Amazin' Amazon Continues To Trouble Traditional Bricks And Mortar Operators: Analysis

By Steve Wynne-Jones
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Amazin' Amazon Continues To Trouble Traditional Bricks And Mortar Operators: Analysis

When, earlier this week, Facebook saw around $120 billion wiped off the value of its shares, the lofty New York Times suggested that faith in tech firms' 'invincibility' was on tenterhooks.

Nobody, however, thought to tell Jeff Bezos at Amazon.

The Seattle-based online giant posted a 39% increase in second quarter sales, to $52.9 billion last Thursday, with operating income rising to £3 billion, up from $628 million in the same quarter last year.

Through its e-commerce platform, Whole Foods, AWS cloud computing arm, Alexa, broadcast studios and support services for small business, Bezos is fast building a firm that reaches almost every aspect of day-to-day life.

In fact, such is Amazon's broad spectrum that in its quarterly statement, the term 'retail' is only mentioned once, and that's in a footnote.


Sustained Impact

But Amazon's impact on retail - both e-commerce and bricks and mortar - is undeniable, with analysts GlobalData Retail among those queueing up to acknowledge the group's efforts on several fronts.

"First, it innovates and tries new things like no other retailer," says Neil Saunders, GlobalData Retail's managing director. "The laundry list of projects Amazon is working on is extensive and this heady pace of creativity is the key reason why it stays several steps ahead of the market and is able to generate so much growth.

"Much of this is the result of a company culture of never settling and not being afraid to fail. In our view, other retailers would do well to take a leaf out of Amazon's playbook on this front."

Secondly, across everything it tests, Amazon retains its customer-centricity; discovering the issues that frustrate its customer base and putting in place measures to rectify them.


"It rarely innovates by increments, but instead looks to find problems consumers face and then uses technology in creative ways to help solve them," says Saunders.

"This means that innovations usually result in increased customer loyalty, improved conversion and transaction rates, and ultimately increased sales. Looking at the market from the point of view of the customer also allows Amazon to retain an edge over other retailers."

Thirdly, Saunders notes, Amazon has created a "compelling ecosystem" which permeates many aspects of its customers' lives. "Prime is at the heart of this and membership makes it both easy and financially sensible to buy into the many products and services Amazon has to offer," he adds.

Quiet Influence

With regard to the business' effect on traditional bricks and mortar retailing in Europe, Greg Lawless of Shore Capital believes that Amazon's "relentless focus on continued innovation and the obsessiveness with delivery for customers" means that Amazon is "quietly influencing" the retail scene in the UK, with much of the recent merger activity - who would have thought a year ago that Sainsbury's and Asda would join forces? - being enacted to counter Amazon's potential market dominance.


"Quite how Amazon expands in the UK category wise remains to be seen; there are barriers to success on a scale it has achieved in books, entertainment and general merchandise, and move into clothing, electrical and grocery categories," Lawless explains.

"With respect to the latter, we note the acquisition of Whole Food Markets in the USA and the reported approach for the John Lewis Partnership’s food division - Waitrose in the UK and wonder if this remains the most likely route to a mass-market position in grocery."

With this in mind, Lawless surmises that it is doubtful that Amazon may wish to acquire pure-play online retailer Ocado, as has been suggested in the past.

It is worth noting the differential revenue momentum between Amazon and Ocado and their respect stock valuations as a multiple of sales," he explains. "Amazon trades on a forward one
year EV/Sales multiple of 3.1 times (x), whereas Ocado trades on a multiple of 4.1x."


Regardless of Amazon's next move, it's likely to remain the main talking point among retailers in the coming years, independent of the travails of some of its more high-profile tech counterparts. Sorry, Zuck.

© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.

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