When you think about Amazon, what is the first thing that pops into your mind? Prime Membership? Free Shipping? Any product you would ever need? Any and all of these answers are probably among the top choices for most consumers. However, Amazon and its dominance are much more than that and the path that the company is looking to take to continue its growth is anything but ordinary.
When viewing Amazon as a business, it could be categorized as a Competency company, meaning that it is focused on being right and being the best (based on ideas from William Schneider’s The Reengineering Alternative). It is driven by competition and aims to be superior. We see that in the way that Amazon operates from its pricing strategies to reported hiring and firing practices. Despite dynamic stories around its founder, Jeff Bezos, and the tight ship that he runs, the majority of us remain loyal to Amazon and sit on the edges of our seats waiting to see what it will do next. I would argue that Amazon can do little wrong and will maintain our love and loyalty through the trust that it has instilled in its customers.
I want to focus on three interesting areas that Amazon is focusing on to drive its growth with its core consumer base.
If you look at most industries, what goes around seems to come around. The grocery industry used to include home delivery of milk and eggs every day. Once modern luxuries such as grocery stores came to popularity, the home delivery model died. People wanted to be able to go and shop for the vast assortment of processed and fresh products in one convenient place. The overall grocery market is estimated at $680 billion according to Pentallect, which includes pet food, health and beauty aids, flowers, and alcohol. The company predicts that figure to grow and hit $735 billion by 2022. Of that market, grocery delivery occupies approximately $4.5 billion and is expected to grow to $9 billion by 2022. These figures demonstrate that the once dead industry of home delivery is alive and well and will continue to grow.
Like any other “new” service, the consumer adoption rate slowly ramps up. We have seen this dynamic most frequently when it comes to subscriptions such as ink supplies (HP Instant Ink) and laundry detergent (Amazon Dash). And with improved technology, supply chains, and delivery systems, home grocery delivery is slated to become more seamless than ever before. Further contributing to this are lower costs, better delivery time windows, and methods to keep cold food at the proper temperatures.
So how does Amazon fit into this picture? In June 2017, Amazon purchased Whole Foods for $13.7 billion. This acquisition enabled Amazon to up the ante in terms of grocery fulfillment. Amazon has offered its Amazon Fresh service to Prime customers since 2016 in select cities and now offers free 2-hour Whole Foods delivery orders within six test markets. Amazon Fresh is available to Prime Members for an additional $14.99 per month. Orders less than $50 incur a $9.99 delivery charge.
Amazon competes with services from mass merchants such as Target and Walmart to club store, Costco. In efforts to compete, Walmart offers free 2-day shipping on a slew of items with no membership required and a minimum order of $35 ($5.99 shipping for orders less than the minimum amount). However, no fresh or frozen foods are included. The mass merchant also offers Walmart Grocery with faster delivery than its two-day shipping offering and a larger array of food choices than its base program. Target purchased the grocery delivery service, Shipt, which offers same day delivery services. The service requires a membership that is listed at $99 but is on special for $49 and provides customers that spend more than $100 on their first order a $15 credit. The service claims to provide products from your local Target for the freshest options. Target also has a service through InstaCart that can deliver in as little as 1-hour. Costco also offers multiple delivery options, similar to Walmart, with same day and 2-day shipping. Costco’s same day shipping is also powered by InstaCart. It requires you to be a Costco member, has a $35 minimum order, includes all grocery and household items, but customers must be home for delivery. The two-day shipping does not deliver perishable food and has a no delivery fee for orders over $75.
Amazon will surely continue to expand its availability of its grocery delivery and with its purchase of Whole Foods, it has a competitive advantage for people interested in what is known to be organic and fresh food. Amazon sees this industry as a growth opportunity that fits in well with its overall focus and mission statement: “Our vision is to be earth's most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.” While it faces some viable competition in this space and all parties are still ramping up their services, Amazon has a great chance of prevailing due to the trust it has built with its customers in terms of customer service and its reliable delivery. Amazon caters to its Prime member base and will use its established relationships to grow its reach within these households.
