Amazon is crushing traditional US retailers – Are Australian retailers next?

Electronic (E) commerce and cloud computing giant Amazon is the largest internet retailer in the United States. In 2015, Amazon surpassed Walmart as the most valuable retailer in the United States by market capilisation. While Amazon has produced an impressive first quarter result for 2016, traditional retailers such as Gap and Macy’s reported a decline in sales.

1463027650964

Figure 1 – An Amazon fulfilment centre

Current state of play

Figure 2 shows a steady increase over the last 15 years in online sales as a share of retail sales in the United States (US), but this alone is not enough to explain the sharp decline in bricks and mortar retail sales. Weak consumer spending can not be blamed as a record 17.5 million new cars were sold in the US in 2015 indicating strong consumer spending.

1462998402392

Figure 2 – Online sales on the rise – Wells Fargo Securities

The distribution channel advantage

Amazon’s main advantage seems to be through its streamlined distribution channels. Amazon simply functions as the electronic equivalent of the farmer’s market: a place where buyers and sellers can meet to enact their desired exchanges (Iacobucci 2014).

Paul Grey, founder of New Zealand company ExportX, used Fulfilment by Amazon (FBA) to help his fellow New Zealanders reach customers around the globe. Mr Grey has effectively added another level to the distribution channel however, by using FBA, has opened up previously inaccessible new export markets for over 50 New Zealand manufacturers. Paul stated that the FBA program has made it possible for products to be delivered to customers at the “level of service, at the right price, without all the costs of conventional international distribution”.

It is evident is that distribution is important with regard to making the product available to the consumer. However, to get the best possible outcome, the 4 P’s of place, promotion, product and price need to be fully integrated. The Amazon distribution model benefits the consumer with a wide range of products at competitive prices that are delivered quickly. There are also clear advantages for the manufacturer as well with the ability to increase sales and reach new customers in previously inaccessible markets.

Berkshire Hathaway chairman Warren Buffet, who owns about 2 per cent of Walmart, also recognises the Amazon advantage and told shareholders on April 30 that Amazon is a “big force” that will disrupt more business. “Amazon has a real advantage in its intense focus on having hundreds of millions of generally very happy customers, getting very quick delivery,” Mr Buffett said (AFR Weekend, 2016).

Expanding the Distribution Channels

Not content with dominating the E-commerce figures, Amazon founder, billionaire Jeff Bezos, is seeking to make the internet shopping experience even better by expanding its grocery delivery business. Leasing 20 aeroplanes to move more merchandise on the US and opening new ‘high tech automated’warehouses closer to cities to speed delivery times.

Amazon is also starting to penetrate the traditional brick and mortar retail distribution channel sector by opening their own stores with the first shop in Seattle with other pop-up store to follow.

Death of traditional retailers?

Seve Odland, the former chairman and chief executive of school supplies, electronics and furniture retailer, Office Depot, said e-commerce and smaller speciality shops were “killing” department stores. The bricks and mortar retailers are being forced to transform themselves and create a whole new business model.

This is traditionally hard to do while trying to hit quarterly earnings and taking care of your traditional customer base. While the US bricks and mortar retailers clearly face an uncertain future, what lies ahead for the Australian retailers?

References:

AFRWEEKEND (2016) Traditional US retailers being crushed by Amazon. Accessed 14th May 2016 [ONLINE] Available at: http://www.afr.com/technology/traditional-us-retail-sector-is-being-crushed-by-amazon-20160511-got0ca

Business Insider Australia (2016) There’s a major threat to US retailers that no one in the industry is talking about. Accessed 14th May 2016 [ONLINE] Available at: http://www.businessinsider.com.au/amazon-is-killing-department-stores-2016-5?r=US&IR=T

Forbes.com (2015) What’s Killing Department Stores? Accessed 14th May 2016 [ONLINE] Available at: http://www.forbes.com/sites/retailwire/2015/11/23/whats-killing-department-stores/#6efb75b315cd

Forbes.com (2014) Five Millennial Trends That Will Pave The Way For Marketers In 2015. Accessed 15th May 2016 [ONLINE] Available at: http://www.forbes.com/sites/jefffromm/2014/12/19/five-trends-that-will-pave-the-way-for-marketers-in-2015/#7d8585291743

Services.amazon.com (2016) Why Sell on Amazon? Accessed 15th May 2016 [ONLINE] Available at: https://services.amazon.com/selling/benefits.htm/ref=asus_soa_snav_ben

Iacobucci,D,2014 Marketing Management (MM4) South Western, Cenegage Learning Mason

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s