Welcome to the Jungle: Retail in the Age of Amazon

When Amazon purchased Whole Foods, it confirmed the power of combining a rich digital ecosystem with a network of brick-and-mortar locations. Big retailers started realizing they couldn’t afford to treat digital touchpoints as just an enhancement to their physical-first offering – they need to dedicate resources to fortifying existing assets, reducing friction in the customer experience, and researching new ways they can use digital to diversify their own brand’s ecosystem. In 2018, the brands that will be most successful at defending against Amazon will be those that make big investments in bridging the gap between digital and physical shopping.

 

Why Look to Amazon?

The $700 billion grocery industry had grown largely stagnant since the 1980s. Seemingly out of nowhere, Amazon, the world’s most valuable retailer, gobbled up 466 stores’ worth of product and infrastructure for a cool $13.7 billion. The acquisition was mentioned more than 304,000 times on social media. Amazon’s stock surged; competing retailers’ stocks stumbled. Whole Foods became more affordable, and Amazon Fresh appeared overnight.

A far cry from its humble roots selling books online, the retailer has morphed and reinvented itself into a marketing platform, a delivery and logistics network, a credit lender, an auction house, a major book publisher, a production studio, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Now, with the Whole Foods deal, Amazon has shown that it also has an appetite for brick-and-mortar. Retailers who rested comfortably behind their carts, cashiers, and countertops are coming to realize that their greatest safeguard against digital threats is diminishing, and Amazon has the money and ambition to prove it.

Today, more than 50 percent of shoppers turn to Amazon when shopping for a product online, and 45 percent of online retail searches start on Amazon.com. Customers know their order will likely not arrive today; they won’t be able to feel, see, or experience the product in any way, yet the majority of shoppers are turning to Amazon first.

50 percent of shoppers turn to Amazon first for product searches

Why Amazon Behaves the Way It Does

Amazon’s company mantra goes like this: “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.” The Day 1 mantra teaches that constant, feverish innovation is the only way to ensure continual growth and the only way to ward off institutional stagnation. By cultivating a culture of constant change, experimentation, and a healthy view of failure, companies like Amazon set the pace for the marketplace rather than having to react when they’re unprepared.

Jeff Bezos quote

This is something that traditional retailers struggle with, especially those whose physical locations were considered the company’s lifeblood until e-commerce shook them from their quiet, commercial slumber. Almost all of them have adopted the “online also” mentality, but when you have online-first brands like Amazon carving out physical space for themselves, then you have some catching up to do. Big retailers are losing their competitive advantage over their digital counterparts, which is why they should push for better, frictionless, customer-centric digital experiences to meet their customers where they spend most of their time.

 

Evolving Retail

Retailers can fall into the trap of dividing brands into two general categories: ones that rely on their physical stores and digital-first brands who rely solely on e-commerce. But because they’ve divided the physical and online experience, they’ve failed to adapt to growing digital needs and have alienated the digital-native customer. Joanna Arhontis, author of “The New Retail Revolution: Bricks and Mortar Stores are not Dead Just Different,” insists, “Brick-and-mortar stores have not embraced online. They have tried to take their stores and put them online and have left out the experience. They don’t quite understand how to engage with the customer like we do in-store. We have to bring that to life online. The consumer needs the retailer to engage with them.” Customers are insisting on digital support, but most retailers are failing to accommodate them. For instance, online sales will exceed $400 billion in 2017 and are expected to soar above $560 billion by 2020 – it’s the responsibility of the retailer to adapt to these changes and provide an experience that respects the user’s increasingly digital preferences.

Chart showing retail sales growth prediction for 2020 will be $561 billionAmazon, on the other hand, is completely changing what people thought was possible with omnichannel retail. It’s expanding its own customer loyalty program, Prime, to function as the new loyalty program for Whole Foods. And it’s rolling out the “Amazon experience” at Kohl’s, which grants merchandising privileges for its home devices within Kohl’s locations, but also allows any Amazon user to return products that were purchased online. Amazon is disrupting retail by constantly pursuing a more fluid customer journey that expands across digital and in-store.

 

Embrace the Ecosystem

As the most salient example of constant territory expansion, Amazon takes unpredictable forays into industries that would have seemed bizarre for it to enter only a few years ago. When successful, these moves help Amazon connect with customers through an increasing number of touchpoints by offering even more convenient services, and by sweetening Prime’s value proposition to prevent users from abandoning Amazon for other services. This is what’s called “brand stretch,” or a brand’s ability to reasonably venture into related categories while still staying true to who it is. Not all brands enjoy the seemingly limitless brand stretch that Amazon appears to have, but they can still adapt by harnessing closely related, complementary activations and business extensions so they’re more able to close the gap between their in-store presence and the ever-open ecosystem of digital touchpoints.