The second unexpected growth area that I want to look at is housekeeping. Amazon is now aiming to expand where people might not expect. In 2015, Amazon launched a platform to connect customers with handymen, housekeepers, and landscapers fueled by ratings. Amazon seeks to help people find the services they need. Its original model was based on independent contractors and didn’t require Amazon to directly employ anyone in the industry or invest in supplies. After a few years practicing that model, Amazon decided to test out the water of the housekeeping industry with further investment. In what Amazon calls Amazon Home Assistants, it is actually hiring employees, which has its challenges, but also lends to the ability to train them, determine schedules, and control the products used.
This shift again speaks to its mission statement as it does not want to sacrifice the quality of its service for cost. While Amazon identified that the segment is a $600 billion market, it has not been able to grow the way it wanted and is therefore looking to pivot its business model. Can taking more control of its workforce within its housekeeping service and pairing with customers be the solution to growing its business in this market? Could this help Amazon grow into other service oriented markets? Amazon is testing its new venture in the Seattle area and charging $156 for a weekly cleaning of a 1,500-square foot space.
While other companies might have similar services, I know I get small advertisements stuck to my front door every so often, Amazon has an advantage. Trust. Why would I let a person come to my house and clean? Because I trust Amazon to provide a safe and experienced person. Amazon likely identified that this was the aspect missing from hiring independent contractors. That trust was missing from the offering.
The final area that I want to touch on today is third party resellers. Amazon and other online resellers offer what is often referred to as Marketplaces, which allow other resellers to use the site’s platform and shipping services to sell their own products. Amazon, Walmart, EBay, Sears, and Newegg are a few of the sites that offer this type of service.
While Amazon sells a fair amount of product directly, its Marketplace is really where the majority of sales happen. Customers can often get more unique items or better prices through the Marketplace. This is not to say that it does not have its faults, as counterfeit and gray market items are more prevalent through this type of channel.
However, the Amazon marketplace is a win-win. It enables small and large resellers to have additional or sometimes their only placement in the ecommerce channel. While leveraging shipping from Amazon. And more than anything else, while a customer may not have heard of the individual reseller, their association with Amazon once again builds an overall trust. Customers can be more confident in their purchases when they are made through the Amazon site. Customers can also view ratings of that reseller and gauge reliability to some degree. Amazon also benefits as it does not have to deal with the full logistics of carrying many of the products that sell through this channel. It gains profit from the sales but is not on the hook for all of the supply chain.
Not so Fast
Despite having a diversified strategy and a clear aim for being the best, there are forces that may stop Amazon in its tracks and are worth noting. Trying not to get too political in this post, but with the current administration, no one knows who or what is safe and Amazon may be the next target. In the past couple of weeks, President Trump made it very clear through his tweets that Amazon is on his radar. He has accused the Washington Post, also owned by Bezos, as reporting fake news, accused Amazon of taking advantage of the US Postal Service, which according to other sources is far from true, and further suggested that Amazon does not pay appropriate taxes. Other tech companies are also at risk for increased regulation under this current administration. However, despite some fluctuations in stock prices, there is no current indication that Trump’s tweets or attention on Amazon have impacted the commitment of the site’s customers or its strategic direction.
The question begs to be asked…how does a website that most consumers associate with purchasing everyday items transition into markets such as housekeeping and grocery delivery? Further, how does Amazon grow while under the microscope of POTUS?
In my opinion, it boils down to one word: TRUST.
Amazon has built a platform that according to One Click Retail, accounted for approximately 44% of 2017 US ecommerce sales. While low pricing can be a primary competitive advantage, it takes more. Amazon has consistently offered the products people need at the prices they want for fair shipping costs. Amazon’s Prime program has created loyalty and trust with its customers, which is not easy to come by in today’s fickle landscape. While the majority of us will continue to associate Amazon with our best online shopping resource, the company will use the trust it has established to expand into other services that are growing and are likely the future. It will be able to succeed in many of these areas due to the trust it has built through everyday experiences with millions of people. Do I need grocery delivery? Probably not. But if I ever jump on that bandwagon, you better believe, I would try Amazon’s service first!
And the reason that Amazon can do it all comes down not only to price and competitive advantage, but ultimately the trust it has built. The giant has created its own circle of trust and capitalizes on it, which despite efforts by the powers that be, will continue to garner growth.
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