If you ask any retail leader what their biggest threat is, there is one common answer: Amazon.
It’s no surprise. The online giant racks up $232bn (£185bn) of global revenues every year and accounts for almost half of US and a third of UK ecommerce sales, with strength in a diverse mix of categories ranging from books to beauty.
Just like ‘Google’ became a verb, so has Amazon. To be ‘Amazoned’ means to have one’s business crushed by the online retailer moving into your category.
But Amazon impacts all retailers, not just those it competes directly with. Even in areas where it is not stealing market share, the bar it sets in terms of payment, delivery and customer experience has driven up customer expectations. And its devotion to innovation and solving customer problems means that bar is constantly being raised.
In Understanding Amazon, Retail Week delves into:
1. Understanding Amazon’s strategy
Amazon may be unrecognisable from the online book store that launched online 25 years ago, but its mission remains the same.
In 1995, the company wrote: “Our vision is to be Earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.”
That was founder Jeff Bezos’ aim – to become ‘The Everything Store’.
Former Amazon executive Jon Reily, now vice president and commerce strategy lead for digital consultancy Publicis Sapient, tells Retail Week that sci-fi fan Bezos drew his vision from an unusual source. “He was a child of the sixties and was obsessed with Star Trek and The Jetsons,” he says. “That was his vision of what society will look like.”
Reily says The Jetsons, in particular, provided inspiration for Amazon. The cartoon painted a utopian vision of an automated future with robot servants (Alexa, anyone?), drones and products instantaneously arriving in the family home after being ordered on a screen.
He may have been planning ‘The Everything Store’, but Bezos started out with books. He developed the idea for Amazon while working for hedge fund DE Shaw, where he was researching new business opportunities on the rapidly growing internet. He made a list of 20 product areas that were most viable to sell online, with books at the top of his list.
He couldn’t get DE Shaw to back his idea so decided to go it alone. In 1994, Amazon was born and the face of retail was changed forever.
The Amazon flywheel
Bezos’ idea centred on using the internet to offer customers a larger selection of goods at a lower price than competitors.
This ethos prevails today and forms the basis of Amazon’s business model – its infamous flywheel.
Put simply, Bezos believes that lower prices lead to more customer visits, which in turn increase sales volumes and attract more third-party sellers to the site.
This allows Amazon to get more bang for its buck when it comes to fixed costs such as fulfilment centres and servers, and the efficiencies that this brings enables Amazon to lower prices further.
The idea is that the flywheel is a virtuous circle, which is pushed allowing it to build momentum, until a breakthrough moment when it turns itself.
The flywheel is now in full flow and Amazon feeds it further by adding more and more products to its offer.
Amazon and profit
Of course, Amazon had the luxury of being able to rack up losses while it waited for the flywheel to gain momentum.
In fact, in 1997 Bezos told Inc.com: “We’re going to be unprofitable for a long time. And that’s our strategy.”
The retailer prioritised growth over profitability, cementing customer and sales growth as crucial KPIs. The idea was to establish market leadership first before focusing on growing profits.
Reily says Amazon is “very tolerant” to its business divisions making a loss because it “has an opportunity to raise capital bigger than any company in the world”.
However, Amazon has been profitable for the past four years and its small profit – net profit margin was just 4% in 2018 – has steadily grown.
And there are subtle signs that Amazon is starting to take profitability more seriously. Last year, Amazon raised the price of its Prime membership in the US by $20 (£16). Prime has long been a loss leader to boost customer loyalty and sales.
It is also investing in private labels and exclusive products. TJI Research, which tracks Amazon’s brands, says the etailer now boasts 144 private labels and 622 Amazon Exclusive brands.
The marketplace model
Amazon has introduced more than 30 new verticals since its inception and its marketplace model, selling goods produced by third-party businesses, has helped it add evermore products into the flywheel.
The bulk of items sold on Amazon’s website come from third parties, making up 58% of total revenue in 2018 compared with just 3% in 1999. The reason behind this is simple – Amazon makes more margin from third-party goods.
Amazon takes a commission of around 15% of the sale price, depending on the category of goods, and can make additional revenue from sellers that use its Fulfilment by Amazon (FBA) logistics service.
