How to beat Amazon

Disclaimer: I own a few shares of Amazon stock so I am biased in my support of them.

Amazon is quickly becoming (took them 18 years, but who’s counting) and may already be the 800lb gorilla of online shopping. Amazon alone accounts for more than 5% of total online retail sales (as of 2013, that total was $1 trillion) and despite being a behemoth and generating tons of sales, pours more than 100% of that back into R&D and growth. So the amount they are spending to widen their moat and raise their walls is staggering

So if Amazon, which is predicted to do $170B in sales by 2017, is so huge, how can
anyone dethrone them? Let’s look at a few of the strategic approaches.

Head-on or out-amazoning Amazon.
Well if you want to go head on with them, which is Walmart’s strategy, you are going to need $20 Billion or more to catch up to them (they spent $13B on warehouses in the last 5 years alone). Why so much? You need to address all the core competencies Amazon has developed over the years: logistics, economies of scale, and brand recognition. Amazon is currently building warehouses near every major city in America. Within an hour of each major metropolitan area is a warehouse that stocks millions of items. With each day that lead is getting bigger and bigger with each additional dollar that Amazon pours into its infrastructure. Amazon is notorious on Wall Street for eschewing short term profits for long term strategic reasons. So how do you beat someone who doesn’t give a crap about what shareholders think?

Right now the only companies capable of competing on this scale will be Walmart, Target, Sears, Walgreens, CVS, and Radio Shack. Why do I think these guys including perennial doormat Radio Shack can compete? One answer: retail footprint. According to Stores.org each of these retailers has either a ton of local outposts or tons in overall sales. Target has the fewest stores amongst this bunch (but still generates $70+ billion in annual sales).

Let’s make a quick assumption (based on a number of Amazon’s moves): the goal is to offer same day delivery to most of their customer base in order to change people’s behaviors to DEFAULT to Amazon for buying something (groceries, toiletries, whatever). Doing same day, or even next day delivery is incredibly challenging logistically. Moving things across multiple state lines costs tons of money in energy and fuel and time. So that means you have to be able to ship from multiple points to multiple points.

With that in mind, the best way to fulfill local orders is to turn each store into a logistics hub. If you can pull from your individual store inventories and ship to customers quickly and efficiently you don’t need to build huge cavernous warehouses for all your products. Now you might be asking yourself how would Radio Shack compete with this? Well they would most likely have to outsource the delivery/dispatch of products (to someone like instacart perhaps), but they have 5000+ stores; at one point 85% of the people in America lived within a 5 minute drive of a Radio Shack outlet. Imagine distribution from 5,000 “warehouses” to consumers that are nearby? Walgreens has 7000+ stores, the same with CVS, or 7-11.These stores, especially Radio Shack stock limited inventories compared with Amazon, but they have the opportunity to become first to mind for certain verticals. Think if you wanted an electronic, you would look to best buy or radio shack first rather than Amazon for it. I could see Amazon partnering with 7-Eleven on a national or international scale (they already have lockers in 7-11 which means they are looking at local presence as an issue).

Alternatively will a third party who acts solely as the logistics arm succeed? Google, Ebay, Instacart, and others are all trying this. However this brings up memories of Kozmo and peapod which burned immense amounts of cash in the 90s trying to figure this model out.

So can it be done? Maybe. Will it be tried? Probably. Ultimately though you need such high volume to compete with the razor thin margins Amazon is working on that only a handful of companies are willing to take that risk.

Skip the low margin stuff, the opportunity is high margin.
Amazon’s expertise is in moving a ton of stuff cheaply and quickly; they aren’t concerned with high-end retail YET. Amazon has made a few moves into specialty retail through its mini shops and some of its acquisitions, but it is clearly not their focus yet. They are still trying to solve the volume issue first. This leaves a big window of opportunity for someone trying to build a business in e-commerce that has a few years of window before Amazon comes rolling in with a $500M experimental fund.

There are a few ways you can tackle high margin business: proprietary brand names (Think warby parker, Toms, etc. ). Or sell other people’s exclusive products (FAB, Etsy, quirky, to name a few).

The last way to tackle Amazon, is look at the subscription businesses that birchbox, dollar shave club, and others are building. By replacing convenience and recurring revenue as the primary drivers of consumer decision making, you avoid the pure price consciousness of many online shopping decisions today. This route is a long and slow plath to billions though. We’ll discuss this strategy at a future time.

After all this, the question still sits there unanswered: can you beat Amazon? My theory is yes, but its a very tough and expensive endeavor to beat them head on.

Andy Dunn from Bonobos has an excellent post on this (and a bit more eloquently written than this)