Keeping Up with the Impact of Amazon
Q&A with Peter Hildick-Smith, CEO of Codex-Group, LLC and renowned expert on Amazon’s impact in the book retail and publishing world
Peter is a dear friend of GrowthWorks and serves as our key, go-to resource on all things Amazon. He is an expert on retail strategy, innovation, branding, loyalty, as well as publishing and digital media. Peter has been helping the book and publishing industry weather the Amazon storm and thrive in the post-Amazon world for over a decade. In 2004, his organization, Codex-Group, originated a national, quantitative Amazon impact assessment program to support retailer, technology, & producer companies targeted by Amazon. This assessment, which has continued with quarterly updates up to the current day, has been referenced and studied by hundreds of publications and organizations that have also been tracking and reacting to Amazon’s exceptional rise to prominence in so many more spaces than just books.
Peter’s expertise and influence have become a critical input to a lot of our work these days, as Amazon is continuously identified as a major / main disruptor impacting most, if not all, of our clients in a significant way. As our firm shifts focus to transcending disruption (per Phil’s blog last week) we believe that our ability to deliver success for our clients will rely on a deep understanding of Amazon’s impact on the consumer-oriented manufacturers and retailers we serve.
We will be partnering with Peter to deliver a new GrowthWorks + Codex offering – COMPASS: Disruption Impact Testing Program– which will combine our brand, innovation and customer experience expertise in consumer-facing markets with Peter’s well-established and proven approach to assessing Amazon’s impact in retailing and publishing. Much more to come on the offering, but for now, we sat down with Peter to outline why (for many manufacturers and retailers) the time for action is yesterday.
1. AMAZON HAS BEEN A RECOGNIZED THREAT FOR YEARS, BUT IT FEELS LIKE THERE IS INCREASED FOCUS / HYPE TODAY, DO YOU AGREE? WHY / WHY NOT?
I believe that 2017 has been a unique year because we are finally experiencing the major effects Amazon has had on a truly wide range of organizations across nearly all consumer facing categories, based on which camp organizations chose to be in in the recent past.
For example, some retailers chose to evolve with Amazon and make strategic evolutions alongside of Amazon’s innovations and offerings. Those retailers have sought to minimize Amazon’s impact on their businesses by either evolving directly with Amazon, like Kohl’s has done (by accepting Amazon returns at certain locations and dedicating floor space to Amazon devices) and Sears (with its decision to distribute Kenmore through Amazon) OR evolve alongside of Amazon as Target, a former Amazon web services client, has planned to do (with its plans to redesign 600 boutique stores) or as Walmart has done with their recent acquisitions of jet.com, moosejaw.com and other online platforms, and plans to do (with its delivery straight to customers’ refrigerators and instant refunds on returns – both in certain markets). However, some retailers who haven’t evolved or reacted quickly enough to Amazon’s threat are feeling some pain. For example, Amazon Toy Sales reached $4B in 2016, 20% of the market, while Toys ‘R’ Us filed bankruptcy in 2017. Amazon Apparel is now the #1 apparel retailer in the U.S. surpassing Macy’s, which has closed 68 stores year to date. It’s impossible to not see the cause and effect. More broadly, over 6,500 retail outlets have closed across America so far this year, as online pressure continues to reshape the retail landscape.
2. DO YOU BELIEVE THAT ALL CONSUMER-FOCUSED MANUFACTURERS AND RETAILERS ARE IN THE SAME “STAGE” OF AMAZON IMPACT TODAY?
Not really. To be honest, as a result of our 13 years of research in this area, and many recent discussions with industry experts, including Phil (CEO of GrowthWorks), we see there are actually four clearly defined industry stages of Amazon impact and disruption:
Stage 1: ALL NEW POSSIBILITIES. This is where a company’s hope for the future in working with Amazon is high, yet Amazon’s level of control of one’s business is low. Some of the types of companies that we believe are in this first stage are niche / start-up beauty, apparel and food manufacturers.
Stage 2: THE FUTURE REMAINS BRIGHT. This is where incremental business growth with Amazon is very strong, and hope high, while Amazon has gained a greater level of control of one’s business. CPG food manufacturers (like Kellogg’s, Unilever and General Mills) are often now in this second stage.
Stage 3: LOSING CONTROL. This is where hope shifts from high to moderate and Amazon’s level of control increases from maybe 5% share of volume to 15% or more. Some examples of the industries and companies we believe are in this stage are apparel, VMS (vitamins, minerals and supplements) & electronics manufacturers, to name a few.
Final Stage: EXISTENTIAL THREAT. This is where the hope in working with Amazon decreases and the share that Amazon has on one’s business increases well beyond 15%. Book publishers and toy manufacturers are certainly in this stage.
The clients we’re aiming to help with Compass: Disruption Impact Testing Program typically fall into the second and third stages.
3. IF YOU WERE LEADING A CONSUMER RETAIL OR MANUFACTURING ORGANIZATION TODAY, WHAT HAVE YOUR STUDIES REVEALED THAT WOULD SCARE YOU MOST?
