Amazon.com – The Silent Killer

Amazon

There is a new disease that has appeared on the horizon and people must be warned about it. It’s a killer. It is Amazon.com cancer.

Amazon.com is creating a revolution in global retail. Amazon.com has implemented a unique strategy and operates under a unique business model. Amazon.com’s customer service and logistics are of a benchmark standard. Amazon.com has become a case study of the internet retailing and customer service. There is one more revolutionary achievement for which Amazon.com needs to be credited with, and that is the slow and silent death of the retail industry. Most people do not recognise Amazon.com as a retail sector cancer which is killing retail participants. Now don’t get me wrong, I am not criticising Amazon.com because of I a gripe with the company. On the contrary, I am not even criticising the company even though my writing about it seems to be negative, I am merely stating an observation and am providing commentary that needs to be considered by retail participants as well as customers alike. In the short term Amazon.com will continue to be the customer’s best friend, but like cancer, the pain will be felt eventually, but then it will be too late.

The retail landscape has clearly changed over the past century. In the beginning were small general stores which sold small volumes of a wide variety of products. They were convenient but not very efficient. They were small family owned and operated businesses which had a small selection of products in different product categories. Low volume sales of each product type meant that the stores could not take advantage of large purchases from the manufacturer and wholesaler. A market niche was available and over time it was filled by specialist stores that focussed on a more limited range of products, but they had more variety available and sold in considerably larger volumes since customers would go to these stores when they needed to buy something of that product category. Examples include bike shops, chemists, butcher and the like. One characteristic which continued to remain the same was that these stores were stand alone family businesses with slightly improved efficiency in terms of slightly better buying power. This was a good business model and offered improved potential for profit. If only the business model was polished and improved the profit potential would be even much greater. Eventually, it was. A new generation of store was born, and that was the chain store. Generally the chain stores were no longer family run and operated. They were headed by professional businessmen and managers and they had considerable more buying power and additional efficiencies thanks to streamlined processes and economies of scale. The same brand of bike store, hardware, fast food outlet or chemist was now found in different parts of the city, state and even country. Since there was so many specialist stores that offered greater customer service, knowledge and lower prices the general store became obsolete. It lost almost all of its competitive advantage, which was convenience. The larger and more specialised stores were open longer and streets began to be lined with specialist stores meaning that what a consumer needed to buy could be purchased relatively quickly, conveniently, and now considerably cheaply. If a family wanted to operated a business it would now need to be some type of specialist business as these had the growth potential to make the family lots of money.

Then there was cancer. The first sign of cancer was the supermarket, although this type of business seemed innocent and safe enough. The supermarkets were great. They offered a great variety of groceries under the one roof. Supermarkets had great bargaining power which only improved over time as their size and scope increased. Supermarkets offered much, much cheaper prices than the local general store which was now struggling. In fact, the supermarkets killed the general store, which no one was complaining about since general stores were much more expensive, offered limited products, and finally, the supermarket came in to level the playing field and give the power back to the consumer. Supermarkets became such a revolution that they formed a normal part of a family’s Friday night outing. With so much customer support and loyalty the supermarkets grew and corporate heads knew they were on a winner. In fact, the supermarket business model was so great that there was no reason to limit the product offering only to groceries. Then there was the addition of the meat section which offered a wide variety of meats at friendly prices. No longer did the butcher have the advantage here. Then there was the addition of the fruit and vegetable section. With this was the start of the decline of independent and chain greengrocers. The supermarkets expanded and expanded. A medicinal section offered vitamins, tablets, lotions, potions, creams and cleansers. The local chemist is only saved by their ability to offer prescription medication, whereas the supermarket cannot, but that is about it. The key to success was found – huge variety, mass scale, large volumes and customer friendly terms and conditions, such as a no questions asked money back guarantee. This model was duplicated and department stores were formed which used the same formula as supermarkets except that instead of stocking groceries and food, they stocked a variety of speciality items such as electronics, toys, furniture, books, sports goods, entertainment and so forth. Things were getting better and better for the consumer as the retail industry was maturing and characterised with innovation in product delivery. New alternatives were developed. Large scale specialist stores were just like department stores except better. Their product focus was much more limited, and this provided them with the opportunity to offer a specialised service by knowledgeable employees at low prices due to the large volumes which they turned over. Mega stores such as Officeworks were focussed on the business customer and supplied everything devoted to business. Bunnings focussed on the handyman and offers most things possible for home renovations and building supplies in Australia. Leroy Merlin and Obi are two examples from Europe which have the same focus on building supplies. Other specialist retailers in Australia include Dick Smith electronics, Michael Hill Jewellers, Collins Bookstores and so forth, each specialising in their own area.

