.
Here are a few from my own childhood that no longer exist.
Historically rollover is due to a secular change in how people both buy and sell stuff. We might call this disruption, but these changes are tied to transport, communication, suburbanization, etc. No mistake, there’s innovation but in retail this is a response to secular change.
Sears famously was a catalog store (farms!) anchored in appliances, tools, etc. As fashion and shopping malls became big, Sears position would weaken.
Discount stores became a big thing, especially during down economies. That drove innovations like cheap house brands, bulk buys.
Each generation of retail can be thought of as a response to the structural changes in society — people need things and retailers provide them. If the things people need, the places they go to get them, or the way they find them change, then retailers adapt (or innovate) to meet those needs.
Department stores were a response to the rise and commercialization of women’s fashion in the US, creating a whole stretch on Manhattan of stores stocked with many different brands of clothes. The rise of consumer credit became a big part of this innovation as stores began to offer payment terms (monthly billing) in order to attract and maintain customers.
The suburbanization of the US gave rise to big box retailers. Many of the retailers in urban settings continued to grow but ran up against limits. The first large format stores followed people to the suburbs. Of course the history of shopping malls is closely tied to this as well.
But with each of these changes came a pattern of success, fast growth, and then troubled times.
The stories of being “disrupted” in retail are as numerous as there are defunct retailers. Hey check out thedepartmentstoremuseum.org for a whole site of defunct retailers.
Behind the scenes all along there’s been…retailing. It is a thing. Everyone’s job is harder than it looks.
Retailing is location (where), finance (float!), display (finding), basket (quantity), categories (what to stock), assortment (brands), customer (full price, discount).
If you only buy stuff but don’t work in the field, retail is definitely one of those professions that appears from the outside to be straight forward. In fact it is incredibly complex and extremely difficult to operate. One way to think about this is that if retail was so straight forward, there would be far fewer failures and “opening a store” would have a much higher success rate.
Retail is an operational and finance intensive business along with a significant amount of intuition and artisanship.
Every generation has generally brought innovation or “disruption” to some bundling of the core elements of retail. Even if from afar they look the same.
Stories then written about how a new model (or form factor) will come to dominate and end all others.
A funny thing happens…
As the new model begins to show age, the old lessons/approaches of retail take over.
Just as every startup starts out with cultural attributes and mantras like no meetings, flat orgs, or fast decisions and at some points finds itself wrestling with a re-org in an all day meeting unable to decide what to do, retailers all start off with approaches counter to existing models. These approaches are viewed positively because they address concerns people have always had with “stores”.
Then over time, seemingly strangely, every retailer gravitates towards doing what all the previous retailers ended up doing. Example abound of these “conversions” such as retailers that promise not to have sales or discounts (Tiffany famously says they don’t discount, but really…), or LL Bean backing off free shipping, or Nordstrom dropping their customer-is-always right return policy.
Find a successful retailer that has not:
- shut stores b/c not every location worked
- started selling house brands
- began making money from financing
- changed core selling terms
Retail is so unpredictable, yet brutally predictable. If you follow earnings calls for retailers you can just see these patterns. For example, every retailer reports sales as “same store year over year for stores open a year+” meaning the measure of sales volume in a store (if it has been open more than a year). When a retailer is new it expands rapidly opening new stores all the time (think Gap, Starbucks, Target). Then, painfully predictably, some stores stop performing. This could be many things like location choice, local economy, mismatch of nationally selected products and local market, local or regional management, etc. But at the national level it just doesn’t matter as pretty soon stores start shutting.
Back to Amazon. Some recent Amazon success stories:
- Logistics
- PRIME (especially free shipping)
- Basics
- And now Advertising
Logistics that Amazon has created is truly awe-inspiring.
To be in retail or tech in 80s/90s was to know Walmart‘s insane logistics. Anecdotes like scanning Pampers at the register would cause a warehouse palette to be placed on the next truck heading to that store were endless.
The scale is crazy big now. Walmart’s scale was crazy big at the time too.
Now today’s technology is hitting all the same scale limits. Remember Amazon’s founding was to essentially be a virtual store. Wasn’t long before warehouses showed up in every time zone. Just like WMT.
PRIME is a much loved innovation. Said another way though, PRIME is part of using loyalty and finance as a key part of retail.
Sears famously had a credit card. People would finance purchases that way and be part of special promos and incentives.
Over time pressure to make more from this “business” of Sears caused rising interest rate, credit quality to decline. A positive became a risk to biz.
No doubt over time basket of PRIME will be looked at as cost not benefit. How many items don’t have PRIME these days?
Amazon Basics are awesome. Batteries, phone cables, and so on.
Literally every clothing department/retailer starts off carrying big name brands. They watch the data see what moves, then head to clothing mills and start the journey of house brands.
One day you go to the store and have trouble finding socks or t-shirts from your fav brand — the house brand is right in front of you. Or maybe your fav brand isn’t even stocked any more.
