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A look at the "Amazon effect" on retailers everywhere

A look at the "Amazon effect" on retailers everywhere Tom Caporaso

Macy's announcement in August that it would be closing 100 stores in the coming months threw the evolving contours of the retail landscape into sharper relief. As e-commerce constantly expands its reach, consumers are finding easier, more affordable ways to shop than driving to stores, forcing retailers to continually adjust or completely overhaul longstanding beliefs and previously successful strategies -- or risk losing everything.

Brick-and-mortar retail has always been a dog-eat-dog industry, and having to deal with a seemingly never-ending slew of technological changes only ratchets up the pressures. More than a few once-thriving stores have been unable to adapt and thereby survive, while others are feverishly trying to remain viable and relevant in a world increasingly dominated by Amazon, which debuted barely two decades ago as a small online bookseller.

The "Amazon effect" -- i.e., the change it has driven in consumer behavior, causing brand-name stores to shutter a sizable number of under-performing stores -- has been evident and growing for quite some time. To understand the impact that Amazon has had and will continue to have on the retail industry, let's look at how Amazon has ascended to its leadership position, Macy's recent response to the evolving retailer environment, and some steps that retailers can take to retain and expand their audiences.

Amazon's success

Amazon's beginnings offer useful insights into the company and its founder. Jeff Bezos started the online bookstore out of his garage in good part so that Amazon's "origin story" would be similar to those of famous Silicon Valley start-ups. His decision to name the company after the largest river in the world was another early clue that he had his sights set on much bigger things. Launching as a bookseller also gave Amazon immediate and ongoing access to ever-increasing amounts of information that the company could measure and analyze in the aggregate but also whittle down to reveal the changing interests and tastes of individual shoppers. This unwavering devotion to consumer data as the primary driver of business decisions is the cornerstone of Amazon's success.

The birth and growth of e-commerce has created an ongoing flood of facts and figures that all retailers can use to learn about the interests and behaviors of their individual customers, of course. Amazon's launch as an online-only store at the dawn of internet shopping, though, forced the company to focus on developing, testing and enhancing the various processes and functions needed to thrive in that space well before any established retailers began doing so.

Amazon's continual scrutiny of customer behavior allowed it to gain another early advantage on its competitors. Shipping costs have long been and continue to be the biggest reason why online shoppers abandon their carts. In 2005, the retailer therefore introduced Amazon Prime, which became just the second subscription program ever to offer members free shipping on online purchases. In exchange for an annual fee, Prime members could shop with greater confidence, knowing that they'd receive free two-day shipping on practically every order they made through Amazon.

As online technologies have grown, so have the Prime benefits -- and its audience has followed suit. In November 2011, when the program added Prime Instant Video and Kindle rentals, there were an estimated 5 million Prime members. Within two years, Amazon boasted about "tens of millions of members worldwide." Since then, Prime has added streaming music, unlimited photo storage and (in over two dozen cities) one- to two-hour deliveries via Prime Now, and it now has an estimated 54 million members in the U.S. and up to 69 million around the world.

Amazon has also been significantly upgrading its operational capabilities in recent years. In addition to setting up almost 100 fulfillment centers in North America, it's purchased thousands of truck trailers to reduce shipping costs; established a growing fleet of Boeing 767 cargo planes to haul merchandise across the country; and built up fleets of bicycle couriers, delivery trucks and car drivers to further trim delivery times and costs. It's also well on its way to creating a drone delivery system that could one day get items into Prime members' hands within minutes of orders being placed.

These and other innovations have helped Prime build a remarkably loyal audience: 91 percent of first-year members sign up for a second year, and 96 percent of those members renew for a third year. Overall, Amazon also claims an overwhelming share of the e-commerce market. Between January and April 2016, it accounted for 41.2 percent of all online sales, far outpacing its nearest challengers: Nordstrom (2.7 percent), Best Buy (2.7 percent), and Macy's (1.5 percent).

Macy's response

Macy's clearly has a lot of e-commerce ground to make up on Amazon, and its decision to close 100 stores -- 15 percent of its 728 locations -- is designed, in good part, to fortify its online efforts. Per Macy's press release announcing the news:

  • The closings will primarily involve stores that have seen ongoing declines in profitability and volume.
  • Some locations will close because their real estate value is greater than their retail value.
  • Macy's will use the money it saves and/or earns to enhance the in-store shopping experience at locations with the highest potential for growth, as well as to invest in its digital businesses.
  • From consumers' perspectives, the ultimate goal will be to make Macy's "America's preferred omnichannel shopping destination."

