Amazon Has Local Retailers Racing To The Bottom (And That’s Very Bad For Business)

If you were in any doubt about the level of business acumen possessed by the leaders of many of Australia’s largest retailers then the last week or so will have confirmed your expectations. Despite what many retailers think, Amazon’s big advantage is not price – it’s service. But events of the last week seem to have confirmed that Australian retailers are clueless when it comes to reacting to a changing market.

Last week, KMart’s managing Director challenged Amazon to “Bring it on” and announced that the company will compete on price. Already, I’ve seen billboards around town advertising coffee mugs that were $2 will now be $1.50. And I’m sure we’ll see lots of examples of this.

Similarly, retail giant Myer has announced that they are firing up the time machine and relaunching the bargain basement where designer brands will be offered at discounted prices – which sounds a whole lot like the TK Maxx sales pitch.

And, let’s not forget Gerry Harvey with his “get off my lawn” rants about online and how it will never take off.

Back in my early days in the commercial world, I worked for a company that offered vocational training to business people. In those days, the government offered very generous tax concessions to companies that invested in staff training and development. So, we rode a wave that came crashing down when we were hit with a disruptive force – a change of government policy. The company I worked for was eventually sold and shuttered a few years after I left.

But one of the tactics that was considered was discounting. Whether that would have worked at that time is moot. The lesson I learned came from my CEO who had run the US operations of an Australian wine-maker. He told me the story of a company that made a nice $20 bottle of wine. When sales of the $20 bottle fell a little, the wine-maker discounted to $15. Sales recovered but when the price went back to the normal $20 sales fell. The market had, because of the discounting, altered its perception of the $20 bottle and now valued its normal value at $15.

By racing to the bottom, they damaged their own brand.

If Australian retailers think discounting will save them from Amazon and other online retailers then they are setting themselves up for failure. As well as killing the value of their brand, they will depend on ever decreasing margins that will affect their ability to deliver products to customers.

Amazon’s value proposition isn’t only price – it’s service.

Ryan Murtagh, the CEO of retail platform provider Neto said discounting is not the only weapon retailers have in their arsenal.

“We’ve been speaking to a number of Amazon resellers and have a good understanding of what is successful. With Amazon announcing their arrival, we’ve been speaking with retailers that have been successful with Amazon in other markets. What’s interesting is the ones that are successful aren’t competing on price. The ones that are successful compete on price and value, but more than anything it’s on experience, he said.

One of the examples Murtagh cited was a cycling retailer who sells a product that is sold by over 100 other Amazon retailers. They sell 20,000 units more than the next most successful retailer for the product – who only sells about 200 units – while being $80 dearer.

“The reason they sell so much more is because they deliver a better customer experience. They deliver faster – it isn’t just about price; it’s about a great customer experience. To compete with Amazon on price is very dangerous,” said Murtagh.

One of the changes Murtagh is seeing with incumbent retailers is a sudden focus on getting back-office operations in better shape so they can better compete or join the Amazon marketplace. The systems they have today simply can’t deliver a great experience every time while maintaining a presence right through the customer journey from browsing through purchasing, all the way to even making the product return process seamless.

“I think that’s what scaring people about Amazon. It’s the experience. Services like Amazon Prime mean people can have anything delivered in two days and the returns policy is covered by Amazon,” said Murtagh.

While Gerry Harvey says it will take Amazon years to establish their own logistics network, Murtagh says he knows Amazon has already been talking with local logistics providers/.

“With the buying power they have, they will have very strict SLAs with those providers,” Murtagh added.

According to Neto’s research, one in three Australians plan to shop on Amazon once they open full operations in Australia. And unless locals get the customer experience right, they simply won’t be able to compete. This is where Amazon differs from Ebay and other online markets, said Murtagh. Amazon’s control over the entire customer experience, from order to delivery is their advantage.

For Australian retailers that plan to survive, they will need to embrace this. That means either getting their own house in order, joining the Amazon marketplace or learning to say “Would you like fries with that?” while keeping a smile on their face.


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