The Amazon Effect

The meteoric rise of Amazon in the past twenty years has been something to behold More has been written about this company than any retailer in the history of the world So why do we need another article about Amazon Have we missed somethingThe answer quite likely is yes Amazon affects the entire retail industry from vendorsmanufacturers to consumers and every company in between The ironic thing about this is that even Amazon is not making money due to a raft of factors and is making it difficult for its competitors to make money as wellAmazonamp8217s Prime has led tens of thousands of retailers to try to match their free shipping policies While Amazon can for the time being lose money offering free shipping due to its Wall Street subsidies most of those emulating them have no such luxury Yet the practice prevails with oceans of red ink being the standardAs a matter of rule amp8220free shippingamp8221 plus deep discounts is a recipe for financial disaster Yet as long as keeping up with Amazon drives your strategy financial ruin is your likely destination This is why so few online retailers actually make money and their numbers are quite deceiving because top line sales growth is what gets reportedHow are vendors affected by AmazonFirst letamp8217s take a look at what so often happens to vendors who sell directly to Amazon Amazon has a predatory pricing strategy where they want to be the cheapest price out there I call this amp8220the last man standingamp8221 strategy One vendor showed me an invoice in which he sold 1000 units for 880 each Amazon sold it for 10 that included free shippingAmazon obviously lost money selling that item but how would other vendorsamp8217 customers react to the pricing Vendors have a hard time pricing the same product over Amazonamp8217s price Why Because people go to Amazon first to research prices amp8230 even those of their competitors Walmart Costco New Egg CVS etc all check Amazon first just like consumers do Amazon has supplanted Google as the primary retail search engineIf big box retailers see Amazon selling a product for 10 they will demand to buy it for much less than 880 per unit If a vendor cannot sell for lower big box retailers quite often will pass on purchasing it The Amazon Effect here is to crush vendor margins through predatory pricing This is not theoretical Our buyers at PulseTV search Amazon for each and every product we sell We refuse to sell products that are too heavily discounted on Amazon that would lead to our margin erosionMany big box retailers are now suggesting that if vendors continue to sell to Amazon they will reduce orders or stop purchasing those items completely We have vendors selling to us at PulseTV insisting that we cannot sell their items on Amazonamp8217s Marketplace They want to protect their margins This trend will continueIt is not just selling directly to Amazon that is a problem for vendors Amazonamp8217s Marketplace has millions of sellers and vendorsamp8217 products can end up being sold by someone in Paducah KY for pennies over cost even below cost Remember profits seem not to matter in the digital space as long as top line sales growth is maintained So pricing strategies on Amazonamp8217s Marketplace are not necessarily economically rational meaning geared to earn a profit for the sellerAmazon made and continues to make an impact on logistics This includes fulfillment and shipping practices In just twenty years consumer expectations have changed significantly Once upon a time ordering and expecting to receive that shipment in 24 weeks was common Not anymore If you are a retailer and not shipping within one business day you have problemsSo order processing pick pack and ship and customer service requires more vigilance and resources to make sure that time is compressed All of this compresses margins for retailers even further which is why when you unravel clever and creative accounting online retailers only achieving profitless prosperityAnd lastly To those online retailers who rely on Amazonamp8217s Marketplace to sell their goods I have a bit of a warning for you You become more fragile the more you rely on the marketplace Amazon can and does change their rules not to benefit you but to benefit Amazon The nature of the marketplace is like a gladiator arena90 of all sales come from the amp8220buy boxamp8221 in Amazonamp8217s Marketplaceamp160 The most common way to earn that position is to have the lowest landed cost to consumers So there is a neverending race to the bottom to secure the amp8220buy boxamp8221 This makes every retailer susceptible to the clown who does not care about making money but is in the top line sales growth game And worst of all Amazon insists you do not own that customer They do so there is not a great back end earning potential for retailers It is estimated that 10 of purchasers will find their way back to the retailer but this is an estimate of dubious originMuch more could be written about how Amazon has changed the retail game for online as well as offline The Amazon backlash will pick up speed once Wall Street demands profits from this company Stay tunedThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillage management or associated bloggers

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The Amazon Effect

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Jaffer Ali

Empowering Women in Media: Insights from Industry Leaders (Video) - By E.B. Moss

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