This tension is part of every maturing retailer in every segment. No retailer escapes house.
Today’s big thing is Amazon is creating a “new” business of advertising. 🤔 What is this? It is a program where sellers can push their merch higher up search results so customers see them.
Shocking.
How do you think anything shows up in a store? Buyers (ppl at retailer that stock stuff) don’t just decide “hey let’s get brand X”. Placing Brand X in a store is not just a “product” choice, but a negotiation over terms and conditions. Over placement in store.
The recent statistic is that Amazon is the #3 online advertising business with 4.6B behind Google and Facebook. Thinking about that number, what would one guess is the amount of spiffs, co-marketing, incentives, and more that change hands between say WalMart and P&G, or between Microsoft/Intel/HP/Dell? P&G spends about 7B on advertising, most outside of stores but it is one company. About 15% of P&G goes through WMT. Imagine 3B on “internal” or “in store” advertising and promotion. So about 450M of spend directed at WMT in some way. Much of this might not be checks, but price cuts to P&G, or rebates at end of quarter, or maybe WMT features P&G in their paid demand gen. It is all very fuzzy.
We think a lot about supermarket shelves (P&G invented all that). But there are many other places money is spent on “advertising”:
- Consider innovations like Ralph Lauren’s store within a store.
- Or that fancy “Windows PC” station at BestBuy.
- Or even an Apple Store at Yodabashi!
- Or those Windows PC TV commercials featuring HP Elite XYZ notebooks.
Who pays for all those? Placement, advertising, even staffing in the store.
Well turns out you don’t really know. It is all part of money going back and forth between retailers and mfg or distributors. Buy 1M of merch, spend 100K on signage, get 20K of training, 100K advert.
Untangling all this is a massive effort and literally what retail is all about. Would it surprise anyone that billions of dollars are spent between PC OEMs, PC retailers, Microsoft, and Intel. Maybe 6 people could actually trace all that money and figure out really who paid what.
When I was a kid, in our store my father used to routinely wrestle with choosing different forms of “discounts” — essentially a system of linear equations he had to solve. There were incentives on certain items, or different prices if he agreed to feature products in newspaper advertisements, or better prices if he didn’t discount the items, or deals if he increased buy volume of less popular items along with popular items. Plus there was always agreeing to not returning unsold items or paying early. The biggest line item opportunities came from acquiring in-store display fixtures and stocking them with mfg’s items.
The bottom line for our business though was money in versus money out, all up for the month. Margin is everything and solving those equations is what yields margin. It is also why so many small retailers really struggle — the job is a lot of complex finance, not just product and customer love.
The PC supply chain from chip to consumer is filled with these. Windows Pro v. Home, is there a Windows stick on the PC, signed 64 bit drivers, Intel chips, does it meet Ultrabook specs, is the BestBuy store appeal score a certain level, what if you sell a printer with it, and so on. Each of these might come in the form of discounts but they are more likely to come with better in-store placement or product use in advertising (tip: if an ad ends with “Intel Inside” you might be seeing an ad Intel paid for or subsidized and if Intel paid then it looks “free” or a product discount to the OEM).
All of this is legit. It is just 10’s of billions of dollars in the whole of the retail pipeline from ingredient to consumer. But it is why counting Amazon as having an advertising business is a lot like counting companies that let your download software and install it as “cloud companies”. Just a bit of riding a wave.
Why? Because in retail the ultimate thing that matters is margin. While the Amazon saying is “your margin is my opportunity” it turns out this is a two way street.
Everyone in the retail pipeline gets/receives money multiple times in the process of making, stocking, selling.
This used to be called “cost of sale” and maybe Amazon’s innovation will be to think about it differently and account for it as a business separately. That doesn’t change that this is all about margin.
It might even accelerate pace to become like every other retailer ever. Why?
Because visibility of cost will make the end state even more visible. It will make it much clearer to the whole pipeline what is going on. Most important — Amazon itself will come to value this sooner.
Retail has always been brutal. I grew up in a family run retail business. Spiffs, 2% net 30, coop advert, etc. were all family discussions.
What we’re seeing in Amazon is innovation for sure. But it is on a trajectory that retail has seemingly followed every generation. // END
PS/ I love love Amazon. Nearly every day I come home to some box on my doorstep.
But retail is a thing. It gets reinvented and then it re-converges on past best practices. A connected and networked world causes things to converge more rapidly every generation.
This post was not about whether to be long or short Amazon. If you consider Walmart, it is has gone through periods of global domination much like we see Amazon today and periods of operational difficulty and as recently as a 2 quarters ago “doom and gloom, Amazon will kill them”. The reality with retail “form factors” or “models” is that they do rely on consume behavior and routine. Innovations come along quickly but consumer behavior can be difficult to change. Not everything Amazon has tried has worked. Grocery delivery for example is proving difficult. And at the same time, Walmart has not become a social norm for every price/income segment (and Target’s recent strength shows that).
