Amazon’s impact on retail has been remarkable. Its focus on technology and new ideas have produced innovations that set the bar for the industry. Rebecca Thomson charts its rise and possible future.

The Kindle Keyboard and new Kindle Touch

The full extent of Amazon’s influence on the retail industry has perhaps only recently started to sink in.

A few years ago, it was seen as a brilliant etailer – the poster child of the 1990s online boom. Today, it is increasingly recognised as a game changer, and in only a few years has become the business that everyone watches with a degree of apprehension, as well as admiration.

Its success is reflected in its global sales: in 2011 they reached $44.1bn (£28.5bn), compared with $10.72bn just five years earlier.

The list of new services it has introduced to etail is impressive. Innovations include product reviews, personalised offers and a one-click checkout process. It has overhauled the entertainment category, and traditional players such as HMV and Waterstones languished in its wake. And its ability to creep into new realms, launch new services and steal market share with little fanfare has made retail’s biggest players take notice, particularly over the past couple of years.

Many traditional retail giants are playing catch-up with some of Amazon’s innovations. Tesco, for instance, launched its own Marketplace in what is the latest attempt by a retailer to challenge Amazon’s dominance and WHSmith responded to the Kindle with its own e-reader, the Kobo. “The clever bit is how Amazon has by stealth taken away an awful lot of the market place,” says Sarah Wilson, director of consulting operations at Egremont Group. “I’m not sure people really noticed.”

What makes Amazon particularly significant, however, is that it is morphing into something much more than a retailer. Competing with Apple and Google, it is attempting to create a new environment, which retailers and consumers must operate within. Amazon is eyeing every part of the value chain, from content produced by its UK publishing arm, launched in April, to consumer gadgets such as the Kindle, introduced in the UK in 2009.

“Competing with Amazon may not be the only answer – participating may also be necessary,” says Michael Jary,  partner at OC&C Strategy Consultants. “Retailers that are retailing in a traditional sense, particularly in non-exclusive product, will come under increasing pressure.”

Whether retailers participate by selling the Kindle – as Waterstones disclosed in May it would do – selling goods via Marketplace, or selling novels published by Amazon – they may find co-operating with one of their most aggressive competitors unavoidable.

Investment in technology

But how has Amazon evolved from being an efficient online bookseller to become a global giant that directly affects other retailers’ strategic direction in a little over 15 years?

The etailer has always, and continues to, invest a large amount in technology and data analytics. It has cultivated strong customer loyalty and trust by providing good service, and it has set a fearsome pace of change, says Planet Retail analyst Lisa Byfield-Green. “A lot of retailers haven’t been able to keep up,” she adds.

Matt Piner, lead consultant at Conlumino, points out that Amazon got its website functionality right early on, and managed to keep prices low by leveraging its cheaper overheads. In addition, it quickly broadened its offer beyond the core book market. “It’s become the modern-day equivalent of the department store,” says Piner. “Amazon is the epitome of the threat that retailers face from pure-plays.”

Amazon drives this pace of change by being unafraid of risk and unwaveringly forward-looking. UK managing director Chris North said at the Retail Week Conference this year: “We take a five- to seven-year view on investments. It gives us access to opportunities you will not have access to.”

It is this strategic, long-term view that sets Amazon apart from many other retailers beholden to quarterly updates and City reactions. Amazon founder Jeff Bezos managed to convince investors that the company needs to think long term, and the success of initiatives such as the Kindle helped to strengthen his argument. Investors gave the company the breathing space to adopt this strategy, and it has rewarded their patience by constantly generating new ideas.

Darren Vengroff, a former principal engineer at Amazon and now chief scientist at data mining company RichRelevance, says these ideas come from an obsessive focus on data.

He says the company organised into small groups that have a lot of autonomy in their particular part of the business. “They get to the point where they understand it so deeply that they see opportunities that others might not,” Vengroff says. “It’s not so much a culture of a ‘eureka’ moment – ideas don’t come from nowhere but from a lot of analysis.”

