Business must brace as aggressive Amazon gets set to strike

ROBERT GOTTLIEBSEN
February 24, 2017
The Australian

Business columnist Melbourne @BGottliebsen 

When Amazon comes to Australia with its full local distribution system our retailers are set for an enormous shock. Many will discover just how far they have fallen behind the rest of the world in sophisticated online marketing and distribution as a result of their focus on bricks and mortar retailing.

Amazon will begin full operations here towards the end of this year but the real impact will hit in the first half of 2018.

This week, as I yarned one of Amazon’s two million “sellers”, I began to understand what lies ahead.

My ‘seller’, who is based in the US, contracts the manufacture of glass and similar products to an enterprise in China and the products are then delivered to Amazon global distribution centres.

Until the products are sold to the consumer he owns the stock and he determines the price at which the products will be sold. But if his products remain unsold in the Amazon store too long he is charged a high storage fee. So, if one of his products is not selling, there is a clear incentive for him to cut the price to a level where it will sell. In other words, the Amazon market sets the price of his products, not Amazon.

But Amazon is delighted if a product sells well at a high price because they get a bigger return.

Whereas our supermarkets and general retailers are reducing their supplier numbers, Amazon encourages new products to widen its global range but it is not left with unsold stock if the fresh product fails.

Many Australian retail suppliers who have been dropped or ignored by the large supermarkets or department stores will now get a second chance.

As well as marketing products from “sellers”, Amazon has its own range which it sells very cheaply, particularly when it enters new markets. Amazon’s costs are well below conventional retailers. 

The base objective of the Amazon operating system is to sign people up to be so called “prime” customers and present them with an array of goods and services that is so extensive that they won’t need to go anywhere else. 

And every time there is an interaction with the “prime” customer Amazon learns more and more about that person and so it can become much more targeted in what they promote. The Amazon product markets now extend to software, phone services and films — Amazon makes its own content to rival services like Netflix. Amazon prime customers doubled their consumption of video, music and reading products in 2016.

In 2016, Amazon net global sales rose an incredible 27 per cent to $136 billion. Amazon profits have always been held back by investment in new markets but in 2016 profits rose from $596m to $4.2bn.

The seller explained to me that to be a continuing Amazon supplier you need to handle customer queries and complaints rapidly and well. For example if there is a query or complaint about one of his products then under the Amazon system he must come back to the customer within 24 hours and Amazon are always monitoring the timing and quality of his responses. As a result, he installed a system to have a reply within a maximum of 4 hours. 

Under the Amazon system he is allowed to sell via other digital networks and indeed Amazon will execute the delivery — it’s an important part of their profitability. Again, they also learn more about rivals in the digital marketplace.

But in some ways, the establishment of this vast global network is just the start. The advance of artificial intelligence is taking marketing and distribution to completely new levels.

Amazon is conducting trials of drone delivery in the UK. The person receiving delivery by drone lays an Amazon mat out and the drone drops down to deliver the products.

Delivery times are reduced below 30 minutes. And Amazon is even experimenting with a massive warehouse in the sky that operates as a huge airship where the drones can pick up their goods without returning to the ground. 

A great many enterprises, and not just retailers, need to watch very carefully the likely impact of Amazon on the current or future business.

Posted in

Subscribe to our free mailing list and always be the first to receive the latest news and updates.