How Are Retailers Handling Amazon’s Presence?
Every so often, there’s a business innovation that entire industries have to take note of. The Montgomery Ward catalog modernized the mail-order business in the 1870s; the auto industry had to adjust when Henry Ford introduced the moving assembly line; and now, retailers have to adjust to the challenge from Amazon. The e-commerce giant offers a unique challenge to the traditional brick-and-mortar retail store, both large and small. But it also offers unique opportunities that some retailers have taken advantage of. Like most innovations, the overall “Amazon effect” is a mixed bag that could hurt some, but help others who effectively adjust to the change.
Bad news first: it’s undeniable that Amazon, and e-commerce in general, offers a stiff challenge to the brick-and-mortar sector. Online retailers amass only a fraction of the fixed costs that physical retail locations face – real estate costs, heating, electricity, office supplies, and a laundry list of other expenses that physical locations incur just to run on a day-to-day basis. Online retailers, by contrast, have few physical locations and save a huge amount on their fixed operating costs. They also save on labor costs, because fewer locations means fewer employees are needed to run the daily operation. As of 2018, Amazon had about 650,000 employees total, including full and part time workers. For an international company that operates such a precise logistical system, this is a relatively small number. By comparison, Walmart employs 2.2 million workers.
Amazon May Hurt Large Retailers More than Small Businesses
The conversation about Amazon frequently focuses on its effect on small business, but the fixed cost problem arguably affects large retailers more. Online shopping has had significant fallout in the retail business overall. Sears, Toys R Us, and Mattress Firm are only the latest retail giants that have closed locations or faced the threat of bankruptcy. With thousands (or millions) of employees and large property lots that need maintenance, a dip in sales can have a devastating effect on large retailers when overhead costs are so high. These businesses have predictably responded by cutting those overhead costs, in the form of location closures and mass layoffs. Retail jobs in physical locations continue to take a hit, largely a result of the online shopping craze.
But of course, small businesses are vulnerable to the same pressures because of their physical locations. With less capital and investors at their disposal than the retail giants, a few bad months for a small business owner can mean the end of the business. As Americans increasingly shop online, traffic potentially shifts away from physical store locations as small businesses usually can’t offer the lower prices and lighting-fast shipping that Amazon can. So it’s undeniable that e-commerce offers a considerable challenge to retailers both large and small.
That said, numerous reports indicate that Amazon has offered some unique opportunities for small businesses that, if taken advantage of, can help them thrive. Whether or not retailers want to admit it, e-commerce is here to stay. That would almost certainly be true if Amazon weren’t around. Remember that Amazon accounts for about 49 percent of e-commerce sales – a large market share, but certainly not the only player in the game. So e-commerce would still be a challenge without Amazon. But the difference is that Amazon offers small retailers a ready-made platform to take advantage of.
As of this year, over 50 percent of sales on Amazon are from third-party sellers. It’s easy to see why – Amazon has a global reach. Making a product successful on this platform gives small retailers an infinitely larger reach than they would have had on their own if they only relied on their own websites for e-commerce sales. Exposure on Amazon can serve as crucial marketing for small businesses, driving increased traffic to their own websites or even their physical locations. So Amazon does actually offer a huge platform for smaller businesses to reach a much larger audience than they would ever be able to normally, presenting arguably the greatest growth opportunity that small businesses have had in years.
Unique Struggles for Physical Retail Stores
But selling on Amazon doesn’t inherently solve the problem that brick-and-mortar retailers face. Many of the successful third-party sellers on Amazon are internet businesses themselves – that is, they don’t operate a physical location and can therefore avoid the fixed cost problem. Physical stores, however, still have to grapple with the overhead costs problem of operating a physical store and hiring employees. Even with selling on Amazon, physical businesses might not be able to make up for the decreased traffic and in-store sales they face as online shopping grows in popularity.
There is another flipside to partnering with Amazon – abiding by Amazon’s rules. Amazon sellers have to comply with the pages upon pages of Amazon’s Terms of Service, terms that change regularly. Failure to fully comply with all these terms can result in an account suspension, cutting off a business from a critical source of revenue. To overcome a suspension, the seller must put together a detailed Plan of Action identifying the cause of the violation and how they have fixed the problem. Suspension notices from Amazon are usually very general, leaving sellers scrambling to figure out what caused the violation before the business goes under. So yes, Amazon offers a unique opportunity for retailers to reach a huge audience with their sales, but they have to be extra careful about playing by Amazon’s rules.
Retailers Can All Still Benefit from Amazon’s Presence
Still, the opportunities that Amazon offers small retailers is significant. If brick-and-mortar retailers figure out how to successfully hybridize their businesses by controlling their fixed operating costs and increasing their online sales, they stand a chance of not only surviving the Amazon challenge, but thriving because of it. We should also remember that in the face of this e-commerce challenge, the local, independent store is making a bit of a comeback. Independent bookstores, for instance, have enjoyed a resurgence after being decimated by large retailers and Amazon around 2000. Since 2009, the number of independent bookstores has increased by 40 percent, indicating that consumers may be searching for a more authentic alternative to online shopping. By making in-store shopping a unique experience for visitors, brick-and-mortar locations may also thrive in what many people see as an overly computerized world.
So in the end, the Amazon challenge is the latest business innovation that industries have to adjust to. Some will succeed and some won’t. Brick-and-mortar locations have the potential to face the challenge with some smart adjustment. Remember that the world, especially the business world, is always changing. Spot advantages when they appear and take the advantage where you can.