This article was published in the September 2016 issue of STORES Magazine.
Turning 21 is considered a rite of passage in most Americans’ lives; it signifies a transition into adulthood and a passage from years of schooling to a journey of countless responsibilities.
Amazon.com turned 21 this summer, and it’s fair to say the Seattle-based e-commerce giant is handling the transition with aplomb. In July its market capitalization hit $356 billion, positioning it as the fifth-most-valuable U.S.-listed company; that same month, the second iteration of Amazon Prime Day yielded a 60 percent bump in sales over 2015.
While CEO Jeff Bezos’ model was originally focused on growth over profitability, that has changed, too. The company recently reported its third quarter of record profits, achieving $857 million in income.
“Amazon is a case study in ceaseless innovation and interminable disruption,” says Artemis Berry, vice president of digital retail for Shop.org and the National Retail Federation. “There have been numerous firsts just since the start of this year, including new private label brands, redefined logistics and the debut of online shopping by voice. They have truly earned the nickname of ‘ultimate disrupter.’”
To toast Amazon’s 21st birthday, STORES uncovered 21 times it changed the dynamics of selling, came up with fundamental new ways of doing business and altered how customer satisfaction is measured.
Once upon a time
One of the earliest signs that Amazon would be a disrupter to be reckoned with was 1-Click Shopping. Introduced in 1997, 1-Click eliminated the need for shoppers to re-enter payment information every time they made a purchase.
“It eliminated that redundancy of having to key in field after field of personal payment information,” says Jason Goldberg, senior vice president of content and commerce at Razorfish. “We take for granted today how quick it is to log in, choose an item and buy it with just one click, but it was so unique then that Amazon was awarded a U.S. patent for the technology.”
Former Shop.org executive director and e-commerce consultant Scott Silverman sees 1-Click as the genesis of an overarching theme at Amazon. “You see it over and over again when you study what connects shoppers to Amazon,” he says. “They make processes seamless and frictionless.”
Also in 1997, Amazon announced an IPO and began trading on the NASDAQ exchange, appearing to shift perception among Wall Street big-wigs. The e-commerce powerhouse didn’t report an annual net profit until January 2004; defying logic, Wall Street remained patient.
“Amazon’s horizon for innovation and disruption is five to 10 years, as compared to some investors who can’t see beyond 18 months,” says John Rossman, managing director at Alvarez & Marsal, former Amazon executive and author of “The Amazon Way.” “The company has always been willing to forgo short-term profits and benefits to create a lasting long-term business grounded in innovation and doing what’s right for the customer.”
Silverman believes Amazon has changed how Wall Street values a company, though he raises a question: “Do the analysts who follow Amazon perceive it to be a retailer or a technology company?”
That question was raised by investors in 2006 when Amazon launched its cloud computing service, Amazon Web Services. While skeptics saw this extension of the business as a distraction, Forbes reported earlier this year that AWS grossed $7.9 billion in 2015.
It disrupted retail by providing small retailers and numerous startups with the server capacity they needed to compete with the big guys,” Goldberg says, effectively democratizing e-commerce.
Endless aisle
Amazon made it easier for smaller third-party sellers to dip a toe in e-commerce with Amazon’s marketplace. Rossman says he and his former team built “a very transparent and robust merchant integration that put customer trust at the absolute center. Our goal was that a customer buying from a third party had to have a trusted experience and we were willing to do whatever it took to make that happen” — including implementing a mandate that Amazon manage the payments and wallet.
Sucharita Mulpuru, former vice president and principal analyst with Forrester Research, also calls the Marketplace disruptive. “It changes how one thinks about the economics of the retail business,” she says. “Retail was historically about buying product, marking it up and selling at a profit. Amazon sells product that other people own and they’re making very significant, rich margins that they use to subsidize various approaches to customer retention.”
Several aspects of selling were controversial when first introduced nearly two decades ago, but some are commonplace today. Two standouts: Selling used books next to new and allowing shoppers to search inside the book.
“Other than cars, no one had ever seen this done before, and here was Amazon allowing the customer to see this on a single detail page,” Rossman says. “Publishers and authors didn’t like it — obviously they don’t make more money on used book sales.”
Search inside the book was considered by publishers and authors to be counterintuitive. “Amazon’s hypothesis was that if customers got a peek at a few pages, they would actually buy more,” he says. “Their intuition was right. The technology became the digital proxy for shopping for a book in a traditional store.”
Another fundamental game changer is Amazon’s breadth of assortment. “At a time when the megastores like Barnes & Noble and Borders were winning on assortment, along comes Amazon with a million SKUs,” Goldberg says, “and those guys watched their competitive advantage slip away.”
Experts also deem free shipping noteworthy. Initially, shoppers had to meet thresholds — $75, then $50, then $25. “Marketing expenses became fungible with free shipping,” says Ken Seiff, founder and managing partner of Beanstalk Ventures. “It was just genius on Amazon’s part.”
Seiff calls out the unconventional return policies applied to select items. “They simply tell shoppers to keep some items, as it’s cheaper to not pay to ship it back,” he says. “It earns them a lot of good will.”
“Shoppers trust Amazon pricing will be the same, regardless of where they live.”