From our ongoing quarterly Compass testing, there are three primary leverage points that we’ve been tracking closely that would scare me the most…
First, LOYALTY. Amazon Prime continues to fuel unprecedented levels of high value customer loyalty. Free expedited shipping has now become ‘table stakes’, but Prime is unchallenged in locking up high value consumers with its additional ‘free’ streaming entertainment platforms. For example, Prime is dramatically boosting Amazon’s dollar share by 50% when measured just within the Amazon + Target + Walmart + Whole Foods competitive set versus non-Prime members. We’re also seeing Prime capturing the most affluent consumers, with members spending fully 48% more in total in combined Amazon + Target + Walmart + Whole Foods purchases (past month dollars) than non-Prime members.
Second, OWNING THE REPEAT PURCHASE. In the consumer book market where Amazon has been honing its retail skills since 1995—consumer book publishers earn as much as 70% of annual revenue from new products introduced in the last 12 months. As a result, their #1 business priority is new product awareness, which is far more efficiently delivered to consumers by physical retailers than by online sellers, where new product discovery remains a major weakness. As a result, physical book retailing continues to have critical consumer value and relevance in this consumer category.
In total contrast, the majority other consumer products businesses (packaged food, health & home care and personal & beauty care, etc.) earn 95%+ of their annual revenue from the repeat purchase of mature, established products. This puts the #1 business priority on delivering consumer repurchases as automatically as possible, with minimum transaction friction. This is online retailing’s, and particularly Amazon’s greatest strength with its over 600 million (!!) product code offerings and massive logistics network. Repurchase behavior, as driven by Amazon innovations like the Dash button, Subscribe & Save, and Echo voice enabled re-ordering, is where online has its greatest leverage and potential to dominate fast moving consumer goods and with that physical retailers, simply by locking up the consumer re-order flow. In my opinion, books got off easy, other consumer goods categories will not be so "lucky".
Third, INFLUENCE. Amazon’s threat goes beyond unprecedented retailer loyalty and repeat purchase leverage, to behavior influence. Their continual testing of new merchandising modules, like Amazon Charts or Kindle First, are changing how consumers learn about and engage with Amazon’s own brand products by uniquely featuring them in new ways to compete with their own leading vendors. At the same time Amazon Marketplace allows third party vendors to compete directly with national manufacturers by under-cutting their pricing and thus winning “buy button” control on every product page.
4. WHAT’S MISSING IN SOLVING THE AMAZON CHALLENGE TODAY?
When it comes to getting help with your organization’s most pressing Amazon challenges / opportunities, most of the Amazon-related services that exist fall into a few categories, which are primarily focused on helping manufacturers in Phase 1 and Phase 2 boost their sales with Amazon:
Data-Driven / Market Research
SEO Services / Building an Amazon Presence
Sales Optimization / Selling Services
Account Management Services
However, a major gap remains with companies seeking guidance and strategy when entering Phase 3 and Phase 4:
Essentially, there are few Amazon-specific strategists that incorporate all aspects of the overall Amazon experience, including research, to provide a holistic response program
5. WHAT IS YOUR PRIMARY ADVICE FOR CEO’S, CMO’s, VP’S OF STRATEGY OR INNOVATION AT CONSUMER-FACING COMPANIES?
My advice would be to look for relevant, and strategically aligned, opportunities to incorporate four key elements of Amazon’s approach into their own organization’s innovation and growth strategies.
First – Commit To a Long-Term Focus – since Amazon’s founding in 1995, as a retired senior Amazon executive recently told me— “from day one we were told that we were in it for the long haul, that we would never measure our financial performance on a quarterly basis, or hold ourselves accountable to financial market objectives, and that these cultural imperatives are driven from the top down and that is the only way they stick”. This of course enables greater, more consistent investment to achieve market leadership. While all this insulation from financial market pressures is the envy of every public company Amazon competes with—it would be totally useless without an absolute commitment to three other essential principles that most Amazon competitors have yet to master.
Second – Focus on Continuous Innovation – Amazon has the relentless creativity to constantly develop, test, launch and improve new products, programs, technology and infrastructure. Where innovation is primarily a batch process in most manufacturing and retail companies, it has reached the level and sophistication of a continuous process at Amazon, with new initiatives continually appearing in even their most mature segments like books.
Third -- Pivot Outside of Your “Business Model” – after its first year in market Amazon’s first major new technology play, the Kindle Reader, would have been judged an absolute failure at any publically traded company, and killed. We estimated that the product’s year one sales to well below 100K units. But because Kindle was the key to their cornerstone strategy to disintermediate the publishing business, Amazon not only persisted, they actually pivoted their entire business model a full 180 degrees, switching from online direct-to-consumer operator to consumer packaged goods marketer almost overnight—driving physical retail distribution through competitors like Target, Staples and Best Buy, and doubling down on their investment with over $500MM in above the line advertising support.
Fourth – Truly Own Your End Customer – Amazon has been attracting and capturing direct relationships with the top 20% of U.S. consumers since its founding 22 years ago, while other retailers and manufacturers have made mostly limited tactical attempts to build and own direct relationships with their best customers over that time. For manufacturers, these efforts have typically been limited by their understandable reluctance to give their consumers competitive direct pricing value, sticking with SRP pricing to avoid disrupting their retail “partners”. As a result, manufacturers’ customer relationships remain superficial at best. By contrast, as Amazon states in each annual report—every “vendor, manufacturer, distributor, producer of the products we offer and sell”…is Amazon’s “competitor”! That competitive mindset frees Amazon to focus 100% on their relationship with just one “partner”— their direct customer.