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Does Your Company Need An Amazon Strategy?

How do you compete with a company which doesn’t care if it makes a profit?

18Dec

Amazon is huge.

It is hard to really convey how big and influential Amazon has become over the last 2 decades.

Even in physical size alone, Amazon is daunting. According to Frugaldad, Amazon’s warehouses have more square footage than 700 Madison Square Gardens and could hold more water than 10,000 Olympic pools. In more financially relevant terms, Amazon currently owns 10% of all North American E-commerce. With Office Depot, Staples, Apple, Dell, Walmart, Sear, and Liberty all sharing another 10% between them, that leaves the thousands of other retailers in America to fight over the remaining 80%.

However, this isn't enough to fully illustrate the influence it now has over the retail industry as there is one thing which has long distinguished Amazon from all its competitors:

Amazon doesn’t care about making a profit.

It was hard to see how this could constitute a functioning strategy and the company definitely had its fair share of skeptics for many years. But with CEO Jeff Bezos now the richest man in the world at a personal worth of almost $100 billion dollars, those skeptics have mostly dried up. This strategy worked because from the very start, Amazon has always favored growth over profit. Considering Bezos started the company from his garage, it can’t be argued that this ‘slow-burn model’ of maintaining a business has worked incredibly well for the company.

So how do you compete with a juggernaut that doesn’t care whether it makes a profit or not?

The scary answer seems to be...

you don’t.

A brave new world

In 1999, Wall Street valued Amazon at $24 billion, despite it having never made a profit.

For comparison, at the same time, chain department store, Sears was valued at $16 billion, 20% less.

Sears, practically an American institution at the time, had been around for over 100 years, yet, according to Wall Street, was worth less than a 5-year-old company which in that year alone, had lost $125 million.

‘I think my generation grew up with Sears, and Amazon is worth 20% more than Sears in market capitalization.’ one Wall Street investor told 60 minutes in a 1999 interview. ‘Investors are focused on the future and Amazon has growth potential that Sears simply doesn’t.’

And investors have been proven right in a spectacular way with Amazon now the 4th most valuable company in the world. Yet, the wild thing is, Amazon still operates at a loss, this year alone losing $7.2 billion according to Statista.

This has had devastating consequences to every market within their scope, and that is a lot of companies. For example, according to Yahoo finance, Sears this year showed a loss of -17% in Q3 and is now worth only $430 million, while Amazon is worth a whopping $560 billion. That means Amazon is now almost 1,400 times more valuable than the department store and as a consequence, Sears has had to shutter dozens of its stores across the country.

And it's not alone.

According to Credit Suisse, more retail stores closed in 2017 (8,640E) than at the peak of the economic recession in 2008 (6,163), and that was almost solely down to competition from Amazon.

The problem for retailers is, they now have to try and offer the same level of fulfillment that Amazon provides its customers. However, features like 24-hour delivery come at a hefty price and it is almost impossible for any other retailer to afford to operate at the loss margins Amazon does.

So with Amazon now the dominant force in the retail market, other companies have to massively adjust their business strategy in order to simply remain in existence.

If you can’t beat ‘em...

For brands, the most effective way of doing this seems to be to simply join the fray.

For example, Calvin Klein decided to start distributing an exclusive line of clothing on Amazon, with a focus on high volume-low cost products and core replenishment categories such as underwear. In 2016, its parent company PVH’s CEO Manny Chirco announced they had achieved 20% digital revenue growth in its 3rd quarter.

Levi jeans, another American clothing institution, at first fought this change to the landscape. Being the oldest clothing line and inventor of denim jeans, the company thought it could weather out the change by virtue of its powerful brand story.

Turns out, it couldn't and its revenues suffered dearly for most of the early naughties due to intense competition from fast and cheap retailers like Amazon. It too has caved into its own Amazon strategy in recent years, selling a line of jeans exclusive to the site.

Full-up on crumbs

Another successful strategy being adopted by some companies is to focus on areas of the market which Amazon doesn’t have much interest in. Dollar General is a prime example of this; with its focus on the low-end market, it has capitalized in a big way by drilling down into its Amazon strategy of going where Amazon isn’t. And it has worked as Dollar General has more than doubled Macy’s profits last year on less revenue and is now, according to the Wall Street Journal, worth twice as more as Kroger, the largest pure-play grocer in America.

This means that despite a rash of closures by other retailers across the country, Dollar General plans on opening thousands of outlets across mostly rural America. So while there might not be one magical Amazon strategy, retailers and brands still need some kind of strategy in place if they have any intention of making it through the next decade.

L2 founder Scott Galloway says ‘The first thing I tell boards whenever they ask how to compete with Amazon is, unfortunately, you have to:

1. Lower profit expectations

2. Reinvest in the consumer experience.

Like it or not, Amazon is here to stay for the foreseeable future and they have reshaped the retail market in ways which can't be reversed. The age of high-profit margins and undying customer loyalty are fading away. However, this doesn’t have to mean the end for a business if it can adjust and evolve to the new standard set by the giant. If there is one thing we can learn from those Wall Street investors in 1999, it’s that it always pays to look towards the future.

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