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How Can Smaller Retailers Compete Today With Amazon?

Tuesday, October 29, 2019

From Robert J. Bowman, SupplyChainBrain

Amazon.com continues to tighten its grip on retail e-commerce. In 2006, the company broadened its reach with creation of Fulfillment by Amazon, a service that invites sellers to route their shipments through Amazon’s huge network of warehouses. More recently, the company began amassing its own fleet of transportation assets, bypassing the dominant parcel carriers.

But are smaller retailers that agree to work with Amazon, either on the fulfillment or selling side, in danger of being swallowed up by the beast? How can they maintain their unique brand identities at a time when Amazon threatens to become the only brand that consumers care about? In this conversation with SupplyChainBrain editor-in-chief Bob Bowman, Scott Webb, CEO of Avionos, offers his view on how smaller entities should be approaching the issue of “co-opetition” with the mighty Amazon.

SCB: What are the biggest challenges that small retailers face today in competing with the Amazon behemoth?

Webb: Obviously, smaller retailers have the advantage of knowing their customers really well, but they struggle when it comes to articulating and creating value for new customers. How Amazon has changed the game is to provide a much broader concept of value, so that customer expectations have shifted from individual service to breadth of service and product availability. This creates a challenge for a smaller retailer that has built itself up with the ability to focus on a specific need or product. They’re fighting an uphill battle against changing customer expectations, and how they define value in the retail relationship.

SCB: They can't compete on selection and price, can they? Those are two elements that seem particular strengths of Amazon's.

Webb: You're right, in many categories. Certainly breadth of selection across categories is where Amazon has an unparalleled advantage from an e-commerce standpoint. Where niche retailers can still compete, however, is vertically within a segment. Typically we see that smaller retailers are able to find unique categories in which they can outperform Amazon in depth of product availability or value pricing. By that we mean pricing that includes a lot of value-added service. High-touch and high-consideration products require some education of the customer. But it’s an area where, because of their specialty and focus, niche retailers can outperform Amazon.

SCB: Are you saying they can actually win in breadth of selection as long as it's within a narrow or a niche type of product category?

Webb: The right way is to say “depth of selection” within that category. Particularly in the high-considered products, there tends to be more customization and personalization. It's an area where, while Amazon has certainly enhanced personalized experience, its personalized product selection is still nascent. It’s where niche retailers still can thrive.

SCB: One area that Amazon is especially strong at is fulfillment and delivery. In fact, it just announced new one-day delivery options. How can smaller retailers beat it at that crucial stage?

Webb: Two thoughts here. One is that with Amazon's expansion into doing its own fulfillment, we expect the other main carriers, UPS and FedEx, to respond with pretty aggressive terms to attract smaller retailers. That should benefit retailers when they're shopping for those services.

The other development we expect to see is co-opetition with Amazon. It’s similar to how the company grew its Amazon Web Services (AWS), which initially was built for Amazon to use for itself, then was brought up to scale and expanded as a third-party service that was sold to other vendors. We expect Amazon to do the same thing with fulfillment. It will start as its own biggest customer, but we expect it to begin offering a third-party service to small retailers, even those who aren't selling on the Amazon.com platform.

SCB: Haven't we already seen the introduction of the Fulfillment by Amazon program formally?

Webb: In small batches, yes. If it follows the AWS model, it will become a strong and compelling independent offering. That could be a point where small retailers who aren’t selling on the Amazon platform could see the opportunity to leverage it as a 3PL (third-party logistics provider).

SCB: Are there risks involved in relying on Amazon to handle one's fulfillment?

Webb: In a co-opetition, you are certainly supporting the profit of a company that otherwise directly competes with you. There will still be a healthy business case for small retailers to look at it as an avenue to use Amazon as a partner. The businesses that need to be careful are the ones that are competing against a growing threat from Amazon’s private-label business, because now you're looking at a lack of differentiation with a pretty significant competitor.

SCB: How should small retailers balance the decision between whether to allow their products to be sold directly through Amazon, or in the other extreme, stay off Amazon altogether?

Webb: That calculus is constantly changing. One of the reasons behind the growth of Shopify is that you're seeing tools come to small retailers that make it more economically viable to run a direct channel in competition with Amazon. The bar to having a highly valuable and visible direct channel has lowered. It comes down to, can you economically make yourself highly visible in your sector and in the space in which you're competing?

There's real calculus on that. Can you drive SEO? Can you drive product selection to overcome the inherent advantage of selling on Amazon, which is the eyeballs? That comes with a real tradeoff, that you’re being merchandised alongside your direct competition, and sacrificing a lot of the direct customer relationship. That calculus changes when retailers have the opportunity to create an owned experience that allows them to drive their messaging at scale.

SCB: So how can smaller retailers make the right investments in delivery and fulfillment capabilities?

Webb: The first thing to look at is your current delivery model, and whether or not you have the volume to get preferential pricing from the parties that exist. It’s right to be cautious about where Amazon's maturity is in that market right now. A lot of our advice to these retailers is to look at the pricing they can get on aggressive fulfillment from existing partners, and leverage, in that case, the Amazon offering as a way to get preference on pricing.

SCB: How does the picture look going forward?

Webb: As Fulfillment by Amazon becomes a mature offering, it will provide a realistic and valuable alternative for small retailers. Again, though, we would caution those retailers who are competing not with Amazon in general, but specifically with Amazon's white-label products, that it might be less beneficial to those organizations to join its fulfillment service.

SCB: It sounds like you're saying that if you’re a small retailer competing with Amazon, and you can depend on other options like FedEx and UPS, you don’t necessarily have a slower supply chain. Is that correct?

Webb: Absolutely. You have the opportunity to focus on the differentiators within your product selection, and drive that to a unique fulfillment process with existing providers. We do expect the landscape to shift as the Amazon fulfillment matures. But for now, these competitive dynamics present opportunities that can be advantageous for smaller retailers. We see an opportunity for them to reap some rewards from that.

SCB: A lot of small retailers and small merchandisers depend heavily upon brand identity. Do brands still matter in the age of Amazon? Is it possible that Amazon is becoming the only brand?

Webb: Brands definitely do still matter. We know this from research that we've done. The experience that the brand offers is what matters. We've moved past the point where a consumer is going to buy purely based on brand recognition. Now it’s about the experience that the brand can offer. The danger in selling through Amazon has always been that you start to lose that brand equity because you’re no longer driving the experience to your customer – Amazon is. Retailers that can create a unique experience are able to reap those rewards. The mechanics of how you value your brand might have changed, but brand value still is critical in the customer relationship.

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