Most of the stores will shut down by early 2017; the rest will stay open until their leases end or other contractual arrangements are reached. Once the closings are completed, though, Macy's will still have outlets in 49 of the 50 biggest markets in the country. Its presence in those areas could be crucial to Macy's ability to compete with Amazon for online clothes buyers.

Amazon is on pace to surpass Macy's as the leading apparel seller by 2017, even though 76 percent of consumers prefer to buy their clothes in stores. Fast delivery is becoming increasingly important to consumers, after all (in fact, 50 percent of shoppers are willing to pay extra for it when they want something quickly), and Prime members enjoy free two-day (and, in some cities, same-day) delivery. Macy's could therefore use those outlets to facilitate speedy, affordable shipping options for online customers in large markets.

Macy's isn't alone in reducing its brick-and-mortar presence. In recent months, a number of national chains, including Ralph Lauren, Aeropostale, Sears, and Kmart, have announced store closings, and Sports Authority has shut down altogether. The "Amazon effect" has obviously played a role in these decisions, but it's also important to note that e-commerce sales still account for just a fraction of total retail spending -- and will for quite some time.

In 2020, for example, U.S. e-commerce sales are expected to reach $684 billion, which would mark a 72 percent increase over 2016 revenue projections. Nevertheless, that will comprise just 12.5 percent -- i.e., one-eighth -- of overall retail sales that year. Of course, Amazon accounted for nearly 60 percent of the growth in online sales in 2015, taking in $23 billion more last year than it did in 2014, and it will likely receive the lion's share of online gains in the short-term future.

Key steps for retailers

Amazon's success can seem daunting, but brick-and-mortar stores, particularly well-established brands, have certain advantages that can help them compete in the overall marketplace with Amazon. For one thing, they have significantly more physical locations than Amazon (which recently opened a bookstore in Seattle and plans to open another one in San Diego). They therefore have much greater institutional knowledge and understanding of the channel through which consumers still spend the overwhelming majority of their disposable income.

To survive and succeed in the coming years, retailers will need to give customers well-rounded, omnichannel experiences that drive repeat purchases. Here are five keys for accomplishing this:

Embrace data collection and analysis
As noted earlier, e-commerce has created an ever-widening torrent of information about customers. Retailers have to put all that data to work for them in the same way that Amazon has. They need to find out what their customers really want (and don't want) and then determine the most effective, efficient and profitable ways to fulfill those desires.

Make the in-store environment inviting, rewarding and fun
Online shopping is easy and convenient, so it's critical to give people persuasive reasons to come into stores, where retailers can make much stronger impressions on them. Among other features, stores should provide knowledgeable, friendly sales assistants; comfortable spaces; and apps that help drive multiple visits.

Cater to consumers' mobile interests
Smartphones are now the leading source of e-commerce traffic; retailers that don't satisfy their customers' mobile desires will quickly lose favor with them. For starters, stores should make it easy for shoppers to browse, compare and buy items online via smartphones and tablets. They also need to develop apps that fulfill customers' needs wherever they are -- in stores, at home or on the go.

Customize every possible contact
Consumers now expect retailers to recognize them and remember their shopping histories. Retailers need to make the most of this new reality. Whether it's equipping in-store personnel with tablets that can instantly display a patron's purchases or tailoring order confirmation emails to individual customers, stores should personalize every communication they have with their shoppers.

Create a compelling paid-subscription program
A well-designed subscription program can help a retailer address all of the above steps. A lot of stores already have loyalty programs, but most offer free enrollments. Customers who pay to join a subscription program, though, are much more likely to keep shopping at that retailer, both to justify the expense and to maximize the return on their investment. They're also more likely to open and read program messages, further enhancing the store's ability to retain them.

The "Amazon effect" is forcing many stores to substantially adjust or even eliminate long-held strategies and approaches to survive in today's retail world. The industry will continue to evolve, as will Amazon, so retailers will need to be nimble, smart, and innovative just to keep pace. One fact remains as true as ever, though: The stores that figure out how to consistently satisfy the changing wants, wishes, and needs of consumers will stand the best chance of long-term success.

Tom Caporaso is the CEO of Clarus Commerce, a recognized leader in e-commerce and subscription commerce solutions. Among its various properties, Clarus Commerce owns and operates FreeShipping.com, the pioneer of the pre-paid shipping and cashback...

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