How retailers can fight the Amazon Goliath

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How are Amazon’s sales growing so dramatically — 30 to 40 percent quarterly for the last umpteen quarters — when even the big retailers are struggling to grow 1 to 2 percent? In record time, Amazon has taken on the Goliaths of retail yesteryear with their massive resources, nationwide store footprints and well-known brands, and turned them into isolated Davids.

In 17 short years, Amazon has grown to be the 12th largest US-based retailer, larger than even Macy’s or Staples.  Amazon’s 2011 online sales of $48 billion dwarf every competitor’s online sales, and are larger than the next ten online competitors combined including Staples.com, Apple.com, Walmart.com, Dell.com, OfficeDepot.com, QVC.com, Sears.com, Netflix, CDW, and Bestbuy.com.

What is driving Amazon’s amazing growth is a network effect, the likes of which have never been seen before in retail. For many customers Amazon is the one-stop shop where they start and end their shopping.

This suggests the question: how did it get that power?

Amazon’s incredible network effect has exponentially sped up, allowing it to enter new categories with ease thanks to a massive customer base of at least 160 million customers and tens of millions of items from thousands of retailers (and Amazon itself).  Amazon is indisputably winning the war for online market share. But this war is not just an online war.

Amazon’s wickedly effective loyalty program, Amazon Prime, has made it really easy to buy across product categories too. Netflix now faces a formidable foe with Amazon’s entry into video (conveniently bundled into Amazon Prime).  And the entire B2B sector is wondering about its fate with Amazon’s recent B2B launch of AmazonSupply.com offering 500,000 industrial and commercial items at launch.

For these diminished Davids, a trail of dead and struggling retailers in books and consumer electronics is just the beginning. And thus far, nary a retailer could stop formerly loyal consumers from leaving their stores.

With mobile devices entering into retail stores, the war has also become a physical store war which will affect retail survival.  Few retailers have the customer base and product selection to go up against Amazon alone.  Retailers have their backs against the walls trying to defend their higher cost structure and often higher prices against Amazon’s likely lower prices accessible on every smart-phone in the middle of their stores.

In this war for retailer survival, retailers can employ four stand-alone strategies to improve their odds:

1.       Offer exclusive products that aren’t easily found elsewhere – Retailers can’t just sell commoditized products and hope to be successful.  They need to sell custom products or unique products that are exclusive to them.  This will require retailers to vertically integrate and become product designers and not just product sellers.

2.       Add services that can’t be shipped in a box – Retailers that invest in services which customers value have a defensible proposition. As one example, pet retailers now offer in-store grooming, vet care, boarding and day care, all services that can’t be duplicated online.

3.       Retailers need to double-down on their digital focus and investment, not brand legacy. Whatever they’re doing now, it’s just not enough.  Retail CEOs spent far too much time on their legacy business of retail stores and not enough time on their future business of online and mobile retail.  Digital strategy cannot just be delegated to the “SVP of Digital” but rather needs to be part of a CEO’s day-job.

4.       Lead digitally, support physically – Retailers need to flip their mind-set from using websites to support stores, to using stores to empower websites to compete against Amazon (and all competitors).  Retail stores can be potent weapons in retailers’ business plans.  Hundreds/thousands of retail stores provide the proximity to customers that Amazon lacks despite dozens of fulfillment centers.  With buy online, fulfill from stores, online customers get next day gratification.  With buy online pick up in store today, online customers enjoy same day gratification, a superior option to Amazon’s delivery times.

And if any or all of the above stand-alone strategies aren’t good enough (and they likely aren’t), retailers need to find allies in the customer loyalty war.  Taking a historical perspective that retailers should heed: great wars in history are rarely won alone, but rather with the help of allies.  There’s no reason to attack each other when they share a common foe. In an alliance, they have a fighting chance of survival.

Retailers should join a network solution like ShopRunner – a growing consortium of over 60 retailers harnessing that alliance including ToysRUs, PetSmart, American Eagle, Sports Authority, Newegg and Blue Nile who are cooperating to provide a wide product assortment to ShopRunner members driving sales across the network.  ShopRunner’s members are motivated to buy across the coalition’s websites with unlimited free 2 day shipping and return shipping, and across retailers’ stores with the option to pick up packages at designated ShopRunner PickupPoint locations.  As such, ShopRunner members end up buying more from ShopRunner participating retailers (which of course, don’t include Amazon).

Fiona Dias is the Chief Strategy Officer at Shoprunner and was formerly the head of e-commerce at Circuit City.

Photo via Robert Scoble/Flickr

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