This means Amazon stores, picks, packs and delivers products from these sellers, with all such items eligible for next-day delivery through Prime. This is not only an additional revenue source for Amazon, but allows it to benefit from economies of scale in shipping.
Should retailers and brands work with Amazon?
It has long been a dilemma for retailers and brands: should they sell on Amazon – a business that, for many, will represent their biggest competitor?
There are clear negatives associated with selling on Amazon. Giving the etail titan access to your product, of course, takes away one of the biggest USPs of shopping directly with a brand.
Amazon also owns the customer relationship on its marketplace. It collects massive amounts of customer search and purchase data and will only share minimal amounts with sellers, who are not allowed to market to customers post-transaction.
“This compendium of information gives Amazon’s first-party business – Amazon Retail, ie, private label – a huge advantage of picking winners over and over when targeting products that it should sell on the marketplace,” James Thomson, a former head of Amazon Services and now partner of Buy Box Experts, writes in Big Commerce.
Amazon’s private labels have been touted as a major threat to big brands in certain categories. Some are concerned that Amazon can use the customer data to finetune its offer, allowing it to manufacture similar products at lower prices.
In batteries, for example, the retailer’s AmazonBasics private label is now the most popular brand for online purchases in the US, outstripping big-name rivals such as Duracell.
However, a report published by UBS earlier this year found that, on the whole, third-party brands were defending their share against Amazon’s private labels.
UBS said that “Amazon brands did not rank in the top-20 or top-100 bestsellers lists” in around half of the categories the firm sells, and said batteries, alongside nappies, were notable exceptions.
Amazon also pushes for supplier discounts, according to Chip DiPaula, co-founder of Flywheel Digital by Ascential, which advises companies selling on Amazon.
He says: “It takes people out of the matrix and treats each manufacturer the same. It also has a reputation of trying to extract more promotions from third-party sellers. It says this is in order to win customer loyalty”.
Amazon’s category managers tend not to be specialists so are less concerned about brand relationships. “Category managers move around the business. The head of luxury fashion might’ve been in charge of stationery last week,” says one supplier.
However, there are some clear benefits: sales volumes.
Thomson points out that if a brand has decent customer awareness, chances are that some of the millions who shop on Amazon have searched for that brand on the marketplace and, if unable to find it, many will move on to search for a rival brand.
Thomson says: “For such a national brand, it makes a lot of sense to be evaluating Amazon as an incremental sales channel. Yes, there may be some cannibalisation from its other channels, but we’ve found that the vast majority of sales on Amazon are incremental, given how many Amazon customers there are, and how few of them are likely to have shopped on the brand’s own website.”
Ultimately, Amazon can boost sales – and for some that will be the be-all and end-all.
DiPaula says: “Many suppliers and FMCGs need to be part of that growth, even if it means at a lower margin.”
The power of Prime
A core strength of Amazon is its fulfilment prowess, and its Prime subscription makes speedy delivery standard for members.
Bezos described Prime as “all you can eat express shipping” when it launched back in 2005. He did not view Prime as an additional revenue stream, but was more concerned with changing people’s mentality so they wouldn’t shop anywhere else.
And it has worked. According to Consumer Intelligence Research, Prime members spend $1,400 (£1,126) a year on average, compared with just $600 (£482.50) from non-members.
Amazon has made sure that Prime is hugely appealing to shoppers. Following its £200m acquisition of Lovefilm in 2011, which it subsequently rebranded to Amazon Prime Video, it has added entertainment streaming to its offer.
This is just one of the many benefits Prime members get. These include music streaming through Amazon Music, unlimited photo storage on Amazon Cloud and the ability to borrow books and magazines through Prime Reading.
Analysis by JPMorgan last year estimated that the real value of the services Prime offers in the US is $785 a year, compared with the $119 a year paid.
Some Amazon products and services, like its video-streaming service, are also only available to Prime users. Amazon Prime Wardrobe, its try-before-you-buy fashion subscription, Amazon Pantry, which sells everyday essentials such as groceries and household goods, and its grocery offer Amazon Fresh all fall into this bracket.
This means that everyone buying food on Amazon is a Prime member whom the retailer already knows lots about, so can tailor offers to them.
