Whats is Amazon Effect?
Amazon Effect is a term used to describe the disruption that online retail has brought to the traditional brick & mortar retail model.
Although the term refers to the general impact of ecommerce, including all players, it is associated with Amazon because it is the biggest player, and the first to induce real changes to consumer behavior and the overall industry’s landscape.
Amazon Effect on Brick & Mortar Retail
Amazon Effect has forced traditional brick & mortar retailers to bring a lot of changes to their strategies, in order to protect their market share.
The New Role of The Brick & Mortar Locations
Instead of having physical stores just for shopping, retailers started looking at their shops from a different angle, and started using them to create their own competitive advantage, by using those properties for new purposes.
Such as:
- Creating in-store experiences through planned store events
- Using those locations for curbside pickup and click & collect (BOPIS) order fulfillment
- Encouraging customers to return online bought items to the nearest store location
- Implementing a seamless omni-channel shopping experience that can start at any point and end at the other
Embracing Online Shopping
A lot of retailers were very late to embrace online retail, until they started losing market share to ecommerce players. This is when they stepped up their efforts to embrace this new channel and build their own online properties.
Ecommerce is costly and challenging, and if it wasn’t for the Amazon Effect, which pushed retailers out of their comfort zone, they might have never done it.
New Merchandising Models
Amazon has challenged retailers to widen their product assortment, in order to compete with its vast product catalogue.
Because of its marketplace model, Amazon can add an infinite product selection, without carrying the cost or risk of inventory, or being restrained by buying budgets. This has influenced other retailers, such as Walmart, to add the same marketplace model to their merchandising strategies, and try to compete with Amazon on sellers, by offering them better rates and better reach.
Amazon Effect on Supply Chain
Amazon has brought new models and shortcuts to the supply chain of this industry.
Direct to Consumer
Amazon has given product manufacturers a direct store front to sell to the end consumer through the marketplace, and thereby bypassing wholesalers and retailers. In the absence of such channel, manufacturers would have had to invest a lot in establishing and operating retail stores, in order to achieve such forward integration.
When Amazon first started, many manufacturers started listing their own products. However; this has led many retailers to feel that now their supplier is competing directly with them, and started steering away from carrying brands that are sold on Amazon at their brick & mortar stores.
Another type of brands, called “Amazon only Brands” started emerging. These brands have built big businesses, based solely on their sales to Amazon customers.
New Logistics Standards
On the logistics side, Amazon has set the standard when it comes to customer expectations for delivery speed.
It used to be that, when you ordered a product online, it could arrive within 3 to 5 business days, or sometimes more. Now, with Amazon Prime, customers see quick delivery as a given, and are becoming less tolerant to long delivery times.
Amazon Effect on Customers
Amazon Effect has changed how customers shop, and what they expect throughout their shopping experience.
The fact that many products were listed at lower price online, has created a new phenomenon called “Showrooming”, where customers go to the physical stores only to see, touch and feel the product, and later on order it online instead of buying it at the store.
Customers have also come to expect the online price to be the fair price of the product, and for many product categories they started to check the prices online and compare them to what’s in store before buying.
Amazon Effect on The Economy
Amazon Effect on the economy can be seen in many different areas.
Effect on Prices
When prices have started to get lower, due to increased competition, direct sales from manufacturers to customers, and higher visibility of the prices through online channels, this had an effect on inflation.
For many years, low inflation has stayed persistent, to the extent that economists were afraid of a deflationary period. Hence the low, sometimes below zero, interest rates to stimulate consumer spending.
Effect on Jobs
It could be argued that Amazon Effect has brought along a lot of job losses, through brick & mortar store closures; induced by online competition.
However; Amazon has also created a lot of jobs.
As of March 2022, Amazon employs 1,622,000 full and part-time employees across its different business functions.
Effect on Small Businesses
Through its new ecosystem, Amazon has created opportunities for many small business owners to benefit from, and also represented a threat to a lot of them.
Online Selling
The rise of online retail, and customers getting used to shopping online, has given a lot of small business owners the opportunity to create their own online shops or sell on marketplaces like Amazon or Walmart themselves. This has allowed them to gain more exposure and have a wider reach.
Now, a small business owner can sell nationwide; something that was farfetched before ecommerce.
According to Amazon, half of the items sold on its platform come from small and medium-sized businesses.
Amazon Affiliates
Amazon has also given a rise to affiliate marketing, and this has been a major source of income for many small business owners, who are content creators or operate an online publishing business.
Lower Margins
While giving sellers a platform to sell to the world, Amazon is notorious for its high fees, that come under different categories. Sellers have to pay those fees from their own margins, and some of them find it difficult to stay profitable selling on Amazon.
Threat of Competition
Amazon has also assumed the role of marketplace owner and player at the same time, which created a competitive threat to its sellers. Especially that Amazon has access to all the sales data and customer details.
This has created a trust issue between Amazon and many of its sellers.
Amazon Effect & It’s Impact on The Retail Industry
There is no doubt that Amazon Effect and the rise of ecommerce has brought a lot of change and disruption to the retail industry. But one could argue that much of this change is for the better.
Every once in a while, a new player will come and disrupt an industry. Old players have two options: to innovate and compete or become obsolete. And retailers have chosen to fight back, and this has brought innovation to the industry.
In fact, we argue that retailers are now forming a big threat to Amazon themselves. This is because the majority of shopping is still brick & mortar.
Contribution of online sales to total retail sales has been rising since 2013, and peaked in 2020 due to the pandemic. But, even at its peak, it was still at 16% of sales only, and the rest happens at physical stores.
This has driven many pure play online retailers, including Amazon, to invest in opening brick & mortar locations or acquire existing retailers. In 2021, Amazon operated 672 physical stores in North America, according to its 10-K filing, and it has recently started expanding this footprint by opening more Amazon Style, Amazon Fresh and Amazon Go stores.
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