Are Amazon online cost advantages eroding?

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A decade ago, there were substantially different cost models of selling through online versus physical stores. Today, competitive advantages of selling through pure ecommerce versus stores are not as great as some might perceive. While Amazon continues to march toward dominating pure ecommerce, there are signs that indicate that online cost advantages over bricks and mortar retail are eroding. As the “last mile” gets faster, it is also getting much more expensive. Recent trends indicate that hybrid retail models can effectively compete on costs to sell through to end customers. Future retail success and profitability will depend less upon unique channel cost advantages, and more on innovative “phygital” retail integration.

Why this is important: While pure ecommerce has consistently achieved double-digit growth, trends indicate that historical ecommerce cost advantages are eroding. Today’s hybrid “phygital” retail models can compete if they also meet customer expectations.

Historical cost advantages that fueled Amazon’s success

In a previous blog, we examined the total cost to sell through to the end customer. In an AlixPartners case study of apparel, pure online sales resulted in about 2% more gross margin than sales from stores.  While this difference in gross margin is relatively small, it can make or break retailers.

A number of key factors have historically made pure online the more profitable channel:

  • No physical store ownership, rent or store operating costs
  • Centralized inventory lowering overall inventory costs and risks
  • Very competitive shipping rates to the customer’s door

In addition to retailer cost factors, the changing shopping habits of consumers created an up swell of willingness to purchase online, especially if there is free two day shipping. In many ways, Amazon was in the right place, at the right time with the right team to capitalize on the bifurcation of retail channels of online versus stores. Kudos to Jeff Bezos’ strategic leadership in capitalizing on this opportunity. 

Online Retail Amazon

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10 Trends that signal Amazon’s pure ecommerce cost advantages are eroding

The commentary on the purported retail apocalypse typically focuses on disadvantages that bricks and mortar retailers must overcome in order to compete cost effectively with Amazon. However, emerging trends indicate that many of those historical online advantages may be eroding.

  1. Shipping costs are going up, especially for the last mile. The last mile is by far the most expensive. Carriers like UPS have been raising shipping rates to consumer homes, which is far costlier than to businesses.
  2. Amazon’s shipping costs are going up dramatically as % of revenue. While Amazon’s revenue continues grow, shipping costs are also escalating as well, even with preferred rates
  3. Amazon is raising Prime membership rates. Prime members are more profitable and purchase more.  They also fuel the dramatic rise in free two day shipping for individual items. Amazon is raising annual memberships $20, and a significant number of Prime members have indicated a concern about that.
  4. US retail rent is declining. The US has been “over stored”. With increasing numbers of out dated stores closing, property owners are offering more attractive rental agreements for new and remaining stores, especially in expensive cities and malls.
  5. Amazon now owns stores, and is opening more new stores. Amazon not only owns 400+ Whole Food stores, it is opening its own Go stores. Amazon retail operating costs will increase as it expands its physical retail presence.
  6. Pure online brands are going physical to grow. Harry’s Razors is just one of the latest pure online retailers to start selling in physical retail chains like Target and Walmart. Amazon just partnered with Best Buy for selling Fire TVs. While physical presence is increasingly important to fuel growth, it also requires physical inventory in stores with all the associated costs.
  7. Walmart and others are mastering “phygital retail”. Physical retailers like Walmart are turning bricks and mortar stores into omnichannel assets by creating multiple options and unprecedented convenience through: self-checkout apps, automated return apps, click and collect towers, as well as innovative home delivery.
  8. Distributors are stepping up to beat Amazon on delivery. Distributors are becoming much more of a strategic partner and through processes like drop shipping, can help retailers beat Amazon’s delivery to the customer’s door.
  9. Retail stores are growing smaller and more efficient. With click and collect, stores do not require as much physical space, and can reduce the amount of physical inventory and risk.
  10. Shipping from stores is growing more possible. Innovative companies like Ace Turtle are creating platforms enabling shipments from stores, lowering last mile costs and inventory levels.

Will Amazon growth grind to a halt? Hardly! Amazon built success on a culture of innovation obsessed with serving customer needs. Moreover, Amazon’s ecosystem is robustly built to win ecommerce. However, those retailers adopting a “phygital” strategy are no longer inherently disadvantaged. In fact, they can now beat Amazon on a number of fronts by focusing on how to best serve customers holistically, and cost effectively through multiple options.

The bottom line – there are no longer “channels”, or specific channels which are clear cost winners. More importantly, customers no longer purchase in terms of channels. Yesterday’s extraordinary, is today’s standard. The future of retail success lies in “phygital” than innovates to exceed customer expectations, regardless of when, where or how they purchase.

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