To drive customer acquisition to Prime, Amazon has launched Prime Day, a day of promotions that takes place in July and is open only to members. Not only does this bring more shoppers into the Prime ecosystem – in turn driving more loyalty and greater spend – but it also stimulates sales at what is usually a quieter time for retail.
2. Understanding how Amazon innovates
Amazon is an innovator at heart – and it spends big to make sure it stays ahead of the curve. In 2017, it spent $20bn (£16bn) on research and development, more than any other US company.
As Bezos said in his 2016 shareholder letter, “customers are always beautifully, wonderfully dissatisfied” and he is committed to keeping up with their expectations. Indeed, Amazon sets the bar for these expectations, be it one-click payment or same-day delivery.
A culture of builders
Last year Bezos said to shareholders: “From very early on in Amazon’s life, we knew we wanted to create a culture of builders – people who are curious explorers. They like to invent. Even when they’re experts, they are ‘fresh’ with a beginner’s mind.
“They see the way we do things as just the way we do things now. A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight.”
But how does Amazon decide where to place its bets?
Reily says it’s “very grassroots-orientated” with ideas coming from across the organisation: “People have long leashes to experiment and see if things work. Everyone is expected to be forward-thinkers, particularly leadership.”
Reily explains that ideas are taken to the CXBR (Customer Experience Bar Raiser) counsel, a panel of “seasoned Amazonians” who decide what ideas to pursue.
The press release approach
Amazon has a ‘what if’ philosophy when it comes to innovation, says Reily. The company envisages the endpoint of what it wants to create and takes backwards steps to work out how to get there.
Amazon vice president of global innovation policy and communications Paul Misener told the Impact 2019 conference: “At Amazon we have invented an invention machine. Like a Turing machine, it has three basic components: the endpoint – kind of its purpose, what does it do; the algorithm – how does it work; and the output.”
The first big step for any Amazon development project is to write a press release announcing the finished product. Each Amazon development meeting starts with one such press release, in the form of a six-page memo. These are read in silence before discussing its merits and weaknesses.
Misener explained why Amazon takes the ‘press release’ approach: “First of all, it’s a commitment. Secondly, because it’s a press release, it’s in customer language and is about what is in it for the customer, not how you did it, as the customer doesn’t care.
“Lastly, by writing it today for something that won’t be available for months or years from now, you’re admitting what you want to do is not possible today.”
To make it possible, Amazon experiments and part of that experimentation process means they must be prepared to fail. As Misener explains: “It turns out that to innovate, you have to experiment. And in a real experiment you don’t know how it’s going to turn out.
“At Amazon, it’s okay to fail, make mistakes and waste a lot of money. It’s not wasted because you’re experimenting on behalf of customers. We’ve had lots of failures over the years. Jeff personally takes credit for billions of pounds worth of failure.”
Misener says one of Amazon’s biggest failures was the short-lived Fire phone, which was discontinued just over a year after its 2014 launch and led to a $170m write-off. However, around the same time it started developing the Echo device, which has revolutionised the world of voice commerce.
Amazon may outwardly embrace failure, but Reily says people are “judged” on these failures internally.
“People are judged and graded on Amazon’s Peculiar Ways – a set of dialogues that embody Amazon. One of the things they’re judged on is if you’re right a lot. So ‘fail fast’ is true to a degree, but they want you to be successful a lot. They track your success to make sure you’re not flooding the system with crazy ideas, otherwise you’ll not be promoted.”
Regardless, Amazon is a business that undoubtedly takes risks and, when it does get it right, that approach can be very, very lucrative for the company.
As Bezos himself told The Washington Post in 2016: “The great thing is when you take this approach, a small number of winners pay for dozens, hundreds of failures. And so every single important thing that we have done has taken a lot of risk-taking, perseverance, guts, and some of them have worked out, most of them have not.”
Amazon’s leadership principles
Customer Obsession - Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.
Ownership - Leaders are owners. They think long term and don’t sacrifice long-term value for short-term results. They act on behalf of the entire company, beyond just their own team. They never say “that’s not my job”.
Invent and Simplify - Leaders expect and require innovation and invention from their teams and always find ways to simplify. They are externally aware, look for new ideas from everywhere, and are not limited by “not invented here”. As we do new things, we accept that we may be misunderstood for long periods of time.
