We’re seeing history repeat itself as major retailers duplicate the mistakes of many newspapers. I recall just under twenty years ago yarning with Andrew and Paul Bassat as they were attempting to get their Seek internet based employment classified business off the ground.
At the time, Fairfax laughed heartily at the possibility that the internet would damage the great Age and Sydney Morning Herald employment classified ads river of gold. We all know what happened there.
However, just two years ago in the US, the founder and CEO of food retailer Whole Foods, John Mackey, confidently declared that Amazon’s entry into US groceries would be “Amazon’s Waterloo”.
Amazon acquired Whole Foods this week and the takeover sent reverberations around the retail sector of the Australian stock market as investors feared the possibility of a newspaper experience for Australia’s retailers.
As the retail shares were falling, in Melbourne global management consultants AT Kearney called a breakfast meeting to explain Amazon’s plans for Australia. The room was packed with suppliers, retailers, transport groups and the like, all anxious to understand what was ahead and how to adapt.
They were determined not to make the newspaper mistake of two decades ago and the Whole Foods mistake of two years ago.
Amazon will not change everything overnight but it is important to understand how they operate. You need to start with the company’s objective which has been modified to the point where Amazon now aims to be “the earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online”.
And when Amazon looks to Australia the saliva must flow from their mouths. No country in the world looks more attractive than Down Under.
AT Kearney point out that in 2020 the expected online retail penetration rate in the US will be 14.8 per cent and in the UK it is 18 per cent. In Australia we are only predicting and 8.4 per cent penetration — which is even lower than France.
Australians are normally early adopters of technology but we have not adopted online shopping like the UK and the US because, like the classified newspapers of old and groups like Whole Foods, Australian conventional retailers do not make the sophisticated offerings that entice customers to change their buying patterns.
But that is going to change and change rapidly and I fear that segments of the Australian retail market will pay dearly for their newspaper-style strategies where immediate profits took a priority over following what was happening in the rest of the world.
AT Kearney presenters Terry Innerst and Lorin Knive believe that in terms of pricing it will be a question of comparing the economics of home delivery with that of selling goods in bricks and mortar stores. And the key to home delivery costs is scale which has been an essential part of Amazon’s success.
In the case of Australian retailers, penalty rates over the weekend are already high and there is danger they will go a lot higher if Coles loses its case in Brisbane.
In the US, Amazon is responsible for an incredible 44 per cent of online product searches and accounts for 51 per cent of US internet shopping growth and 24 per cent of total retail growth. And almost all American retail growth is online.
When Amazon enters into a market, its normal pattern is to attack areas like consumer electronics; apparel and footwear; toys and games and consumer appliances. These are the areas in which it achieves best penetration.
But gradually it moves down the product chain. Interestingly — and an assurance to Bunnings — home improvements in the US has been an area where online shopping has not achieved the penetration it has achieved in other areas. And lowest of all is food and beverages, where in the US the penetration is just 3.1 per cent.
But this is an area where Amazon is a late entrant and what makes Amazon so dangerous is the way its system works and its use of data.
Amazon achieves its scale partly by its own online sales growth but partly because it carries out warehousing and distribution for others.
According to the online magazine Stratechery, in the Amazon thrust into groceries via Whole Foods, Amazon will apply that system and Whole Foods will be among a number of customers that Amazon will supply and distribute as it seeks gain scale in food.
But the motivation behind the Whole Foods acquisition goes further, by applying its data techniques to the Whole Foods sales Amazon will learn a great detail more about food customers’ buying patterns and the products needed to satisfy demand. That returns to the Amazon aim of being centred on the customer.
AT Kearney alerted small producers in the room, particularly in food, that they will gain a complete new set of marketing opportunities. In recent years they have been squeezed out by the large retailers who have only been interested in selling top brands.
Amazon will give them a new chance, particularly if they are skilled in exploiting the attributes of their products via the Amazon search engines.
And then of course there is the enormous consumer data that Amazon will quickly assemble and exploit in Australia.
An incredible 25 per cent Americans are Amazon Prime customers who pay a fixed monthly fee to gain free delivery. But, according to customer surveys, that percentage is expected to rise to 50 per cent over the next decade.
Why on earth when Australian retailers saw what Amazon was doing did our people not set up their own prime retail schemes ahead of the Amazon invasion?
But that is like saying to the classified newspapers in the late 20th century that they should have cannibalised their own highly profitable newspaper business to stamp out the likes of Seek. It is always a hard thing to do, albeit essential.