Rethinking retail in the age of Amazon

Press enter to search
Close search
Open Menu

Rethinking retail in the age of Amazon

By Mark Hamstra - 08/30/2019
Faced with what some have said is the survival of their overall business concept, many traditional food and drug retailers are rethinking their store formats and operations, and stepping up their omnichannel efforts in order to retain market share in an increasingly e-commerce world.

As more and more consumers mix online shopping into their routines, retailers are focusing on enhancing the in-store experience with added services in order to drive foot traffic. In the case of traditional drug stores, they are integrating more healthcare offerings into the mix and creating deeper ties with local community healthcare providers.

As many brick-and-mortar retailers have learned, it is not a fair fight when it comes to competing against Amazon. The e-commerce pioneer drives so much income from other fees and services that it can afford to push further and further into online retailing without worrying about profitability.

While Amazon’s 2017 acquisition of Whole Foods Market has not yet yielded the devastating impact on the rest of the industry that many had feared, Amazon’s dedication to capturing CPG market share and its unique business model make it a constant threat nonetheless.

“Amazon’s business model is completely different,” Scott Mushkin, senior analyst at New York-based Wolfe Research, said. “They are basically a logistics company with a membership base. Out of the gate, they are ahead.”

Consumers do not seem to mind having to pay a membership fee to enjoy the benefits of Amazon Prime, which include free same-day delivery on thousands of items, discounts at Whole Foods Market and access to Amazon’s diverse media content. Amazon grew its membership by about 5 million households in 2018, despite raising the annual fee to $119, according to estimates from Wolfe Research.

“They are getting 74 to 75 million households to give them $119 before they even do anything,” Mushkin said. “That’s huge.”

In addition to the membership fees, Amazon also generates additional fee income through an array of other channels, including its warehouse management software and the fees it generates from third-party sellers on its website, which now outsell Amazon’s own direct sales to consumers, Mushkin said. He estimated that the profits Amazon generates on its fee income in North America alone are equivalent to Target’s annual profits.

All this revenue allows Amazon to invest in an array of high-cost initiatives, including as same-day delivery and its Amazon Go convenience stores, both of which are designed to expand its share of the CPG market. Amazon also is capturing advertising dollars from CPG companies in a way that most traditional retailers are not.

“This is why Amazon is getting so much into consumables,” Mushkin said. “It’s a flywheel where the more volumes they create in in-home consumables, the more advertising dollars they generate, and it’s like a hurricane warming up. Competing against that is just very, very difficult.”

Walmart reacts
Perhaps the most significant impact of Amazon’s push into CPG e-commerce is that it is putting pressure on Walmart to try to catch up. The Bentonville, Ark.-based retail giant now has more than 3,000 Walmart Grocery Pickup locations around the country, and it continues to expand its delivery operations.

Walmart’s efforts around delivery and store pickup are bolstering the retailer’s convenience, alongside the price advantage the company already holds over most traditional CPG retailers, analysts said. “Walmart sees this as a vast opportunity to grab share because there is so much money for supermarkets to lose,” Mushkin said.

Just as Amazon has a big head start on Walmart when it comes to e-commerce, Walmart’s cookie-cutter supercenters offer the mass merchant some advantages over traditional food and drug retailers when it comes to click and collect, he said. Walmart’s relatively consistent supercenter formats may give it an edge when picking for click and collect because efficiencies that are introduced into the process at one location can be implemented system wide.

Walmart also is on the leading edge of experimentation with driverless delivery, which it has been testing both to customers’ homes and between Walmart’s own facilities. The company recently announced a partnership with Gatik, which provides autonomous vehicle technology, to test the vehicles on a 2-mile route between two of its stores in Bentonville.

“We aim to learn more about the logistics of adding autonomous vehicles into our online grocery ecosystem, operation process changes and more opportunities to incorporate this emerging technology,” Tom Ward, senior vice president of digital operations at Walmart U.S., said in a recent blog post. “We’re always out to help our customers, and that means helping them save time and money. So, we’re using our position of strength to reinvent the shopping experience to take us and busy families well into the future.”

Moving in the right direction
Bill Bishop, chief architect at Brick Meets Click, said he thinks most traditional food and drug retailers are taking e-commerce very seriously and moving in the right direction on several fronts.

“There’s not a serious player that’s not on board with trying to do whatever changes are necessary to succeed in omnichannel, and that’s a very good sign for the industry,” he said. “I think the willingness to accommodate online shopping is growing, and the convenience and ease of doing online shopping is getting better,” Bishop said.

Traditional food and drug retailers have improved the personalization of their offers, and become more customer-centric in their approach to blending e-commerce and in-store shopping, he said.

Bishop said one area where traditional retailers have room for improvement, however, is in their approach to digital communications and promotions.

“Retailers need to be able to communicate broadly and effectively with consumers, and so far most of the digital communications are somewhat limited in their reach and scope, and so reach is a relatively small proportion of the potential market,” he said. “That’s not going to be enough because consumers are increasingly looking to their handheld or their computer for information.”

He said the lack of progress in this area can be attributed in part to the legacy internal structures of conventional retailers, which haven’t yet caught up to the demands of the modern digital environment. “Everyone is still very territorial,” Bishop said. “It just doesn’t seem like anyone has come up with the broad-based solutions that are necessary.”

He also cited the increasing use of personalized digital circulars as a step in the right direction. “That may be at the growth tip of where some good progress is going, but I am a little bit surprised we haven’t seen people move faster, further in that space,” he said. “There’s a lot of headroom there.”

Bishop also said retailers will need to rethink the physical stores themselves as e-commerce begins to capture a larger percentage of sales.

In particular, stores will need to rethink how they look at store-level inventories and find ways to increase inventory turns. E-commerce orders that are shipped to consumers from warehouse or micro-fulfillment centers, for example, are sales that are being taken away from the physical stores themselves, thus making those stores less profitable. This pressure also could force retailers to reduce the size of their stores over time.

Bishop said he sees the potential for some of the technological developments around automation to have a positive impact on efforts to improve the profitability of conventional food and drug retailers. “The good news here is that a lot of the automation that is being developed to handle online fulfillment actually will get repurposed to help in bringing inventories into the stores in quantities that will allow inventory tu