Are Right, A Lot - Leaders are right a lot. They have strong judgement and good instincts. They seek diverse perspectives and work to disconfirm their beliefs.
Learn and Be Curious - Leaders are never done learning and always seek to improve themselves. They are curious about new possibilities and act to explore them.
Hire and Develop the Best - Leaders raise the performance bar with every hire and promotion. They recognise exceptional talent, and willingly move them throughout the organisation. Leaders develop leaders and take seriously their role in coaching others.
Insist on the Highest Standards - Leaders have relentlessly high standards — many people may think these standards are unreasonably high. Leaders are continually raising the bar and drive their teams to deliver high-quality products, services, and processes. Leaders ensure that defects do not get sent down the line and that problems are fixed so they stay fixed.
Think Big - Thinking small is a self-fulfilling prophecy. Leaders create and communicate a bold direction that inspires results. They think differently and look around corners for ways to serve customers.
Bias for Action - Speed matters in business. Many decisions and actions are reversible and do not need extensive study. We value calculated risk-taking.
Frugality - Accomplish more with less. Constraints breed resourcefulness, self-sufficiency, and invention. There are no extra points for growing headcount, budget size, or fixed expense.
Earn Trust - Leaders listen attentively, speak candidly, and treat others respectfully. They are vocally self-critical, even when doing so is awkward or embarrassing. Leaders do not believe their or their team’s body odour smells of perfume. They benchmark themselves and their teams against the best.
Dive Deep - Leaders operate at all levels, stay connected to the details, audit frequently, and are sceptical when metrics and anecdote differ. No task is beneath them.
Have Backbone; Disagree and Commit - Leaders are obligated to respectfully challenge decisions when they disagree, even when doing so is uncomfortable or exhausting. Leaders have conviction and are tenacious. They do not compromise for the sake of social cohesion. Once a decision is determined, they commit wholly.
Deliver Results - Leaders focus on the key inputs for their business and deliver them with the right quality and in a timely fashion. Despite setbacks, they rise to the occasion and never settle.
3. Understanding Amazon’s future growth plans
Amazon has grown over the past 25 years by adding new categories and has introduced more than 30 new verticals since its inception. Further expansion will continue to fuel Amazon’s retail growth.
Reily says: “They will expand into any vertical they think there’s an opportunity and they can make it profitable. The goal is to learn about different sectors and how it will help the mothership. The long-term aim is to be ‘The Everything Store’ and to know more people’s interests to offer them before they need them.”
However, Amazon’s offer will span more than retail – both banking and healthcare are understood to be on Amazon’s radar. It is in early talks with banks including JPMorgan Chase to help launch current accounts for younger customers, according to The Wall Street Journal, and has formed a joint venture, Haven, with Berkshire Hathaway and JPMorgan to find a solution to rising healthcare costs.
Services: the new growth engine of Amazon
Of late, Amazon’s services businesses, rather than its retail arm, have been the big driver of its growth.
In fact, retail analysts Natalie Berg and Miya Knights predict in their book – Amazon: How the world’s most relentless retailer will continue to revolutionise commerce – that the majority of Amazon’s sales will come through services by 2021.
Its services division consists of three parts: cloud computing arm Amazon Web Services (AWS), Amazon Advertising, and its subscription service Amazon Prime.
AWS already accounts for the bulk of Amazon’s profits. Last year, almost 60% of the online giant’s operating profit – a whopping $7.3bn (£5.9bn) – came from AWS, which grew an impressive 47% compared to 2017.
The online giant developed the cloud-based platform in the early 2000s, after becoming frustrated that searching for suitable storage and database solutions was delaying development projects internally.
However, Bezos knew straight away that AWS had the potential to be a large part of Amazon, so invested in a dedicated team to build the business.
Today, AWS works with millions of customers across the world, including more than 100,000 UK customers. Among the ranks of those customers are River Island, Ao.com, Ocado and Sainsbury’s grocery business.
Amazon is also trying to capitalise on the huge traffic coming to its website with its in-house digital advertising business, Amazon Advertising.
Most product searches take place on Amazon’s website rather than Google – between 2015 to 2018, 54% of product searches took place on the retailer’s website, according to analytics firm Jumpshot.
