If it’s the Amazon Century, how did we get here?

Warning, this is not about Whole Foods, it’s bigger than that!

Is this the Amazon Century?

By Lee Peterson

On January 4, Macy’s, the nation’s largest department store chain, announced it would cut 10,000 jobs and close 68 stores. One week later, Amazon said it would add 100,000 jobs in the U.S. The timing of these two announcements is not a coincidence, but inextricably linked and together represent the two competing stories of retail’s future in America.

We have now entered the Amazon century

In the Macy’s announcement, we are reading the final chapter in the story of 20th century retail. In the Amazon announcement, the first chapter in a new story of retail—one that will not only define retail, but all of commerce in the 21st century. Macy’s is not the only retail casualty of this first chapter—one dominated by stories of massive layoffs in the retail sector. This year, hundreds of retail stores will close and thousands of jobs will be lost, including at Sears Holding Corp., when 108 Kmart stores and 42 Sears stores are closed for good, and 4,000 jobs at The Limited, a women’s apparel store chain shutting down its last 250 stores.

We have now entered the Amazon century. A company once dismissed as a low-margin competitor is not merely gaining share and profits. It is rendering once indomitable competitors almost entirely defenseless. Amazon has become the low-margin commodity retailer, the everything store—the competitor every other retail brand must reckon with and measure performance. Yet retailers have continually misunderstood Amazon’s ascendancy. Amazon’s presumed weakness—getting low-margin commodities into consumer homes efficiently—has become its singular competency.

The result of this singular focus is that Amazon might very well end up being the only low-margin commodity retailer left in the industry. The 20th century belonged to the department store, a model of retail that changed and then shaped American culture and commerce for nearly a century. As this commerce model loses relevance, and the category contracts without an obvious defense or viable way to expand again, it is becoming Amazon’s turn to dominate the retail industry.

Is the 21st century the Amazon Century?

So, try and forget about the Whole Foods deal for a second and think about how Amazon managed to achieve so much in less than three decades. Is the 21st century the Amazon Century? And if so, how did we get here? Amazon’s story has consistently been defined by focusing on four key strategies—patience, automation, control, and ubiquity.

Amazon has consistently delayed profits, making massive investments in innovation instead. This patience has paid off.

Your margin is my opportunity

In many ways, the Amazon story is characterized by something quite exceptional in the corporate world: patience. Again, and again, the online shopping giant and its investors showed a willingness to wait, delaying easy profits for the longer game, investing massive amounts of capital into innovation in a constant bid to gain market share from less patient competitors. In fact, for nearly a decade after it was founded, Amazon posted annual losses. It wasn’t until January 20041 when the ecommerce pioneer hit a key milestone—posting a full-year profit. Even so, losses were part of the corporate story for the next decade. As recently as 2013, Amazon posted significant quarterly losses.2 The famous Jeff Bezos3 aphorism may be: Your margin is my opportunity, but this strategy meant taking risks. At least for the first two decades or so. Then something started to change in 2015. With the threat of losses waning, consistent profits became the norm. Amazon has posted six quarters of profits in a row, a streak unheard of in its history. In 2016 alone, Amazon posted operating profits of $4.2 billion.4

Amazon isn’t only building a robot and drone army because it can. It is finding ways to upend the bricks-and-mortar retail model through efficiencies and aggressive moves into automation.

In early December 2016, Amazon began beta-testing a convenience store, branding it Amazon Go. With a single location in Seattle, it has used its own employees to test the concept. The store operates without cashiers, and with very few workers. Shoppers simply take what they want from the shelf. Items are billed directly to their Amazon accounts. The design eliminates labor costs from the shopping process. Bricks-and-mortar competitors are scrambling to adapt—spending millions to retrofit existing store designs and eliminate cashiers. Sam’s Club has launched a Scan & Go app for shoppers to skip checkout, an app also being tested at some Walmart stores, too. Wendy’s has started rolling out automated kiosks in its six-thousand locations. McDonald’s is installing self-order kiosks; so is Johnny Rockets; and Panera, among others. In addition to Amazon Go, the online shopping behemoth is moving aggressively into the grocery-store category, too, and plans to open pick up centers for its Amazon Fresh service. In December, the Wall Street Journal reported it might open as many as 2,000 stores in different formats. Some industry watchers have said some of these locations might operate with as few as three employees at a time.

Amazon grew relying on other companies for distribution and delivery, but it has invested billions building an independent infrastructure. Fulfillment centers are only the beginning of its company-controlled, worldwide logistics network. In the process, Amazon is creating a new kind of commerce system, one based almost entirely on control.

Amazon is building something unheard of in the history of modern commerce—a factory-to-doorstep delivery system. It is a system design from the ground up around a direct feedback loop connected to consumer demand. The next stage of Amazon’s ever-expanding logistics infrastructure isn’t merely ambitious, it fundamentally disrupts the way goods and services have traditionally found their way to consumers.5 Amazon wants to own and control the system entirely, instead of leaving its fate to others, a move that may eventually loosen its reliance on major shippers, and American workers as well. It is building a $1.5 billion, 2-million-square-foot air cargo hub in Northern Kentucky, which will reduce the company’s dependence on UPS and FedEx even further.

This system of control goes beyond shipping. Within Amazon’s extensive network of fulfillment centers, people work side by side with the company’s rapidly expanding fleet of orange robots. Amazon used 45,000 robots this past holiday season— a 50 percent increase over the year before. Controlling this factory-to-doorstop delivery system has allowed Amazon to do cheaply—and profitably, at last—what many of its competitors are still losing money doing. In fact, according to one recent study, only 10 percent of 350 global retailers surveyed are making money on digital orders.

Amazon wants to be everywhere, but most importantly where consumer demand starts: Inside the home. This 24/7 strategy is based on ubiquity.

The “always-on” Echo speaker is always listening, transmitting recorded commands to Amazon’s computer servers, which interpret these requests and finalize orders. The promise of the Internet of Things has now found its home, inside consumer’s home—with over 5 million Echo’s sold since launch more than two years ago. As Amazon continues to make capital investments in bricks-and-mortar, selling its Echo device and bookstores in Boston, Chicago, San Diego, and Seattle, as well as pop-up locations at 30 malls nationwide, it has also created a way to inhabit the epicenter of consumer demand. Amazon isn’t merely thinking about this year’s sales, or questions of procurement and shelf space, but how to inhabit and be there during every stage and moment of a consumer’s life.

Conclusion

As separate strategic elements—patience, automation, control, and ubiquity—would be of little consequence. We would not be entering the Amazon Century. But what has made Amazon’s trajectory possible is how the company combines these four elements—obliterating competitors in the process. Most importantly, Amazon always marshals these four elements under a singular focus—service to the consumer, and the everyday needs of shoppers. This combination has made all the difference, ushering us into the brave new world of 21st century commerce—and a entity that’s becoming more monopoly than traditional retailer.

Lee Peterson
Lee Peterson
Executive Vice President, Thought Leadership, Marketing
WD Partners
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Comments

  • There are 2 companies with 2 different philosophies. One crates a product and tells the market why it wants it. The other creates a system to meet existing and deliver what the market wants easier, faster, and often cheaper.

    What company is destined to succeed and which keeps trying to sell you the same iPhone over and over?

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