Yes, Amazon is “unstoppable” and “we are living in the decade of Amazon,” but competing retailers are simply looking at the issue from the wrong perspective, says a D.A. Davidson Institutional Equity Report. The strategy retailers are using now will look very different in the future. Some corporations will find the magical formula and will prosper while others will perish. The key is understanding the formula and being on the right side of history with the power of Amazon Web Services and its retail sales make it a formidable giant for the forseeable future.
Watch retail business model change; the showroom of the future
All the ingredients for a traditional retail sales boom are in place: In October, the Consumer Confidence Index hit 125.9, the highest level in 17 years; unemployment near record lows; and real GDP up to 3.1% in the second quarter, showing a reasonably strong economy.
The good news for brick and mortar retailers is that more than 3,000 store openings occurred in the first three quarters of 2017. But the bad news, inconsistent with the relatively strong economic numbers, is that more than double the number, 6,800, of stores are set to close, the widest spread in history.
Much of the hand-wringing over declining retail fortunes has been directed at Amazon, with retailers wondering how they can derail the momentum. Sucharita Mulpuru, who leads Forrester’s E-Commerce, Retail, and Marketing practice, says Amazon is the new “evil empire.”
But rather than fighting the empire, Mulpuru sees a different business model as they resist Amazon. “Retailers will remain reluctant to work with Amazon out of fear of it resulting in lower prices for their merchandise and Amazon stealing their intellectual property,” she said. Amazon will hasten the death of weak retailers, while strong ones are likely to change their business models. Certain retailers may “give up on stores, either in the number open today or the formats of existing locations, as they transition to more showroom type formats.”
Don’t fight Amazon Web Services, join them
Fighting the Amazon effect is the exact opposite of what successful retailers will be doing in the future, says Tom Forte, Davidson’s e-commerce analyst. He doesn’t view the landscape from the standpoint of market share or demographic penetration so much as he does from a macro perspective.
The secret to retail success is to integrate with, not compete against, Amazon.
Amazon is increasingly building a platform for third-parties to sell merchandise, pointing to a different model. The Amazon platform will allow retailers to advertise their products, hold their inventory and ship it from their fulfillment centers. “It is even adding physical stores for consumers to reduce friction for those who prefer to shop in that channel,” Forte wrote.
Amazon is already moving in that direction, becoming less of a “retailer” and more of a technology service provider.
Increasingly and importantly, Amazon will empower retailers with its technology to sell more merchandise (both on and off its platform), from its Alexa consumer Internet of Things ecosystem, to its Amazon Fire TV video effort, to its increasing line of proprietary hardware, and to its Amazon Web Services (AWS) cloud computing effort (including to harness the power of Artificial Intelligence, AI). In the future, companies’ ability to embrace Amazon will have a significant impact on their share price, as their ability to compete against Amazon does today.
It is Amazon Web Services that gives it the ability to put an artificial intelligence overlay with machine learning on top of an existing retailers structure where the company will most meaningfully offer. The Amazon difference is likely to “widen the digital divide” between failing and successful retailers.
For its part, Amazon will play dual roles – leader: it will continue to use the technology to advance its own retail efforts, and enabler: with its Amazon Web Service (AWS) cloud computing effort (as previously mentioned), it will enable companies to harness its power, including many that never would have been able to afford such computing power in the past.
Looking at the companies it covers, Forte thinks eBay, Shopify, and Wayfair could add 100 basis points of sales growth by working with Amazon and harnessing the power of AI.