Today, the online retailer is the third-largest advertising platform in the US, behind Google and Facebook. Last year, it posted $10.1bn (£8.1bn) in revenue in its ‘other’ category, which primarily relates to sales of advertising services.
Amazon has a plethora of knowledge on what people browse and buy, where they live and how they pay, which is incredibly valuable for advertisers.
Analysts at Piper Jaffray predict that its advertising business will be bigger than AWS in the next two years and expects income to reach $16bn (£12.9bn) in 2021.
Reily believes another service will be Amazon’s next big growth driver – logistics.
The retailer has been building up its internal logistics network since 2015 so it can deliver its own packages at a lower cost.
Morgan Stanley analyst Ravi Shanker estimates that it costs Amazon $6 (£4.80) to move a single box, compared with $8 (£6.40) to $9 (£7.20) through a third party.
However, Fedex, which opted not to renew its shipping contract with Amazon earlier this year, highlighted Amazon as “intense competition” in its annual report this year.
It read: “Some high-volume package shippers, such as Amazon.com, are developing and implementing in-house delivery capabilities and utilising independent contractors for deliveries, and may be considered competitors. For example, Amazon.com is investing significant capital to establish a network of hubs, aircraft and vehicles.”
Reily thinks Fedex is right to be worried and believes Amazon will soon be running logistics for other companies.
He says: “It’s just like how they created AWS. They needed a cloud computing platform for their own growth, now it’s a massive cash cow for the business. They can do the same with logistics and will be offering it to clients. It’s the most exciting part of their business.”
Reily says the one chink in Amazon’s ‘Everything Store’ plan is grocery. It launched Amazon Fresh in 2007 and brought this to the UK in 2016.
Amazon.com’s grocery sales rose 45% to $3bn (£2.4bn) in 2018, according to estimates from Edge by Ascential. However, its chief marketing officer Danny Silverman says this “still leaves a lot to be desired”. He points out that the year-on-year growth rate fell 25% on 2017’s figures and perishables still make up an “extremely small portion” of those sales.
“After spending years investing in sub-par programmes like Amazon Fresh and Prime Pantry, consumers still aren’t sold on buying fresh food online,” says Silverman.
Amazon held around 30% of the online grocery market in 2018 in the US, according to consultancy Brick Meets Click, but ecommerce accounts for just 5.5% of US grocery sales.
It is important for Amazon to conquer grocery as this wins the retailer frequency of purchase and gives it vital data to understand consumer shopping behaviour.
Amazon and Whole Foods
Amazon’s lack of success in dominating grocery has led Bezos to come to a bold conclusion: online is not enough.
If stores are needed to conquer grocery, it’s no surprise that stores are exactly what Amazon acquired. It snapped up Whole Foods in 2017 for $13.7bn (£11bn) in a move that shocked the retail industry.
Experts say Amazon has big plans for Whole Foods.
Brittain Ladd, a former Amazon executive who is now a strategy and supply-chain consultant for large grocery store operators, says: “Amazon only enters categories and makes acquisitions that it can scale. Amazon didn’t enter the grocery category to only control a small percentage of the $840bn (£674.9bn) grocery industry. Amazon wants to become the leader in meeting customer demand for food.”
Amazon has already made some changes to Whole Foods. It has lowered prices – although Morgan Stanley analysis shows that Whole Foods’ prices are still 27% higher than Kroger’s on average – and has allowed Prime shoppers in 60 US cities to get Whole Foods groceries delivered to their home within two hours of placing an order, free of charge.
Amazon lockers, which act as pick-up points for online orders, are also being housed in Whole Foods stores.
Technology is expected to play a bigger role across the Whole Foods business. The grocer’s chief executive John Mackey told employees at the time of its acquisition that Amazon’s technology will help the grocer transform from “class dunce into valedictorian”.
There are no signs of the checkout-free grocery store, which Amazon has trialled with its Amazon Go fascia, making its way to Whole Foods yet, but it is understood to be testing handprint checkouts in stores.
Amazon – incorporating Whole Foods – is now the ninth-largest grocer in the US, but analysts expect it to surge up that list. There have already been rumours of more acquisitions. The Wall Street Journal reported earlier this year that the online goliath wants to snap up regional grocery chains.
However, there are signs that Amazon’s acquisition of Whole Foods is not bearing fruit.
