How Retailers Can Pierce Amazon’s Impenetrable Fortress
Amazon Prime. Amazon Flex. Amazon Dash. Amazon Go. What’s next?
Everyone jokes that Amazon.com is taking over the world, but it seems as if it's truly dominating the U.S. retail market and beyond. From supply chain to customer loyalty to a culture of innovation, Amazon is attacking retail from all angles, and the industry needs to take a holistic look at how Amazon is building an impenetrable retail fortress.
Combined, each building block of Amazon’s retail fortress enhances its already formidable competitive advantage centralized around three core tenets: reduce costs, lower prices, and increase customer satisfaction.
For retailers to compete against Amazon’s ever-growing dominance, they must first understand each of Amazon’s capabilities, and how the combination of these capabilities enhances the online retailer's infamous virtuous cycle. The Seattle-based conglomerate is formidable, but not unbreakable.
Here’s what retailers need to understand — and build — in order to dethrone Amazon:
1. Supply Chain Dominance
With more than 70 giant fulfillment centers across the U.S., Amazon is well-positioned to dominate the country’s supply chain. Amazon is able to offer fast, easy shipping to the vast majority of the U.S. population. In addition, Amazon has built sortation centers next to fulfillment centers to further increase the speed of delivery. Not to mention Amazon has adopted the latest in automation technology, such as Kiva robots, which zoom around shelves and increase overall efficiency. Combine all this with Amazon's continued experiments with drones, international freighting, air cargo, delivery trucks, etc., and you’ve got the makings of a company that's close to controlling every step of product fulfillment and delivery.
2. Customer Loyalty
At the end of 2016, John Blackledge, a Cowen and Company analyst, estimated half of the households in the U.S. would have Amazon Prime by the end of the year. This segment's purchasing power represents more than $143 billion over Amazon Prime members’ lifetimes with the company, and signals an ever-growing loyal customer base. As Amazon continues to build offerings around the Prime ecosystem, including Amazon Music, Amazon Video and Amazon Photos, customers find it increasingly difficult to terminate their subscription.
3. Private Label Products
Think of anything you want. If you type it in on Amazon, chances are you will find it. And more and more frequently, that product will be from Amazon Basics, the company’s in-house brand that regularly tops best-seller lists in many categories, such as lighting cables, hangers and more. Amazon has even moved into the fashion industry, where it owns seven private label brands.
Amazon is sure to expand even further in offering its own product lines to consumers in an effort to cut out the middleman, thereby reducing cost for consumers. As the value measured by price and quality around Amazon’s private labels grow, retailers will find it increasingly difficult to compete.
4. Cultural and Product Innovation
As a company, Amazon prides itself on being at the forefront of innovation. It's ingrained in the company's culture to fail fast, fail often and learn. Take the Amazon Fire Phone, a failed product that didn't stop Amazon from innovating. Soon afterward, we saw the arrival of Amazon Echo, which has already sold over 9 million devices. The small failures are learnings toward even bigger opportunities.
Rather than just focusing on the price of goods, speed of delivery or other piecemeal aspects of retailing, companies will need to fundamentally transform the way they conduct their business — either through acquisition or by growing capabilities as quickly as possible — if they want to succeed in the fight against Amazon.
Dennis Ngin is the COO of ExpandLab, an e-commerce strategy and development company.