Amazon and the future of physical retail

Amazon and the future of physical retail

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  / / September 20, 2017

There are two parallel conversations about the future of retail that are quite active. One is within the book business and it centers around what the future will be — and will there be one? — for Barnes & Noble. The other one is about the future of retail competitors to Amazon in the broader sense, particularly the big retailers that anchor the malls and shopping centers and are depended upon to draw the traffic to all the other stores that share the same parking lots.

Fuente original: Amazon and the future of physical retail | The Idea Logical Company.

Whenever B&N announces financial results, the whole book business pays attention. When a chain with the ubiquity and brand of Toys R Us goes under, as it did last week, everybody pays attention.

Barnes & Noble has been feverishly changing executive management and delivering pretty vague and unconvincing strategic pronouncements in a context of declining revenues and a sliding stock price. Since B&N is both the single stop capable of putting a new title in front of the most bookstore customers and the single biggest retail customer for publishers’ backlists, it occupies a position of singular importance to almost every publisher.

Amazon may already be a bigger account for most publishers but that doesn’t change B&N’s unique importance. So it is not surprising that publishers obsess about the chain’s financial and operational health. And although I am still skeptical that their demise — or even a rapid shrinkage — is imminent, the consequences whenever it were to come to pass would be industry-changing. That made it a useful topic for the discussion which Nathan Bransford and I had about it which he recently captured for his blog.

Of broader interest is the impact Amazon is having on all retailers. So many of them — Sears, JC Penney, Macy’s — are very obviously struggling. This year alone, we’ve seen stories about the death of department stores and other retailers from the Atlantic, Business Insider (citing Warren Buffet as their expert), and Time, among many others. Borders is gone. Radio Shack is gone. And then last week came the word that Toys R Us is filing for bankruptcy. So Barnes & Noble’s struggles are within a context that goes way beyond them and way beyond the book business.

The New York Times did a story last week about one retailer that is apparently thriving in the face of Amazon competition. That would be Best Buy. Coincidentally or presciently, the Times did a story about Best Buy competing effectively with Amazon four years ago!

The current story attributes Best Buy’s success to the obvious tactic of matching Amazon’s prices and to soft factors like being quiet about cutting costs (so as not to panic the employees) and “staying humble”. But the one single operational change Best Buy made to enhance their competitive position actually demonstrates why Amazon has the advantage over them and everybody else. And why that is not likely to change.

The operational change Best Buy made was to use their distributed store inventory to ship online orders received centrally. The Times piece highlights the reduction in delivery time to customers that can be achieved by shipping from one of the 1000 stores that is closer to the purchaser than a warehouse with the same product. In fact, that’s only one of at least three advantages. The most significant is that they are undoubtedly able to fill orders with stock on store shelves that they would have lost completely by not having stock of the same item in a warehouse. The other is a much more efficient, and therefore profitable, use of their inventory. They effectively need less stock to fill more orders.

Of course, all the retailers that have been crippled or gone under started as brick-and-mortar and made some attempt to build an online complement. That’s what Best Buy did. When you come at things from the other direction, having built a robust online business and then going into brick-and-mortar, what Best Buy had to discover and then build (and which their other competitors didn’t) is second nature.

This is the flip side of the massive economic advantage that Amazon has building out its store network at a time when retail space cost is tumbling.

Amazon first built a supply network of warehouses that could quickly deliver just about any product to just about any place in the US. Putting some of those products in locations called “retail” doesn’t really change anything. They already had the systems in place to know where everything was in response to any order.

When Amazon opened their first NYC store a couple of months ago, we observed that their cost of goods was inevitably going to be lower than another retailer because they could simply park inventory that sat on warehouse shelves on store shelves instead. It would still serve the potential online purchaser just as effectively, and it would fill a retail shelf space at the same time.

So Best Buy, first matching Amazon’s pricing, has now managed to engineer a match to one aspect of their inventory optimization. The Times indicates that Best Buy is still playing another important card, their ability to give competitors to Apple and Microsoft — both of are big enough to support their own retailing networks — a physical presence.

Amazon can’t do that. Yet. But the scale of Amazon’s ambitions are not known to anybody but Amazon. Author Brad Stone called them The Everything Store in his book because they sell every product. That has been demonstrated in spades by their recent acquisition of Whole Foods. The question is whether they intend to become The Only Significant Store. If that’s their plan, Best Buy may well run out of room to position themselves with competitive advantage.

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