Understanding the “Amazon Effect” on your Business

This is the decade of the “effect.” As  an example, we keep hearing about the “Trump Effect.” While not much of his legislative agenda has been approved to date, president Trump still has almost three and half years remaining on his first term in office. It will be interesting to see how much of his “conservative” agenda is implemented and the impact that it will have. Of particular interest will be the NAFTA negotiations that begin on August 16. Similarly, Climate Change is having profound effects in various parts of the world, whether it is from flooding, forest fires, drought, severe storms, or floating ice bergs.

We are also going through an era of major transformations in energy production/consumption and technology. The new Tesla car that was introduced to great reviews this week may be the catalyst to a shift away from gasoline-powered cars to electric vehicles. The fact that this beautifully designed car, introduced at a market friendly price, can get almost 500 miles on a charge, could be a turning point in the evolution of electric vehicles. India has recently made a major commitment to electric vehicles.  This coupled with driverless or at least semi-autonomous cars and trucks, that are a few years away, could have profound effects on energy consumption and transportation.

Smartphones, tablets, ecommerce, apps and Uber threaten to have an equally dramatic impact in many areas of business. One company that is very well positioned to capitalize on the Technology Effect is Amazon. Here are a few statistics to consider.

While total retail sales in the United States grew by 3.8 percent in 2016, ecommerce sales grew by 15.1 percent during the same period. Most of that growth is being driven by one company. According to Slice Intelligence, Amazon accounted for 53% of all ecommerce growth in 2016. During 2016, Amazon had almost 37% market share in ecommerce sales; Wal-Mart had a 2.6 percent market share and Target had a 2.7 percent share. Keep in mind, these statistics don’t reflect the potential impact of the Whole Foods acquisition.

Amazon has differentiated itself by creating a unique warehouse and distribution model and by providing its customers with high levels (i.e. next day, 2 hour) of service. The company has made the investment in brick and mortar distribution facilities, processes, and delivery capabilities, to meet the unique service expectation/performance levels that it has created. The impacts are being felt throughout North America. The list of store closings and bankruptcies is expanding almost daily as a result of the “Amazon Effect.”

In 2017 Radio Shack is closing 1000 stores (14%), Payless ShoeSource (512), JC Penney 140 stores (14%), Macy’s 100 stores (15%), and Sears is closing 150 stores (15%) in the United States. Additionally, The Limited is closing all its stores and Kohl’s is planning to shrink the size of almost all its stores to reflect lower sales. HMV Canada is closing its 102 Canadian stores while Sears Canada is closing 59 stores in Canada, FedEx Office is closing its 24 Canadian stores and Best Buy Canada/Future Shop is shuttering 14 outlets.

Consumers are also changing their product and pricing preferences. As an example, off-price apparel sales in the United States rose 39 percent between 2011 and 2016. Off-price retailer Saks OFF 5TH plans to operate 25 Canadian stores by next year while Nordstrom Rack will enter Canada next year, with plans to open between 15 and 20 stores.

With Amazon’s vast selection of products and distribution options, consumers are choosing to place their orders from their home or office or mobile phone rather than go to the mall. In 1970 there were only 300 enclosed malls in the U.S.; now there are 1,211 of them. Despite the recent turbulence in the retail industry and the Amazon Effect, the number of malls open has actually increased each year. Between 20% and 25% of American malls will close within five years, according to a report from Credit Suisse. That kind of plunge would be unprecedented in the nation's history. Credit Suisse estimates that a record 8,600 stores will close this year alone. That's far more than the record 6,200 stores that closed in 2008, the first year of the Great Recession. What does this mean to manufacturers, retailers, and transportation companies throughout North America?

For manufacturers of consumer products, it means looking at speed to market and the company's range of available distribution channels. Consumers are being conditioned by Amazon’s supply chain to expect high speed, date, and time definite delivery. Consumer product manufacturers need to ensure that their manufacturing and distribution cycles are in line with these high-speed ecommerce service levels.

Similarly, retailers need to ensure their omni-channel channel distribution strategies can meet the range of consumer requirements. They also need to have their pricing and promotion strategies in place to counter Amazon’s dominant position in online shopping.

Small parcel and LTL carriers need to look at the delivery requirements of their retail and home shopper customers and craft a set of retail delivery and last mile distribution/home delivery strategies to address a much more extensive array of requirements.  This may involve new small parcel/LTL carrier business models and a stronger focus on the service demands of the key ecommerce players.  In other words, it is essential for many companies in these various sectors to think through the “Amazon Effect” on their businesses so they can survive and prosper in the years ahead. 

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