Vengroff says a deep understanding of how people shop also drives the organisation. If an Amazon employee has an idea, no matter how small, he or she must sit down and look at every piece of data available that might indicate whether it will succeed. “You don’t know how things will work until you launch it, but you look for clues and you build up a picture,” Vengroff says. “You don’t do anything at Amazon without that kind of data-driven analysis. Behind every catchphrase are mountains of data and hundreds or thousands of experiments that have been done on the site. ”

It is this focus on data analysis that enables Amazon to operate differently from other retailers. Traditional retailers, particularly Tesco and Sainsbury’s, have focused on and invested in data for years through their loyalty card schemes. But Vengroff argues that Amazon has a “laser focus” on its customers that others have not matched. “The Amazon experience boils down to one key thing that manifests itself throughout the organisation – making sure they understand at a very deep level how people are shopping, why they’re doing certain things, and what they will and won’t respond to,” Vengroff says.

How to compete

Amazon’s operation is formidable, so how can retailers compete with such a juggernaut? Having missed the opportunity to get a head start in etail, many traditional retailers now understand the importance of ecommerce, and the next few years will doubtless see them bite back with a few great ideas of their own. Already, multichannel retailers such as John Lewis and Aurora operate in ways Amazon would not be able to – John Lewis’s reputation for service sets it apart, and Aurora is using its extensive network of stores to provide one-hour delivery services. And while the lessons Amazon can teach retailers should not be underestimated, it is also wise to avoid being overwhelmed by the threat.

“There are ways to compete with Amazon and I’m sure retailers will find a way to do that,” says Jary. “10 or 15 years ago, everyone was panicking about not being able to compete with Walmart. It has indeed changed the industry, but retailers have also found ways to compete with it.”

Bricks-and-mortar stores are also a potential advantage. While Byfield-Green says there are rumours of a trial store in Seattle opening this year, Amazon does not at present have a store estate of the sort that retailers such as Apple use to inspire and engage customers.

“Stores are a clear asset Amazon doesn’t have,” says Vengroff. “The challenge for retailers is how they make that work for them.”

Keeping up

Other ways of competing with Amazon include selling exclusive products, providing personal, face-to-face service and emphasising the immediacy of buying a product in-store instead of waiting for it to be delivered.

But whatever strategy retailers choose, it is crucial to stay alert. Amazon has made a name for itself by making surprising moves, and other retailers will need to cultivate the same agility if they want to avoid being caught unawares. “It’s difficult to know where Amazon will go next,” says Wilson. “But you will need to keep an eye on what it is doing.”

Amazon always keeps its next moves closely guarded, but experts say there are several possible avenues it could take.

The etailer’s international expansion is expected to continue, with Chinese growth plans high on the agenda. It is also likely to keep exploring the physical world of retailing. Its delivery lockers initiative, which allows customers to pick up orders from lockers in shopping centres, may pave the way to a more comprehensive, click-and-collect service. “Physical retailing hasn’t gone away,” says Piner. “Whether they develop a click-and-collect pick-up depot or something that looks more like a store remains to be seen, but it’s an option for them to broaden their influence.” 

Amazon is also likely to move further into content publishing. Its publishing division recently bought the US ebook and print rights to Ian Fleming’s James Bond novels, it has acquired the film rental and streaming service Lovefilm, and last month it agreed a deal with Paramount Pictures to allow Amazon Prime customers to stream movies through the service. Its tablet, the Kindle Fire, which has been hailed as the only serious contender to the iPad, will soon be released in the UK.

Amazon will also continue its march into new categories, with plans to develop in fashion and grocery. Finally, it will continue to develop and invest in its formidable technology infrastructure, its third party seller network, and its web services. “Its offer is underpinned by that amazing platform and I think it will keep evolving it,”predicts Wilson.

“There will be bumps in the road – there will be things it doesn’t know,” says Vengroff. “But it learns from its mistakes very quickly. Whether Amazon is immediately successful or whether it takes it a couple of tries, it will get there.”

For a company that only started in 1996 Amazon has achieved a lot and  seems poised to achieve even more. Retailers will continue to be challenged – they are likely to need everything from creativity and technology investment to a rigorous approach to data analysis. Whatever Amazon does next, retailers must be ready to react.