Square-Off: Is Amazon Good for Business?
Amazon is cool, right? Who wants to spend hours holiday shopping in a mall? For that matter, who wants to sift through a bunch of different websites when you can get everything you want from just one? Either way, who wants to pay more for the privilege of not buying through Amazon? Rhetorical questions all? Maybe. But before you get back to your gift list, here are some other questions to consider: Do you know anyone whose job or business got trampled by the raging online behemoth? What m ..
Boy, do we ever read a lot of headlines about Amazon these days. And they are so polarized: either breathless stock-pickers claiming Amazon is going to dominate the world, or breathless doom-mongers claiming the same.
The truth is less newsworthy: Amazon has been a positive force for business, and it isn’t going to dominate the world.
Let’s first take the loudest complainers: old-world retailers. Their problem isn’t Amazon; it’s that new technologies mean their established way of selling products is no longer the best way. Amazon just happens to be the leading user of that new technology.
But the genie isn’t going back in the bottle, and some of the businesses that felt Amazon’s force earliest have successfully adopted these new technologies and married them with their store estate to successfully defend against Amazon. Note that Best Buy stock is trading near an all-time high.
A legitimate complaint is that Amazon’s shareholders forego profits today for growth. But that’s not an Amazon phenomenon; it’s a technological-change phenomenon. Think of the capital spent building railroads in the mid-1800s. It was a tough time to be in the blacksmith business, but the opportunities created by railroads enabled huge opportunities for other businesses.
So how is Amazon already good for business? One of the biggest but least-obvious ways is that a vast number of businesses are Amazon customers. Just like consumers, businesses can buy their supplies cheaper, quicker, and more conveniently than ever before. And businesses also buy $4.5 billion worth of great-value cloud services from Amazon’s AWS division.
Amazon is also good news if you are a small retailer. Small retailers excel at sourcing and curating product but are often horrible at marketing and actually shipping it. Amazon’s Marketplace and FBA offerings have made running a small e-commerce retailer a breeze.
For producers that sell on Amazon, the story is more nuanced: Amazon has steepened competitive advantage for the best over the rest. Who chooses a two-star product nowadays? This will only become more pronounced as search shifts to voice, where Amazon will pick the top-ranked product for you. Producers who are all brand and no quality: beware!
Regulators need to be watchful of Amazon’s growing power to steer consumers to their preferred brands, and its ability to parlay a strong market position from one area to another (for example, from e-commerce to logistics to movies). But there is no reason to believe regulators won’t get this right, eventually.
One area yet to feel the “Amazon effect” is automotive services — selling, servicing, fueling, repairing, and reselling automobiles. Digital technologies could substantially improve the consumer experience, helping find inventory or services and helping choose the best shop through star ratings. Much consumer spend on auto is low engagement; customers just want it done. And we expect these low-engagement requests to be strong candidates for voice search: “Alexa, get my truck serviced.”
Amazon is causing, and will continue to cause, headaches for CFOs of old-world companies. But the rollout of new digital technologies that Amazon exemplifies, properly regulated, will create enormous direct benefits for a majority of businesses – those that it sells to and sells on behalf of – and for new business models spurred or necessitated by Amazon’s success that haven’t even been imagined yet.
Let the new Steam Age commence!
Nicholas Farhi is a partner in the New York office of OC&C Strategy Consultants, a global strategy consulting firm.