Analysis: everyone fears the innovation machine that is Amazon

Amazon’s US strategy seems to focus on physical pick-up points, but the online giant is also feverishly targeting increased European growth. How are traditional players to react?

Continuous innovation

Amazon Fresh’ first “drives” are being prepared in Seattle and according to GeekWire, the retailer has permits to install road signs labeled “AmazonFresh Pickup”. Slogans like “Shop online. Pick up here” and “Relax while we load your groceries” would grace the side of the shops’ building. Similar to the situation in France, staff at these drives would load the customer’s groceries into the trunk of their car, but if they so desire, they can place orders on a tablet and wait for the order to be delivered shortly after. In all likelihood, the store opening will happen sometime soon.

These stores are yet another innovation from the innovation machine that is Amazon. Consider previous ideas like the Dash button, the speech-controlled Echo and the store without staff, Go. It is also making strides in Europe: Amazon Fresh will get a distribution center near Berlin soon and it launched its Pantry service (focused on dry food) in Wallonia last week. This brings Amazon very close to what traditional parties do and these probably wonder whether they should fear Amazon’s strategy.

Unique experience

Roland Berger’s retail analysts compiled a report on Amazon and say it does something most retailers are not able to: it can bring two apparently opposite principles (the largest product range and the lowest prices) together. Traditional retailers were always focused on either the former or the latter, never both.

This combination, a sheer endless product range and very low prices, creates a unique shopping experience. It also creates a snowball effect: an expanded product range leads to more customers, which lowers costs and in turn that enables it to expand its product range even more and so on… The entire situation is also enhanced through Amazon’s third party seller system.

The entire system has given Amazon a “growth reactor”: low costs and low prices are possible because of a highly automated logistics network, vertical integration and the competition between its platform’s sellers. It also expands its product range with its own items and third party additions and improves its customer experience through technological advances.

‘Uberize’ 

These enormous innovation capabilities will only speed up Amazon’s growth pace over the next few years. Intelligent applications like the Amazon Echo will provide new shopping insights and the company will also attract more funds as companies shift their marketing budgets from Google to Amazon. The company will then be able to invest in even lower prices and its Amazon Prime and Amazon Fresh expansions also help improve its product range. Its other B2B businesses also receive additional development and this also helps the company speed up its growth.

Roland Berger believes Amazon could become Germany’s second largest retailer and France’s tenth largest retailer in 2021. The difference is that it faces more stiff competition in France, which will require more tenacity and patience from Amazon’s end. However, how can traditional retailers actually counter the online giant?

Cheaper than Colruyt

Companies will need to implement an actual multichannel strategy to build on the infrastructure and physical store locations they already possess. Another, bolder, option is to organize their own “uberization” and get ahead of the current market trends, in an attempt to create an innovative and distinctive customer experience thanks to the contemporary digital world.

There is no doubt Belgians are very active on Amazon’s foreign web shops already, but Pantry’s arrival is just a small step and will not cause any turmoil yet. A limited survey does indicate that the service has very low prices for quite a number of name brands. In fact: prices are lower than discounter Colruyt’s, but a factual price comparison is hampered by a range of issues. The references are not the same and their sizes also differ. One also needs to include the Amazon Prime membership (€49 per year) and shipping costs (€3.99) to be fully transparent.

Obviously, these things evaporate if a customer orders often, which makes it very difficult to compare this service to other retailers. Luckily for Colruyt and other traditional retailers, this means they will not be drawn into an actual price war with Amazon just yet.

In danger?

Amazon Pantry is only the start, because one day, the company will introduce Amazon Fresh with a complete (fresh) food product range that can be home delivered very quickly or at a time of the customer’s choosing. A section of the consumer base is definitely more than willing to pay for this service and the top three (Colruyt, Delhaize and Carrefour) are most likely to lose customers to Amazon. Local convenience stores and discounters Aldi and Lidl will probably remain out of Amazon’s reach.

Consider Colruyt’s lowest price guarantee, based on an intelligent local price policy: it only needs to lower the price in sections of the market where it faces plenty of competition. However, that formula does not apply to the online world, which means that Colruyt’s main proposition is under threat from Amazon’s surge in popularity. It has not yet reached that position of power, but it is important to stay ahead of the competition. Maybe it is time to look at that “uberization” idea?