I received an Amazon giftcard the other day. As I perused the site and compared prices with other e-tailers such as Target, Best Buy and Wal-Mart, I found that, as always, Amazon undercuts its competition, especially with tax and shipping factored in. Since I spend much of my pocket change at Amazon, this discovery came as no surprise.
But what was surprising was an interesting metric; Amazon, nearly earth’s largest bookseller, books a net profit of only 1.34%. Granted, they rely on volume, not margin, for profits, but this incredibly low number was compelling, and seems indicative of Amazon’s corporate philosophy of using loss leaders – like the Kindle Fire – and microscopic margins to catch and keep customers within its simple and increasingly expanding product and entertainment ecosystem. The thinking is, as long as one buys a book at Amazon – giving them, say 28 cents on every $25 hardcover sold – one may as well purchase digital content from Amazon’s burgeoning music, video, and e-book selections. And while you’re at it, why not everything else?
This tactic obviously comes at a significant cost to traditional brick and mortar retailers such as Best Buy, Target, and Walmart, who have suffered from “showrooming,” where a customer goes into Best Buy, tries out an XBOX, compares the price on their smartphone, and then buys it on Amazon. This loss of customers is no better reflected than by Best Buy’s recent announcement that it is closing 50 stores, and placing more weight on Best Buy Mobile – small footprint stores that exclusively sell smartphones and tablets to cater to the astronomic growth in portable devices, and require less staff and square footage than its TV-centric bigger brothers. At the same time, other electronics retailers are resorting to unusual customer retention methods, like installing fish tanks in stores.
And Target, a repeat victim of showrooming, has taken aggressive steps to remain competitive in an increasingly online ecosystem. It features an incredibly comprehensive system of customer tracking, has signed runway designers like Isaac Mizrachi for its chic-cheap fashion lines, and has pioneered the strategy of placing mini-shops within stores, a strategy that JC Penney has followed, as well. Penney also copped some of Target’s nimble, humorous marketing in recent TV ads. And lastly, in a direct salvo ‘cross Amazon’s bow, Target has stopped selling the Kindle, and will soon set up exclusive Apple (read: iPad) sections in its stores.
Walmart hasn’t taken the same sorts of steps, but with 2011 sales of nearly $450 Billion – roughly tenfold those of Amazon – they might be able to coast. But traditional retailers should be wary – Amazon’s profit has more than doubled since 2008, compared to a 5% increase for Target and 10% for Walmart. And Amazon has also started to encroach on Costco’s space, setting up monthly subscription services, where household goods – toilet paper, printer cartridges, cans of Coke – are delivered to one’s door at regular, monthly intervals, and at a discount.
The competition in retailing – especially within electronics – remains fierce, and it will be interesting to see what steps companies take to stay relevant, whether it be digital media and tablets for Amazon, trendy designers for Target, or mini-stores for Best Buy. Stay tuned, no matter where you buy your TV.
Silicon Spatula 