As competition increased in retail more innovations ensued. Customers began to move away from strip shopping areas in favour of shopping centres since these offered better parking facilities, more shops in the one place, entertainment as well as enjoyable surroundings. Shopping centres became increasingly popular from the 1970’s. With this popularity came greater profit potential for the shopping centre managers and shops. This attracted greater professionalism in this area which resulted in a better shopping experience for customers and more expenditure by them. Rents continued to rise and only the best managed and operated shops were accepted due to demand for shopping space exceeding supply. Shopping centre management selected shops which suited the profile of the centre as well as customers. The smaller family run operations were becoming increasingly irrelevant and less profitable. Their shops remained on the streets as pedestrian traffic decreased in favour of shopping centres. The bigger and more profitable stores continued to grow at the expense of others. A new phenomenon was created, and that is the hypermarket, which is a massive superstore offering a combination of what a supermarket offers as well as what a department store offers. In hypermarkets such as Auchan, Carrefour, Costco, E.Leclerc, Kaufland and Makro, as a few examples, a customer can purchase bread and milk as well as car tyres, boxing gloves, a tent, an electronic scooter and a laptop, if they wish. All of these products are sold in large volumes with small margins. The supermarkets, department stores and specialist stores have now lost their competitive advantage. They are dying, and we know this to be a fact.

“The department store era is all but over. The principal task for directors is to manage the decline” John Addis, 2014.

Evolution of retailing

The first casualties of retail competition have been the general stores eaten up by the supermarkets and specialist stores. Eventually the supermarket landscape changed with some of the least innovative being eaten by the larger ones which offered greater variety. As the retail landscape changes the specialist stores began to be eaten up by competition for more efficient hypermarkets and……..the internet.

Enter Amazon.com, the deadliest cancer of all. Nothing will be spared and only retail bones will be left. Amazon.com is not killing the largest and more efficient of the retailers due to its own efficiencies and better management. No way. Amazon.com is killing off the competition because it sells at a loss. The Amazon.com phenomenon is unconventional in that the company actually loses money because it sells so cheaply. The hypermarkets and other large stores are left holding the “overheads” bag and taking large losses.  In essence, Amazon.com is an internet company with a number of highly automated warehouses. It does not have the overheads the largest of the large retail fish have. This allows Amazon.com to sell cheap. There is more! Amazon.com goes further than sell cheap. The company sells for less than cheap, so much so that it actually loses money on its sales.

“The world’s largest online storefront doesn’t operate like a typical business. It doesn’t need to make money”. Meagan Clark and Angelo Young, 2013

 

The chart below shows the facts of the numbers. Unlike any other large retailer there is no correlation between profit and sales at Amazon.com. The e-tailer has not made any meaningful profit since 2004, as shown in the chart below, even though revenues and sales have been sky rocketing.

Amazon.com financial trend

SOURCE: Clark & Young (2013)

 

The numbers are even worse in the company’s earliest years where revenues were much smaller than they are now. The fact that revenues keep rising almost exponentially now is what keeps investors interested and provides the company with access to funds. A lack of profit seems to be of no concern. Whilst this acceptable at Amazon.com other retailers are not so lucky. With their declining sales and declining profits they find it harder to access funds. Their large size, which has always been their source of advantage, is now becoming their Achilles heel. This will be a case of “the bigger they are, the harder they fall”.

This is a serious, serious cancer. Those who state that this is just another progression in retail, the same as was in the past cannot truly comprehend the consequences here. In the past the small family run local milk bar or general store was sacrificed for larger scale stores that provided lower prices for consumers, gave manufacturers large volume orders, provided jobs in manufacturing and retail and even construction. Large scale shopping centres where formed and the whole retail industry thrived as it matured. Sure, there were casualties, but overall there were additional benefits. Not now. This is a situation where the large stores are too big to fail, except that they are failing. There are already an increasing number of shopping centres in the US that are abandoned – empty! Large and small scale stores are failing. Jobs are lost. Manufacturers are seeing lower orders. This is really, really bad. Amazon.com is happy to operate at a loss, but it is also stopping others from making a profit. Everyone is going down until the only one left will be Amazon.com. Microsoft had a monopoly in the global computer operating system and Amazon.com will have a monopoly in the global retail industry. Tell your friends you read it here first!

 

REFERENCES

Addis, J 2014, “The department store era is over”, Sydney Morning Herald, February 10, accessed January 10, 2016 <www.smh.com.au/business/intelligent-investor/the-department-store-era-is-over-20140210-32bgq.html#ixzz3woySGLex>

Clark, M & Young, A 2013, “Amazon: Nearly 20 Years In Business And It Still Doesn’t Make Money, But Investors Don’t Seem To Care”, International Business Times, December 18, accessed January 10, 2016 <www.ibtimes.com/amazon-nearly-20-years-business-it-still-doesnt-make-money-investors-dont-seem-care-1513368>

Peter Solanikow
Peter Solanikow
Peter Solanikow is a tertiary educated and qualified business consultant and options trader based in Melbourne, Australia.
Peter founded A1 Tuition, an education resource provider, in 1997 at the age of 23. Peter has written a number of educational books as well as presented seminars in accounting and economics.
Over time Peter developed an interest in business management and has assisted hundreds of clients from various countries around the world in management, marketing, strategy and finance matters.
Peter travels to Europe annually and has knowledge and experience in business matters relevant mainly to Poland.

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