Dynamic pricing really changed things, turning retail pricing “into a tech play with … algorithmic pricing rules that allowed for multiple price changes intra-day and inter-day,” says Jenn Markey, vice president of marketing at 360pi. “They want to be perceived as a price leader but, in effect, they’re using technology to be the fastest follower of the price leader.”
She says Amazon created a price leadership position which “brought an unparalleled level of transparency. They also reinforced the concept of a national price” rather than the regional pricing that was more prevalent at the time.
“Shoppers trust Amazon pricing will be the same, regardless of where they live.”
One to one
It’s impossible to overlook how Amazon shaped customer buying with the development and expansion of processes such as automated emails, user-generated ratings and reviews and recommendations based on previous purchases.
“There’s no substitute for using event-based communication to anticipate and eliminate customer questions and uncertainty, and Amazon understands that better than anyone,” Seiff says. “The minute you click to purchase they send an email. Your order ships, they send an email. When the delivery is scheduled, another email lands. This sort of automated communication was game-changing in the direct-to-consumer space.”
Several experts believe that Amazon is responsible for creating greater transparency around user-generated content. Though manufacturers initially pressured Amazon not to include ratings and reviews, having them available builds consumer trust.
Scot Wingo, executive chairman and co-founder of ChannelAdvisor, believes the recommendations engine began with books. “It can be difficult to get people to cross categories,” he says. It “became a clever way of telling folks, ‘If you like this book you might like this movie.’ Amazon’s growth would not have happened as fast without recommendations.”
Amazon Prime boasts tens of millions of members around the globe.
An unproven membership/loyalty program that met with fierce skepticism when it was introduced in 2005, Amazon Prime now boasts tens of millions of members around the globe.
“It’s become the ultimate loyalty program, bundling trust and service,” Seiff says. “What they have done with Prime is extraordinary when you realize that for so many Americans, using Prime has become a default behavior.”
Amazon Prime Now takes it a giant step further, providing same-day delivery to dozens of metropolitan areas — getting some products into consumers’ hands in an hour or less.
“The real disrupter here is the delivery system,” Wingo says. “Amazon has created Flex, which is an Uber-like system of independent drivers. With this growing army of shared economy drivers, they can now reach one of four Americans in an hour or less.”
Speed leads
Amazon builds its logistics infrastructure to support super-fast delivery. In the last 12 months the company has invested in thousands of trailer trucks, moved into ocean shipping, partnered with Atlas Air Worldwide for cargo services and last month debuted Amazon One, its first branded cargo plane.
The company is expanding its footprint of fulfillment centers, moving products ever closer to the consumer and using these vast distribution centers to disrupt fulfillment speeds.
“I’d estimate that they have somewhere around 75 fulfillment centers in the U.S.,”
Wingo says. “The buildout is nothing short of massive.” The first, located near Seattle, was 250,000 square feet. Midwest fulfillment centers tend to be about 1 million square feet; in Texas that bumps to 1.2 million — roughly equivalent to 22 football fields.
At last report Amazon is using more than 30,000 robots.
Inside fulfillment centers is yet another disrupter, Amazon robotics. At last report Amazon is using over 30,000 robots, including Kiva robots (acquired back in 2012), intelligent forklifts and machines capable of counting items on a shelf. “Amazon continues to invest heavily in robotics in the quest to take humans — and the problems associated with them — out of the equation,” Wingo says.
The idea that Amazon is a hybrid retailer/technology provider is repeatedly floated in discussions about the company’s role as disrupter. Case in point: Amazon devices.
“There were a few notable things about the Kindle that were revolutionary at the time,” Mulpuru says. “It had embedded Internet connectivity so users didn’t need to pay extra to buy a book. That completely reduced any friction tied to buying digital goods.”
Some washing machine manufacturers have announced plans to build a Dash button-type of interface into the appliance that would reorder detergent; similar technology is already available from Brita. Then there’s Amazon Echo, a voice-enabled wireless speaker. This device pushes the envelope on conversation commerce, but it’s more than that. Users can request music be played, order pizza, and add products to an Amazon.com shopping cart — all via voice command.
Perpetually focused on shortening the last mile, Amazon is investing heavily in drones.
Eyeing the future
Perpetually focused on shortening the last mile, Amazon is investing heavily in drones.
“I think we will see it first as a business-to-business thing,” Wingo says, “because that is a less complicated path for now.” Amazon has already begun drone testing in the United Kingdom, and has introduced Amazon Prime Air, guaranteeing package delivery in 30 minutes or less.
Wingo points out that when Bezos first mentioned the prospect of drone delivery in a 2013 “60 Minutes” interview, Bezos had been investing in it for some time — once again putting Amazon several years ahead of competitors.
Less than a year ago Amazon opened its first physical store. “Their stores are innovative in that they turn traditional methods upside down. For most retailers their stores are considered primary touchpoints and the brand’s extension online is perceived more like an endless shelf,” Wingo says.
“All the arrows flow in the opposite direction. Amazon’s physical stores feature online book reviews as part of the display,” he says. “Even the pricing approach is an offshoot of the online store. Nothing in Amazon’s store has a price. You have to check it with a smartphone because today’s retail world is no longer about everyday low prices — it’s about prices that change every millisecond.” In a word, disruption.