eCommerce(Amazon) and the New Wave of Retail
Bonobos recently opened up in my home city, Detroit. I don’t know if you’ve ever been to a Guideshop, but it’s a weird concept! You walk in and can try on clothes but can’t leave with any of them. Yet, Bonobos is incredibly successful and has survived in spite of being e-commerce. Well, not truly e-commerce because it’s more of a hybrid, but I didn’t really understand why this new wave of hybrids(Smile Direct (Jordan Katzman, Alex Fenkell), Warby Parker)even came about…
History of Amazon
Amazon has the most obvious monopoly of any tech company today (save maybe Google/Facebook). What it has accomplished in e-commerce — 46% of all online shopping, 130 million unique website visitors in the US per month, and $136 billion in revenue has made what once was a seen as “a house of cards” into “a house of pain”. Pain, pointedly not on the consumer side, but on the retailer, on the logistician, on the film producer, on the cloud service provider, and of course on the bookstores.
For consumers, Amazon has been a windfall — on sales of $136 billion, the company only profited a total of $2.6 billion! As Ben Thompson wrote, the revenue from Amazon Prime largely made up the entire operating profit of the company. In other words, Amazon sells its goods and services at about break-even, effectively making no money — much like Costco — with memberships being the “tax” that sustain the business. Amazon Prime is not only an enabler of low prices but also makes users very ‘sticky’. The switching costs of moving away from a retailer in which you enjoy free shipping, heavily discounted prices, and conveniences in the form of shopping preferences being ‘datatized’ are extremely high. Counter to even thinking about it as a cost, it’s seen by consumers as an “all access pass”. A prime member spends on avg. $1500 per year vs $625 per year for non-prime members. In this way, an Amazon prime member grows Amazon’s two main business lines — retailing and marketing for retailers.
Amazon’s retail business makes up roughly 60% of Amazon’s sales on a per unit basis. This makes sense because Amazon was initially a retailer, selling its own books, but it soon began to let third party merchants sell on its platform too. Amazon became an aggregator, a search engine that fulfilled an essential need for small bookshops to compete against Borders and Barnes & Noble — it was for the “little guy”. However, Amazon cannibalized many small bookstores and ultimately Borders and Barnes & Noble in becoming the very behemoth that was always its ‘manifest destiny’. Merchants only fueled Amazon’s retail side as it was able to track what was selling well for other businesses and then offer the “hottest products” itself without having to innovate. Bezos always envisioned this play:
An online service allows for infinitely more selection at infinitely lower prices because operating online doesn’t have the constraints of the physical dimensions.
Infinite choice manifested itself in books, clothes, consumables, furniture, and every good imaginable. All of these goods meant huge volumes of shipments began to originate directly because of Amazon. It had to be able to fulfill these shipments and so it negotiated enormous discounts with DHL and FedEx. In fact, the price that it negotiated was so heavily discounted that the logistics providers had to raise prices on their other customers who shipped outside of Amazon, who also happened to be merchants of Amazon! Because prices were high elsewhere, Amazon realized that it could operate physical distribution assets while still acting as a broker that funneled shipments back to DHL and Fedex. No matter if an order came through FBA or elsewhere, Amazon would be able to ship for less because of the concessions it forced on logistics providers. This is pure vertical integration: Amazon is a logistics provider, a marketplace, and a retailer.
New Wave
So what’s the problem with e-commerce? In general, two things: cost of customer acquisition and atrocious customer lifetime values for much of the industry. In cost and breadth no one can compete with Amazon economics. When the CEO of Bonobos which was acquired for $300m says that, “Bonobos won’t win because of e-commerce, but in spite of being e-commerce”, we should take notice.
What Bonobos and many others are realizing is that you can’t beat Amazon at its own game of price and distribution. You have to build an incredibly sustainable brand — one that consumers search for — and build up LTV of your customers by getting near to where they live. The premise behind the Guideshop is exactly that — get customers in the store and they will buy more over the course of the relationship.
No longer is it a game about only winning online but also mobile, wholesale, pop up stores, and even in catalogs. Things like brand, experience, and going deep will win, not going broad.
Personally, it’s always more fun for me to go to a store than to shop online. Shopping is an activity and a hobby that I hope we’ll always have the option to do in real life; it will be cool to see how our nearby Guideshops continue to go deeper.
Much thanks to Ben Thompson for inspriation and Blake Robbins and @MVG7113 (Michael Georgizas) for all of their help with editing.
