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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Comments

    except in Australia's market. stuff is over priced. WAYY overpriced. when its cheaper to pay the shipping internationally and still save money. aussie retailers can drop the price to more respectable levels and regain the market share. providing it doesnt yo yo the pricing.

    When I lived in Germany, half the stuff I bought from amazon wasn't the cheapest. Its the convenience (of having things delivered for me to pick up on the way home), the readily available information and the ability to quickly compare product specs that does it for me...

    that and not having to dig through a trolley of crap to find the item/size/colour you want

    Service goes a long way. The fact I can order things on Amazon I can't even purchase in Australia, at any price, shows how far Australian retailers need to catch up. I really hope Amazon don't forget this coming over here. As it stands they already put up some annoying, unnecessary, barriers, such as having geo-restrictions on ordering physical goods.

    3 times today I experienced the epitome of why retails in Australia will bleed with the arrival of Amazon.

    1. Last week I was looking for a leather jacket, numerous stores had fake leather at about $150-$200, but I wanted the real deal. Eventually I found the perfect jacket at Myer for $300, but everything in the area was being discounted and I was sure I could get it reduced a little if I just wait a few days. 3 days later it's reduced to $199, perfect. I place the order on line with a pick up delivery expected of the following day. Only after getting the invoice it says delivery date is approximately 6 days (apparently delivered from one store to another via AusPost). I could have driven an hour to the store I originally tried it on at and purchased it right there and then (checked when I was in the area on the weekend, still there). Called up and asked if it had arrived yet today, no good, still waiting.

    2. Wife was pressured into buying $2700 worth of skin care products by one of those Jericho pop up stalls last Thursday (social anxiety + persistent sales person = bad outcome). Went in and explained the situation and that she wanted to return the items; not interested. Went back today and after lots of discussion they said they would refund her $1500 and she can keep the product, over 50% markup?!
    After more discussion and threats of legal action things were resolved and she got the refund, but it never should have happened.

    3. Bought a new bed from OneBed last Monday, got delivery 8 hours later! Fantastic service, except for the pillows I also ordered that are apparently sent by AudPost and should arrive later this week, when I'm interstate for work. FAIL!

      i know what you mean i ordered a computer online from harvey norman, its a 15 minute drive away.. it took them 3 weeks to deliver it

      Update. Myer sent the wrong size. Tried to resolve the issue over the phone and it was like playing a game of Tag while beating my head against a wall. Was easier to go to several locations to try and resolve. Some great face to face service but that was about it. Issue still not resolved a week later. OneBed pillows arrived 11 days after the order was made, even though the mattress arrived that day.

    Service is also when things go wrong. After awful experiences in Australia, Big W, Shopping Square, etc when a kindle went belly up a week before warranty (bought from Amazon U.S.) had an online conversation with Amazon and within 20 minutes had labels for the return provided and a replacement on the way before the broken one had left. The replacement arrived in a week from the U.S. Gobsmacked about the awesome service.

    don't underestimate discounting, people have been window shopping at regular stores and then getting little to no service with online purchases with cheap prices for years now, that's become the norm for many, I've bought from amazon before simply because at that time I could not buy it locally

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