Amazon Arrives in Australia — Unique Advantages in a New Market
There has justifiably been a lot of speculation about the entrance of Amazon to the Australian market. Depending on the source, their arrival seems to vary from a topic of economic interest, to a matter of national policy. Based on the hugely successful launch on Tuesday, it seems the speculation was warranted.
So …why is this such a big deal?
The reason Amazon’s entrance to Australia is of interest is not because they are simply “better” than our retailers, it’s because Amazon has inherent advantages in their business model which the Australian retail landscape has simply not seen before.
As I am a Business Designer at heart, I find these structural advantages way more compelling than any financial performance reports in a foreign market, and I believe their uniqueness will put Amazon in a category of its own once they begin to build their market share here.
Business Model Advantage 1 — Prioritising Revenue rather than Profit
Amazon has done something unprecedented with its shareholders — it’s convinced them that Amazon is a good investment even it generates no profits for distribution. In fact, the handful of times that Amazon has recorded a profit, it seems like most of their biggest shareholders are confused about why that cash is not being pumped back into the company to support Jeff Bezos’ innovation agenda.
This should concern our retailers, because not only will Amazon bring its experience from the US, but it means that Amazon will be more willing to invest in R&D and innovation initiatives specific to the Australian market. The recent profit slump reported by Amazon should terrify major players in the Australian market, because it means there is more money to fuel expansion. I would hypothesise that investors in our local retailers may not be quite so embracing of a no-dividends policy.
Business Model Advantage 2 — Big Enough to Support Predatory Pricing
Amazon’s size, combined with its willingness to engage in predatory pricing has proven to be a successful tactic in the US market. Even in markets where Amazon is a relatively new entrant, we see that the sheer size (both in terms of revenue and distribution channel) means that they have the power to dominate those categories. Content is a great example of this. Even with established players like Netflix, the Amazon Prime product was aggressively built up with more benefits, more content, and exposed to more markets. Though nobody knows the exact figures, Business Insider pegged the growth from 2013–2015 at around 60 million users.
This is worrying for Australian businesses because the size of our businesses is already a fraction of the equivalent in the United States. Were Amazon to enter a new category in Australia, the barriers to entry are significantly less. Amazon has proven repeatedly that it is willing to sacrifice profits over the short and even medium term to pursue long-term aspirations. The report that Amazon’s pop-up retail efforts in the US are losing money might be seen positively, showing that Amazon will be able to match our established retailers. However, I would urge the opposite response — if Jeff Bezos is willing to support a non-profitable retail venture in the United States, image how easy it would be for him to do the same here?
I believe that particularly in categories that are dominated by Amazon overseas such as marketplace services and Electronics retail, we will see Amazon more than willing to engage in predatory pricing. For instance, what if Amazon were to waive all marketplace listing fees for two years — would eBay survive? What if Amazon undercut the price on the hottest new phone or laptop — would JB Hi-Fi be able to match the losses and for how long?
Business Model Advantage 3 — Guaranteed, Up-front Revenue
Amazon Prime is a strategic financial asset for Amazon across all of its business lines. The premise of Amazon Prime is that for a small annual fee you can have “all you can eat” use of Amazon’s core infrastructure and assets. This bundle currently includes on-demand video streaming through Amazon’s content platform, two-day shipping and access to the Kindle library — all included. A subscription model is not revolutionary, but for a company like Amazon where a subscription model underpins a huge volume of retail sales, a guaranteed, up-front revenue gives them a distinct advantage both in buying power as well as supplier negotiation. In a supplier negotiation where you can guarantee a purchase level that doubles or triples the size of said suppliers business, you are pretty much guaranteed to get the best rates possible, and may have the option to demand an exclusive partnership.
What this means for Australia is that our existing logistics landscape is going to get seriously shaken up, probably panning out in one of two ways. The first scenario is that Amazon will partner with shipping/delivery companies locally, and by awarding such significant contracts make smaller players essentially unviable. Potential partners like Australia Post and StarTrack will find themselves under significant pressure to increase delivery times and customer experience in order to secure what will be the biggest account in the country. Admittedly, I think most Australians would welcome this with open arms — I have my own fair share of post office and delivery related complaints. However, the long-term effect of a smaller logistics marketplace with the frontrunners reliant on Amazon’s continued good graces may leave us worse off. The second scenario is that eventually Amazon gets sick of this arrangement, and decides to install its own in-house logistics operation, a decision that was met with great success in the US and put previous logistics partners in a financially untenable position. Admittedly Australia has some geographic challenges that would make this a more difficult endeavour, but it’s not outside the realm of possibility.
Business Model Advantage 4 — The Long Tail
Amazon is well known for it’s “Long Tail” product strategy. In short, this strategy is having a large number of products (or varieties of a single product) rather than the more traditional marketing strategy of focusing on driving sales across a small number of “hit” mainstream products and services. For Amazon, this has been an incredibly successful business model, particularly because of the artful crossover between Amazon’s retail and marketplace offering, and the ability of Amazon to “convert” customers based on their packaged services and pricing. They have overcome the logistical barrier of managing inventory costs by keeping products active in their online store even if there is no stock available, an SEO strategy that allows them to drive traffic and redirect customers to similar products.
Though the Australian economy does have unique challenges, I have not seen any business in Australia leverage the unique advantages offered by e-commerce. However, it is not the fact that Amazon has been able to execute this strategy that makes it daunting for Australian businesses — it’s the effect that long tail has on the value of brand.
Unlike in physical stores where distribution costs and shelf space limit the number of products you can stock, e-commerce operations like Amazon no such limitation. As a result, traditional “megabrands” which have commanded huge sales volume through distribution rights alone are finding themselves competing with products that are often cheaper and/or better. Increased choice means that customers are turning away from marketing messages as an indicator of quality, and instead relying on experience and recommendations. This is particularly prevalent in undifferentiated and low emotional investment products, the reason Amazon has begun producing their own lines of batteries, cleaning agents etc. The digital lag of e-commerce in Australia has meant that the “megabrands” that are distributed locally have been largely protected from decreasing importance of brand in the way consumers make choices, something that will likely change when Australians get used to choosing from a huge range of comparable products.
The most interesting evolution of this concept will be if the Amazon Echo virtual assistant product gains traction in the Australian market. While their online channel creates an online shopping experience with so many potential products that customers rely on recommendations, voice-activated shopping does the same but removes any visual choice or browsing. This is Amazon’s Long Tail strategy taken to the extreme — limiting choice to a single item at a time, selected by an Amazon controlled recommendations engine.
Depends who you are. If you’re an electronics, books or accessories retailer, yes you should. If you play even a peripheral role in the retail sector, I would be tasking my strategists with designing defensive tactics.
However, if you’re an Australian consumer I would be excited about the arrival of Amazon. Even if you never order something from them, you will likely benefit indirectly through the competitive pressure that Amazon will put on our local retailers in terms of customer experience, shipping times and prices.
Originally published at www.designfarmco.com.au on August 27, 2018.
