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Amazon – Motivation for retail or its fatal blow?

First, I would like to direct your attention to Amazon with an analogy from Greek mythology: Pandora’s box. As a symbol of “beautiful evil”, Pandora’s box holds many gifts and is tempting to open. But if you open it, the adversity conspires against you. Certainly a comparison that more and more retailers would also make – even if, according to Statista’s “Germany’s largest fashion retailers on the web in 2017”, Amazon is currently only in fourth place (behind Zalando, Otto and Bonprix) and thus accounts for a small proportion of the fashion assortment in online retailing. But what is the “beautiful evil” of Amazon and the market power that is constantly expanding? I will answer that question here.

Amazon’s online retail in Germany accounted for around 46 percent of e-commerce sales in 2017 (according to Online Monitor 2018 of the German Retail Association HDE) and, according to a current Statista survey, almost every adult German has made a purchase from Amazon. Shopping experience with an apparently infinite number of products that many people want.

Having originally started with books and electronics, today the sales of clothing and shoes still (!) makes up a rather small part. This is complemented by specific brand shops for fashion and shoes (e.g. adidas, Boss, Gabor) and – increasingly – by regional Amazon private labels, e.g. find, Meraki, Hale Demin, Truth & fable, The Fix, Goodthreads or Kid Nation.

Of course, everything possible can be found in the Amazon online shop: Toys, DIY products, furniture, food and much more. The range also covers in-house electronic products such as Kindle readers and Echo speakers. Those technical devices, such as the Echo Look, which connect the voice control (Alexa) with a display or a camera. Such (language) assistance systems are the technical basis for future smart mirrors, which open up new possibilities for virtual fashion advice in brick-and-mortar retail.

It is not without reason that Amazon has become the world’s largest retailing company and by far the highest-revenue e-commerce platform in Germany. Amazon sets the bar for consumers in terms of supply, availability and (in some cases) price. Today, Amazon also acts as a platform and brings retailers, manufacturers and customers together in the marketplace. This platform offers Amazon the opportunity to analyze both the demand and the supply of its competitors, thus drawing conclusions for the development of its own brands in the apparel and footwear sector.

Through diversification efforts, Amazon now earns a large sum from Amazon Web Services’ (AWS) cloud offerings, for instance, as the market-leading provider of artificial intelligence solutions – in particular, through the integration of Alexa speech recognition and the multitude of applications associated with it. In addition, video and music streaming is offered to customers via the paid Prime program.

The disadvantages of pure online retailing have now been recognized. For this reason Amazon is moving more and more in the direction of brick-and-mortar retail and is pursuing a no-line strategy. Amazon is gaining experience, for example, in its own cashless grocery store “Amazon Go” as well as in a number of its own bookstores and temporary pop-up stores in various shopping centers. Among other things, the showrooming concept is intended to create a connection between the online and offline world. In addition, the fee-based Prime customer loyalty program, enables a shortened delivery of goods.

So what is Amazon’s strength? Clearly its brand image and its size in terms of customer base and product range. Furthermore, there are many different and increasingly brick-and-mortar customer contact points where data on customer behavior and customer needs can be collected and analyzed at a central point. On this basis, products can be improved, and new customers can be attracted. Amazon often uses the so-called network effect to develop new products for customers from internal work aids. This can be seen, for example, in the services of the artificially intelligent Alexa language analysis of Amazon Web Services.

Another advantage is the seemingly endless operational abilities with a lot of personnel and capital, which makes it a prime example of successful acquisition and innovation management as well as automation. Powered by research laboratories (e.g. Lab126), competition (e.g. Robotics Challenge) and almost absolute control over the entire supply chain with its own supply fleet. This enables patent applications for e.g. flying logistics centers with drones or the support of e.g. logistics start-ups (Amazon Flex) for the delivery of the “last mile” to the end customer, where parcels are delivered by private individuals in a secondary activity. Or the use of algorithms for fashion design, in which an algorithm learns a certain fashion style from images and can then generate new articles in similar styles from scratch – an artificially intelligent fashion designer.

What can we take away from this? Amazon is certainly an exceptional company; one that turns typical business rules upside down. The multitude of offers and activities demonstrate an unsaturated striving for maximum growth through the development of new business fields. Amazon experiments and accepts the possibility of failure.

But on the market, we can see that the retailers’ resistance against Amazon is becoming stronger and brand shops (e.g. Birkenstock, Mango) are withdrawing. But also, the direct competition is designing new retail concepts, e.g. Alibaba with Guess. Their Fashion A.I. store competes with Amazon’s showrooming approach and places particular emphasis on digital touchpoints in the fashion sector. In addition, Zalando, for example, is developing into an ever stronger platform provider. Amazon may not yet have a complete understanding of the fashion business, but it is learning quickly.

In general, it will not be possible for apparel and shoe retailers to compete directly against Amazon. Nevertheless, Amazon offers examples of the important success factors that need to be managed. In order to remain competitive and not succumb to the “winner takes all” phenomenon, retailers should enter into alternative partnerships and cooperations. This is the only way to avoid the cannibalization of own sales shares.

Finally, the popular question: is Amazon striving for world domination and will retailers surrender to this power? To be honest, I don’t know the motives and goals of Jeff Bezos or all the possibilities and general conditions of the apparel and shoe retailers. But in the free market there are always new opportunities and competitors (e.g. JD.com; Alibaba). Retail is therefore called upon to always attempt a new path and to face the opportunities and possibilities arising in the future. Surrender is not an option!

At the same time, Amazon should not be underestimated by retailers, as it is typical of disruption that market power or a decline in market share at the expense of cut-throat competition are not directly noticeable in the beginning, but their effect suddenly (and exponentially) becomes apparent later.

To come back to my introduction to this blog post, I would like to refer to the advice of Zeus: Do not open Pandora’s box under any circumstances, or an unknown evil will escape. But not everyone – retailers and customers alike – was able to resist. What lies ahead, only time can tell. But to make another important point: There was also something positive in the box, hope.

So believe in yourself and the path you have taken, but be honest with yourself.

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