Only a fool would bet against Amazon succeeding on the high street
Newly leaked documents suggest Amazon has begun a concerted push to become a grocery retailer on the British high street. Our columnist looks at why it will eventually triumph, and why this new move is a big part of the omnichannel revolution.
On a bright winter’s day, a quarter-century ago, a young entrepreneur flew from Seattle to Boston. He had been invited to Harvard Business School to talk to the ‘Managing the Marketspace’ MBA class. The elective involved asking founders to present their business plan, and allowing the attending MBA students to dissect it, discuss it and then evaluate the nascent company’s prospects.
The 33-year-old entrepreneur started by thanking the professor for the invitation and then proceeded to explain his business model. His company was barely two years old, with tiny sales revenues, but it had big plans for the future. Once he sat down, the MBA students debated what they had seen as he listened intently from the sidelines. Most of the class were unimpressed.
“You seem like a really nice guy, so don’t take this the wrong way,” one of the students summarised at the end of the class discussion. “But you really need to sell to Barnes and Noble and get out now.”
The flexibility and evolutionary capability of digital retailers give them an unfair advantage in the omnichannel race ahead.
The entrepreneur took the criticism on the chin. On top of his odd laugh, most of the students were struck by how implacable he was in the face of such ardent criticism. He appeared almost impervious to pessimism.
“You may be right,” the entrepreneur concluded as the class came to an end. “But I think you might be underestimating the degree to which established brick-and-mortar business, or any company that might be used to doing things a certain way, will find it hard to be nimble or to focus attention on a new channel. I guess we’ll see.”
At the end of most of these classes, the students, hungry for jobs and contacts, usually mobbed the speaker. But very few stuck around that day to talk to Jeff Bezos. After all, this was not the lean, shaven-headed business legend Bezos; it was his goofy, unlikely precursor from 1997. He was 30lb heavier and $200bn lighter than his future self. After a brief discussion with a handful of students, one of them offered a lift back to Logan Airport. And he was gone.
Everyone except Bezos, of course, eventually became a fool of history. And the story has become one of the early chapters in the mythological rise of Amazon. Aside from its potent value to demonstrate that MBA students in general and Harvard Business School in particular know fuck-all about the future, it also illustrates how astonishingly prescient Bezos was from the start.
While everyone in the dog days of the late 20th century saw the implications of the ‘World Wide Web’ from miles away, very few realised the truly disruptive repercussions that its arrival would usher in. I was a business school professor in 1997 and, like most people, believed that the internet would change many things but also that it would ultimately play into the hands of the existing corporate orthodoxy.
Sure, little upstart online brands would proliferate for a while. Cute! But the story of business is relatively boring. Eventually the scale, brand equity and deep pockets of existing physical retailers would win out once again. Business would change, but the businesses in charge of it would not.
What we all missed back then was the exact same thing that Bezos saw so clearly. That physical retailers were so established in a particular way of doing things that they would “find it hard to be nimble and focus attention on a new channel”. That this difficulty would then allow a host of new digital retailers into the game, and provide them with the time and revenues to scale up and become established. And that this difficulty might yet become the crucial reason why physical retailers ultimately fall to their nimbler digital adversaries in the retail decades still to come.
Rise of omnichannel
That’s a point that Darrell Rigby, one of the partners at Bain, makes with great emphasis. He sees a big difference between multichannel retailers – which operate across stores, websites and mobile – and the true omnichannel companies that merge every channel seamlessly together, and reap the benefits of digital proximity, data and convenience, along with the advantages of intimacy, experience and sensuousness that come from stores. And we should listen to Rigby when he defines the slippery concept of omnichannel – he invented it after all.
According to Bain, true omnichannel players are two to five times more profitable than those companies that merely span the channels in a half-hearted attempt to keep up. Happier customers, better growth and improved profitability mean that every company is attempting to become omnichannel. But here we encounter the crucial asymmetry that Bezos referenced all those years ago in that Harvard classroom. The one that most marketers still don’t understand.
In theory, the concept of core competence means that both physical retailers like Aldi and Morrisons and digital retailers like Amazon and eBay will struggle with the challenge of omnichannel. When your whole history, culture and operating model was built from bricks, the challenge of properly adding clicks is a giant, confronting one. So too, in theory, is the shift from clicks to bricks. The challenges might be different, but they are just as gigantic.
As simple as it always sounds, the concept of core competence is massively important and enduringly simple – companies are good at some shit and that makes them bad at other shit. And omnichannel success is founded on an ability to do all kinds of shit, all the time.
But the asymmetry here is that digital retailers are younger and more nimble, and therefore likely to adapt to the challenge of bricks. A competence for change trumps the deficits inherent in the other competencies that they possess. By contrast, most physical retailers are weighed down by history, a more calcified operating model and more limiting set of core competencies. The flexibility and evolutionary capability of digital retailers give them an unfair advantage in the omnichannel race ahead – the “nimbleness” that young Bezos tried to explain all those years ago at Harvard.
Amazon’s competence for change
And that is why Amazon is now targeting the British high street with its grocery concept stores. And why it will almost certainly, eventually, succeed. First, because omnichannel is not an option; it is a prerequisite for ultimate retail survival. Second, because Bezos and those who have replaced him recognise that, while the challenges of moving from clicks to bricks are considerable, they are less than those the incumbent physical retailers, intent on moving in the opposite direction, are facing. And now that Amazon is no longer the small entrant, the combination of gargantuan scale and continued flexibility puts it in pole position to win everything.
Next year, according to leaked internal documents, Amazon will open 60 cashierless grocery stores across the UK. It will add another hundred in 2023 and the same again in 2024. Even if Amazon follows this aggressive schedule, it will only operate a retail footprint a third the size of Aldi’s or M&S’s and a barely a tenth the size of Tesco’s. And each Amazon store across that small footprint will offer a fraction of the SKUs of a typical supermarket. But, as those Harvard MBA students learned back in 1997, looking at the short-term trees merely prevents an accurate estimation of the future forest. This is about 2033, not 2023.
Amazon is already projected to overtake Tesco in 2025 to become the UK’s biggest retailer. But clicks, like bricks, only get you so much of the pie. Just as UK supermarkets are now averaging around 15% of their sales from online orders, Amazon can see the incremental potential of physical sales.
But looking at what brick sales can add to extant click revenues misses the whole point of omnichannel. The whole concept only makes sense if you allow the ‘omni-‘ to completely pervade and then erase the ‘-channel’ part. This is not a race to add new channels of distribution to existing ones. It is a race to become every channel that the consumer ever wanted, all the time. Yes, it’s really that big and Amazon really does believe it can get there.
Is it correct? I guess, to quote a young entrepreneur staring down a class of skeptical students, we’ll see.