Amazon's Australian arrival a game-changer for retailing

Amazon’s arrival in Australia is seen by many as the greatest retail disruption to happen in years.

It is not just a new competitor that fits nicely somewhere on the price-quality line. It disrupts the landscape by beating existing retailers on multiple dimensions of competitiveness.

It’s a matter of choice…

Amazon provides a wide and deep assortment of products. In its original domain of books it offered more titles than almost any other retailer, through large stock levels complemented by a large number of suppliers selling through its brand.

But Amazon is not just a supplier or distributor. It provides a complete marketplace through its portal.

Originally selling only a limited number of categories, in particular books, which are a typical candidate product for online searching and selling, it's expanded to almost any other product category.

Much has been said about large assortments resulting in consumer choice overload; consumers being daunted by the number of product options and consequently being less, instead of more, satisfied with their experience and possibly even deferring or refraining from purchasing.

However, through its interface Amazon has been able to assist consumers in quickly arriving at a subset of most relevant products, helping them overcome the perception of choice overload.

Indeed, through its system of recommendations-based collaborative filtering, Amazon is able to cleverly soft cross-sell in such a way that consumers appreciate the customisation and choice without feeling overwhelmed or patronized. This then maximizes its opportunity to tap into the ‘Long Tail’ of low selling items that have limited marginal costs and therefore can still be profitable.

... and low prices

In terms of pricing, Amazon is also very competitive, perhaps not in terms of offering guaranteed lowest prices (a strategy some locals will try to use to counter Amazon’s offer), but in terms of offering an overall impression of reasonably low, if not very low, prices.

It can afford this not only because of the efficiencies in its distribution, but also because it so far has not been seeking to make a profit. Instead it has focused on gaining market share through low prices and on investing in technology, including its distribution and digital systems.

Regarding the latter, Amazon has even been described as having data storage and data management as its core business, more than retail distribution.

... and customer experience

A weakness of the Amazon model may seem the lack of tangible product experience and delayed product availability.

Consumers like to receive their products as soon as possible. Amazon’s distribution systems, however, have improved to promise the consumer the fastest possible delivery, often within hours of ordering.

A short delivery time, low (or even free, for its ‘Prime’ subscribers) delivery cost and high certainty of on-time delivery are all key aspects to keep online consumers satisfied, and Amazon is able to outperform most competitors on these aspects.

Moreover, Amazon is continuously experimenting and investing in new, more futuristic types of delivery, such as drones or self-driving cars.

In the short term these attempts will be niche-focused and are more likely to generate PR than revenue, but Amazon’s drive to continuously innovate will mean that in five to 10 years’ time the landscape is likely to have significantly changed.

Amazon nevertheless understands the importance to consumers of a physical product experience prior to purchase, not only for books, but also in categories such as fresh products.

It has always been a leader in developing online interactive engagement techniques (think of the opportunity to virtually browse through books online), and it is also increasingly experimenting with having a bricks-and-mortar presence – although only selectively.

It operates particular store types but is, again, highly innovative. It recently opened ‘Amazon Go’, a convenience format that allows consumers to walk out of the store without having to go through a checkout or cashier, using automatic product detection and payment systems. Amazon is also using pop-up stores. For four days during last week’s Black Friday sales it opened a townhouse at Soho Square in London with a kitchen bedroom and games room showing products on promotion. Amazon also continues to invest in virtual reality to allow consumers to experience a product as 'real'.

There are other dimensions and points of differentiation where it is not yet clear how Amazon will position itself and perform.

On the service dimension, David Jones announced it sees its service offer and in-store experience as its competitive weapon. A full-blown properly executed personal service offer is difficult for an online channel to match, but an issue is of course to what extent customers who visit the store actually convert to purchasing, whether in-store or online, within the same brand as initially visited.

Another differentiation can be the sourcing and supplying of local products and brands. Although the extent to which Australian consumers care about ‘Australian owned, Australian grown’ is limited, Amazon’s offer will likely include such products, too.

The history of ALDI in Australia suggests that an overseas company can gain significant local consumer goodwill by sourcing locally.

Further, how Amazon’s performance will score in terms of ‘corporate social responsibility’ and good citizenship remains to be seen. It so far has not, for example,  gained a good reputation for how it treats its own employees, and it has also been accused of avoiding paying tax.

... and trust

Possibly the most important aspect, however, is the extent to which Amazon will keep its customers’ trust, such that they continue to buy at Amazon and are happy to continue to share their data with Amazon, have its Echo device listen in and place orders, or even allow Amazon staff to enter their houses when no one is home, and so allow Amazon to provide an optimal customised offer.

On all the above dimensions Amazon will disrupt the existing Australian retail system. Most under threat are retailers that offer products that are fairly easy to compare online, including branded electronic goods, and so companies like JB Hi-Fi will be in for a rough ride.

In the end, however, while the share of online purchases will further increase, shoppers will still want to go out and have a shopping experience, try out new products, combine their shopping with entertainment and food experiences, and experience the adventure and joy of shopping as they have always done.

Retailers should nevertheless be aware that any in-store shopper from now on will have instant access to the Amazon channel in their pockets through their mobile devices, and in addition soon also will be able to have their goods delivered anywhere, anytime.

This will no doubt have its effects on the retail landscape and threaten existing retailers.

Whether the benefits long-term will pay off, and for whom, remains to be seen. Similar to Uber and the arrival of the gig economy, as we enter the era of the mobile consumer, we'll see increasingly mobile and footloose consumers, being monitored, tracked and serviced at any point and at any time.

This is the new society that for some will be difficult to come to terms with and will lead to many, consumers and retailers alike, having to face significant changes in the labour market and wider economy and society.

This seems inherent to the arrival of new technological developments that in principle allow a greater productivity but not automatically result in an even or fair distribution of the benefits of this new productivity.

As such, the arrival of Amazon is not structurally different from the arrival of previous disruptors, whether new communication and transports means such as telegraph, telephone, train or car, or the arrival of retail formats such as catalogues and TV shopping channels, department stores and self-service supermarkets, which all were disruptors in their own way when they first arrived and resulted in significant changes in society.