“Despite significant efforts to boost sales with discounts at Whole Foods, Amazon has generated relatively little fizz in its growth,” Moody’s said in a report in June.
In its last quarterly update, Amazon reported flat physical store sales – the majority of which come through Whole Foods – of $4.3bn (£3.4bn).
However, Berg and Knights believe that Amazon will crack grocery within the next six years.
In their book, they say: “By 2025, Amazon will have a scalable supermarket concept which it will export globally, transforming the way consumers around the world shop for food.”
In the UK, where Amazon Fresh is only available in a few major cities and is still “very piecemeal”, according to Edge by Ascential director of advisory for EMEA Nick Everitt, a Whole Foods-style acquisition may be on the cards.
Everitt predicts that, to build scale, Amazon will need to acquire an established supermarket and suggests that Morrisons, which already sells on the retailer’s platform, could be a prime target.
Amazon may have a presence in 12 countries but the US still accounts for 68% of its total sales. Is global domination part of its plan?
Everitt points out that not only is its international business smaller than the US, growth is slower too. US sales grew 33% in 2018 compared to 21% at its loss-making international business.
One market that Everitt does not see Amazon pursuing is China, where Alibaba and JD.com have proven too powerful to overcome. Both retailers offer low-cost, often free, shipping, with no minimum orders required, something that Amazon could not compete with.
Amazon shut down its Chinese website earlier this year, although shoppers in the country can still use its international site.
Everitt believes that leaves two big battlegrounds internationally for Amazon: India and the Middle East.
India, which has one of the world’s fastest-growing economies, could be a lucrative market for Amazon, which entered the market in 2013. As internet penetration rates grow, analysts predict India’s ecommerce market could be worth $100bn (£80.3bn) by 2022.
Amazon faces stiff competition from Walmart, which bought Indian etailer Flipkart in 2018. However, Barclays says Amazon’s growth has been outstripping that of Flipkart of late. The bank estimates that gross merchandise values surged 81% to $7.5bn (£6bn) at Amazon India in the year to March 31, 2018 compared with 55% growth to $6.2bn (£5bn) at Flipkart, excluding its subsidiaries Myntra and Jabong.
Meanwhile, domestic conglomerate Reliance Retail is set to enter the fray and is preparing to make an ecommerce push of its own.
But Amazon is investing heavily to make sure it ultimately emerges as the victor in this battle. Last month, it both opened its biggest office in the world in Hyderabad and acquired a 49% stake in Future Coupons, which handles digital payments for – and owns a 7.3% stake in – Indian retail giant Future Retail.
Analysts believe Amazon is testing the waters before making a larger investment in Future Retail, which runs more than 2,000 stores in India. Meanwhile, it was reported last month that Amazon was in early talks to snap up a 26% stake in Reliance.
“We’re going to see a global battle under way for India. For Amazon, because it’s walked away from China, I don’t think failure is an option there. It has to win this market”
Nick Everitt, Edge by Ascential
Everitt says: “We’re going to see a global battle under way for India. For Amazon, because it’s walked away from China, I don’t think failure is an option there. It has to win this market.”
In the Middle East, Amazon launched a new marketplace in April, two years after buying Dubai-based Souq.com for $580m (£466.2m).
Shoppers at Souq.com are now taken to a rebranded Amazon.ae, although Souq is still available in Saudi Arabia and Egypt.
Everitt expects it to be a “slower burn” for Amazon to gain market leadership in the Middle East, pinpointing the fact it is trading over multiple countries and logistics issues as potential hurdles to dominance.
However, there are signs Amazon is using its logistics prowess to set it apart in the region. Its recent marketplace launch brought Fulfilment by Amazon to the Middle East and it is offering same-day delivery in Saudi Arabia.
Everitt says Amazon’s Middle East expansion is not just about retail but growing its AWS business: “The Middle East is a growth region and lots of businesses need their support with cloud computing. It will be a dual-pronged attack.”
4. Understanding Amazon’s stores
Amazon’s store portfolio does not end at Whole Foods – it was already dabbling in bricks and mortar before it acquired the upmarket grocer. Including Whole Foods, Amazon currently operates four different fascias.