 

Expansion Through Acquisition

Expanding your offering through corporate takeover isn’t new – what used to seldom happen between large brands is now happening more and more as brick-and-mortar-based brands focus on keeping pace with, and even staying a step ahead, of Amazon. One way brands are accelerating their digital growth is by acquiring companies that satisfy a technology need for the brand. Because of Amazon’s expanding presence in digital décor and home installation, the big blue-and-yellow brick-and-mortar DIY giant IKEA purchased TaskRabbit specifically to stay a step ahead. TaskRabbit connects people who need tasks done with people who are willing to do them, and although IKEA already has its own installation system, the acquisition allowed it to dig its claws deeper in the digital world. Next up for IKEA: an augmented reality app for the iPhone that allows users to visualize furniture in their home before committing to a purchase.

 

Define and Defend Territory

A decade ago, a brand could get away with being really great at one thing. But Amazon is expanding consumer appetites for richer digital experiences at their fingertips. Successful brands find unique ways to create more digital touchpoints within their ecosystem that still seem reasonable within the definition of the brand. In 2015, Under Armour did just that when it acquired online dietary go-to site MyFitnessPal. The apparel giant recognized that people who wear Under Armour are also likely to be interested in nutrition, fitness communities, and tracking their workouts. This acquisition, like IKEA and TaskRabbit, elevated Under Armour from a brand that outfits elite and amateur athletes into a holistic platform for maintaining a healthy lifestyle. Now, users can be an Under Armour athlete in the gym, on the trail, or in the kitchen. Under Armour has even incorporated MyFitnessPal into its brick-and-mortar experience.

 

Nurture the Omnichannel Experience

Companies that are growing are those that push resources into improving both their digital and in-store experiences. Ulta Beauty, which is actually outpacing Amazon in terms of growth rate, has always had an exceptional in-store experience, allowing customers to sample products and receive makeup tutorials from experienced staff. Ulta’s emphasis on growing digital sales in Q1 of 2017 resulted in a meteoric 71 percent leap in online sales. What’s more, users who shop both in-store and online spend two-and-a-half times as much as users who just do one. By devoting more dollars to digital initiatives, Ulta is drawing more revenue out of its customers while still enjoying the safety of a stellar in-store experience.

Consumers who shop online and at retail stores buy 2.5 times moreBrands are finally seeing the possibility in omnichannel shopping and are making a more concerted effort to bridge the gap that exists between online and in-store experiences. Walmart just announced that it plans on adding 1,000 online grocery pickup locations in 2019. In place of building more Walmart locations, the big-box giant expects to invest in more digital experiences and integrated shopping initiatives to grow e-commerce sales by about 40 percent by the same time. It’s even looking into ways that it can get its employees to deliver products on their way home from work and amp up its logistics to support same-day delivery in certain markets.

 

Resist the Amazon Takeover

Brick-and-mortar brands that want to stay Amazon-proof will need to stop thinking of themselves merely as a physical brand that also has some kind of online experience. Whether they build something in-house or make a strategic acquisition, retailers need to be pushing their in-store vision in a few key ways:

  • Be curated. Sephora is rolling out smaller concept stores that feature state-of-the-art digital personalization and customized makeovers for visitors.
  • Be social. Lululemon uses Eventbrite registrations to draw incremental foot traffic around a common customer passion: free yoga sessions.
  • Be frictionless. Amazon Go’s highly connected brick-and-mortar locations boasted a checkout-free experience. The concept stores have gone through some growing pains, but the principle is building a completely seamless omnichannel experience.
  • Be experiential. Nike’s digital shoe terminals used product-detection technology to display enriched content around products that were placed on the terminals available in flagship stores.
  • Be bold. Walmart’s Store No. 8 is a new e-commerce incubator devoted to concocting innovative ways the world’s biggest brick-and-mortar retailer can transform e-commerce. Store No. 8 is built on the principle of betting big on transformative ideas, and could be just the kind of thing that keeps it out of Amazon’s reach.

 

Change Is Good

Shifting toward a digital-first model in a traditionally brick-and-mortar category is a big move, but it’s not unachievable. Small steps in the right direction can generate outsized returns for even the most change-averse brands. With Amazon setting the pace for both retail and digital innovation, the best brands will treat their digital ecosystem as a storefront, and their storefronts as convenient physical extensions of their digital presence. They’ll look beyond brick-and-mortar and see the possibility (and profitability) of creating meaningful digital experiences that extend the brand into more natural moments in their target’s digital day.

The post Welcome to the Jungle: Retail in the Age of Amazon appeared first on The Richards Group.

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