Doing business with the devil
The world’s largest companies are accepting Amazon’s vast ecosystem as an unavoidable part of doing business. In June, Ikea said it would begin selling through third parties next year, which almost certainly means Amazon and Chinese colossus Alibaba. The giant US chain Kohl’s is to open Amazon shops in its department stores; struggling US retailer Sears and sports giant Nike have separately announced they will sell through Amazon; most top sportsclothing brands appear on the site; Amazon is likely to become the world’s biggest apparel seller this year.
Sears knew that people would stop going into its stores, but it needed the sales: its market value fell 96% between 2006 and 2016; Amazon’s rose nearly 2000%. Sears shares jumped 20% following the Amazon deal.
Companies that cut deals with Amazon are under no illusion they are supping with the devil. Simply by entering a new market, Amazon can obliterate a company’s business. When it was revealed that Amazon had filed a trademark of the marketing phrase “We do the prep. You be the chef”, the share price of Blue Apron, a publicly listed US meal-kit company, took a steep dive. That’s just a trademark.
Amazon runs a large part of “the cloud” by way of its astonishingly lucrative Amazon Web Services (AWS) division, and hosts the online infrastructure of so many companies it is sometimes called the “Amazon tax”. Some of its rivals think AWS has become so big that it may be subsidising the company’s retail business and “underwriting” its war with retailing giant Walmart.
Theoretically, Amazon could clip the ticket of companies doing business with it several times: selling their goods on the site, accepting their visibility-boosting advertising, hosting their own e-commerce services via AWS, and delivering their goods via “Fulfilment By Amazon” (FBA), which also handles service and returns.
Amazon has a long way to go in bricksand-mortar retail. Walmart has more than three times Amazon’s retail revenue and 90% of worldwide retail spending is still done offline, say analysts. Even with the Whole Foods supermarket chain purchase, Amazon was predicted to have less than 3% of the US market share in groceries. That means much more room to grow, as more retail heads online and the separation of clicks and mortar becomes invisible through one giant fulfilment chain.
Amazon is making good use of the profusion of brands it sells. Aware of its vast eyeball-reach – more than half of US consumers reportedly start online searches on the site compared with 28% for search engines and 16% on retailer sites – it is encouraging brands to buy ads on its site. As US digital agency head Sarah Hofstetter told the New York Times, “Amazon is the new shelf space, and if you’re not on it, you may be rendered invisible.”
Amazon’s share of the online ad market is a fraction of Google’s and Facebook’s, each about US$25 billion annually, but forecasts are bullish. The company also has a good head start with voice search through its Alexa virtual assistant – another challenge for brands more offline than on. Martin Sorrell, chief executive of ad and PR multinational WPP, has said, “What happens if I say to Alexa, ‘I like Cheerios,’ and Alexa says, ‘I’ve got Kellogg’s Corn Flakes, which are 10% off’?”