Even if you want to quibble about Amazon being the epitome of the model ecommerce operation, it is certainly the behemoth.
As The Economist argued this week, if the market cannot effectively respond to the opportunity (threat?) posed by Amazon, then competition authorities are likely to intervene more than they do now.
Is Amazon the Standard Oil of its time and a victim of its own success and circumstance?
Ubiquity breeds distrust when it threatens choice, competition and diversity, especially if it is underpinned by a perceived unfair tax advantage.
"It may just be that the business rates revaluation due next month will push Amazon into a perfect storm in the UK as it coincides with the widely expected move onto the UK high street with its ‘Amazon Go’ offer and a move into grocery delivery"
It may just be that the business rates revaluation due next month will push Amazon into a perfect storm in the UK as it coincides with the widely expected move onto the UK high street with its ‘Amazon Go’ offer and a move into grocery delivery.
Amazon’s UK leadership are sharp, high quality and experienced.
They must be looking at their business model in the context of a looming threat of scrutiny from a government with a much greater (and publicly declared) distrust of ‘big business’ and a need to be seen to be protecting jobs right across every sector as it attempts to pull a rabbit out of the hat over withdrawal from the EU.
A couple of significant investment decisions post-Brexit vote will have helped Amazon’s stock with ministers, but the rates revaluation issue brings back its Achilles’ heel into sharp and very public focus.
"Amazon has been presented with a significant competitive advantage. What it chooses to do with it will not only impact its own future, but potentially the future of a large chunk of today’s high-street operators"
It is about to be given a significant operating cost advantage in the retail sector as a result of this and previous governments’ adherence to the principle of taxing property as opposed to income.
This advantage is further enhanced by its corporation tax arrangements.
Last year it declared it will be channelling all UK sales through its UK company, but UK-only retail bosses still believe that there is a residual unfairness, highlighting the continuing opportunity to exploit tax regimes that allow inter-company charges to be deducted from declared sales to create lower profits in the UK.
Ultimately, through government inaction and government direct action, Amazon has been presented with a significant competitive advantage.
What it chooses to do with it will not only impact its own future, but potentially the future of a large chunk of today’s high-street operators.
A taxing issue
As more and more business is conducted away from high-value physical property, so online-only operators find themselves with a structural advantage.
International online operators even more so: especially when the UK has voted to leave the one multinational bloc willing to challenge the tax strategies employed by multinationals, especially by the likes of Google, Amazon and eBay, whose physical footprint is limited to offices and warehouses.
The balance of tax paid by businesses in the UK has shifted radically from corporation tax to business rates, from a ratio of circa 90:10 to one that is more like 50:50.
"The high street with its increasing costs will lose out even more to the online-only operators and as a result we will see even less diversity and the acceleration in many cases of the decline of the town centre"
This has happened in a context when business transactions have moved away from ‘the high street’ such that now 12% of all retail sales are completed online.
There are many advantages to the UK of globalisation and tariff-free/low-tariff trade, not least the access to additional sources of product supply and pools of labour.
However, governments have been much slower to grasp the nettle of how to treat multinational earnings, especially where these are processed outside of a physical location.
The consequence, particularly in the light of the decision to leave the EU and the government’s hard Brexit stance, could be that the UK has far less freedom to manoeuvre and has to accept a ‘low wage, low cost’ economic policy to retain jobs and investment and accept it cannot level the playing field.
In these circumstances, the high street with its increasing costs will lose out even more to the online-only operators and as a result we will see even less diversity and the acceleration in many cases of the decline of the town centre.
And a painful reality
It isn’t just the online retail giants that threaten the traditional high-street retail model. Creeping up on the whole sector, including the online-only retail operators, is the rise of ‘direct to consumer’ ecommerce.
A recent Good Growth study of the electronics sector showed that brand owners such as Sony, Panasonic, Samsung and LG are starting to attract similar levels of customer interest as retailers: they are also investing heavily in technology and customer insight to respond to customers directly.
"Brands are looking to retain the margin they currently give to the retailer and, just as importantly, build direct relationships with the consumer through acquiring their data for themselves"
One of the stories that emerged at the same time as the doomed Kraft-Heinz approach to acquire Unilever was the decision of Unilever to invest significantly in driving direct-to-consumer sales activity.
PepsiCo CFO Hugh Johnston talks about the growth of direct to consumer in China and its "disruption" value. Furthermore, PepsiCo is recruiting from traditional retailers to build its channels and capabilities.
Brands are looking to retain the margin they currently give to the retailer and, just as importantly, build direct relationships with the consumer through acquiring their data for themselves.
With manufacturers dealing with a 20% devaluation against the US dollar impacting key raw materials, expect to see an acceleration as brand owners look to keep prices down without reducing margins further.
How big is Amazon in the UK?
Our benchmarking tool suggests that of the 0.5 billion visits made to the top 150 online retailers every month in the UK, about 18% are made to amazon.co.uk.
Their reach and range in retail is driven by their marketplace operating model, but reports suggest, however, that their retail operations still operate at a loss, with profits being primarily driven from cloud-based web services.
That said, in the US Forrester reported in 2016 that "much" of Amazon’s retail sales came from its marketplace offer – perhaps amounting to 20% of its total US retail sales.
"If on the high street there were a situation where one retailer not only owned the majority of the real estate and ran its own shops, but also ran many of the others and took a significant share of the revenue from its competitors, any government would refer it for a competition review"
There are no available figures for the UK, nor are there figures for profitability by stream of business.
There are well-rehearsed challenges to Amazon’s marketplace model. The two most significant being the level of charges and that Amazon will compete against its clients, undercutting their pricing, if it spots a good seller.
The marketplace model of an ‘integrated’ retailer is a foreign one to the UK.
As the ‘nation of shopkeepers’, we developed a market where there is a physical separation between major retailers and the ownership of the assets employed by other retailers.
If on the high street there were a situation where one retailer not only owned the majority of the real estate and ran its own shops, but also ran many of the others and took a significant share of the revenue from its competitors, any government would refer it for a competition review.
So what are the options?
In circumstances like this where there is a risk of an emerging monopoly or oligopoly and the potential for damage to the fabric of many communities, a responsible corporation may look to self-limit rather than wait to be regulated.
While Amazon is accountable for how it chooses to manage its taxation strategy, it is not responsible for government policy, nor should it worry about the inability of competitors to move fast and reset their costs.
It will, however, be judged by government and customers alike in how it responds.
Our view is that competition in retail generally, and in online in particular, in the UK would be well served by Amazon divesting itself of its marketplace business and spinning it off into an independent and directly competing business, enabling small and medium sized retailers and producers to present their goods and services on an equal basis to the major players.
It won’t be easy, but that isn’t the point. The health of our economy, its jobs and its wealth are closely linked to a vibrant competitive retail environment in every town and city right across the kingdom.
Unless the very large and powerful recognise this and play their part in maintaining a sustainable retail sector in all parts of our nation, we are likely to come out of the next few years not just poorer financially.