Amazon Books - Amazon launched its bookshops in Seattle in 2015 and has since grown that portfolio to 19 stores. It sells physical books and also gives shoppers a chance to test out Echo and Kindle devices.
Reviews are key in this store. The most helpful online review is displayed, as well as the overall rating and number of customer reviews. Amazon’s infamous personalisation is also present in-store with signage reading “if you like this, then you’ll love” next to each product.
Amazon does not break out the financial performance of its individual fascias, but Everitt insists the performance of Amazon Books to date has not been strong enough to warrant a wider expansion push.
“I can see it opening a handful of stores each year, but to make an impact on a global scale you need to open thousands of stores and I don’t think there’s any intention to do that,” he says.
Amazon 4-Star - Amazon launched 4-Star in New York last year, only selling products that are rated four stars and above by its online customers. It now has four such stores across the US.
Digital price tags for each product display both the Amazon Prime price and list price, as well as the average star rating and the total number of reviews a product has received.
Amazon 4-Star was subject to much criticism when it opened, with observers suggesting it looked like a garage sale.
Everitt, however, believes it is an “interesting concept”.
“Curating a range on ratings is a good idea,” he says. “Shoppers all go off ratings, so why shouldn’t retailers transfer that to store? We might see more traditional retailers look to copy this approach.”
Amazon’s latest 4-Star opening is close to its headquarters in Seattle, which suggests it might be looking to experiment with the format further – and move away from the garage sale aesthetic.
Amazon Go - This is the Amazon fascia that has received the most attention and has the potential to upend how stores operate.
Amazon Go is a checkout-free convenience store that uses specially designed cameras, shelves and computer vision algorithms to track which products shoppers are picking up.
Customers simply tap their smartphone upon entry to the store and can then leave the shop without queuing at a till. They will be automatically charged for the items they take via the Amazon app on their smartphone.
Not only is this way of shopping super-convenient for customers, but the technology also helps Amazon determine browsing behaviour in-store and will give detailed statistics on shopper dwell time, what items they look at and what they put back.
Launched in Seattle in 2018, Amazon now has 15 Amazon Go stores in operation with a store in London understood to be in the offing.
Of all its store formats, Bezos is most excited about Amazon Go. He explained in his letter to shareholders last year: “Amazon today remains a small player in global retail. We represent a low single-digit percentage of the retail market, and there are much larger retailers in every country where we operate. And that’s largely because nearly 90% of retail remains offline, in brick[s] and mortar stores.
“For many years, we considered how we might serve customers in physical stores, but felt we needed first to invent something that would really delight customers in that environment.
“With Amazon Go, we had a clear vision. Get rid of the worst thing about physical retail: checkout lines. No-one likes to wait in line. Instead, we imagined a store where you could walk in, pick up what you wanted, and leave.”
The stores leverage what Amazon has dubbed ‘Just Walk Out’ technology, which uses computer vision, sensor fusion and machine learning.
Not only is Amazon Go providing a convenient experience, it’s one that encourages people to spend. Data analytics firm Brick Meets Click estimates that the Amazon Go format generates an impressive $2,700 (£2,169) in sales per square foot of selling space, while also eliminating the cost of store staff. However, analysts estimate that each store is kitted out with around $1m (£800,000) of technology.
According to Bloomberg, Amazon is exploring opening 3,000 Amazon Go stores by 2021.
Experts predict that the Amazon Go technology will be integrated into Whole Foods – although it is untested in a large store environment – and say Amazon could eventually look to sell its proprietary check-out free technology to other businesses.
Everitt suggests the technology could “revolutionise convenience retail and be Amazon’s next growth pillar”.
Whether or not that is the longer-term plan, Amazon’s store experiment is growing bigger by the day.
Reily points out that each of its four fascias has a specific strategic goal: “Amazon Go trials new tech and creates more data, Amazon Books looks at what products people are looking at in-store, 4-Star explores the impact of reviews, and Whole Foods gives Amazon a view on how people shop grocery.”
Combining this knowledge could help Amazon produce a very compelling offer that could revolutionise bricks-and-mortar retail.
And could it help Bezos move closer to his The Jetson’s-inspired ‘Everything Store’? Reily says: “In 2100, perhaps we’ll live in a world where everything has an Amazon smile in it.”