Mature market leaders are supposed to grow slowly, but Amazon.com Inc. is growing as fast as it did when it was a startup. That raises the question: How does everyone else compete?
It’s a question many retailers must be asking themselves after Amazon released its fourth quarter and 2010 financial results yesterday.
Those results show that Amazon, which is far and away the biggest online retailer in the world by sales, continues to outpace the growth in the e-commerce market—and by a wide margin. While U.S. online retail sales grew by around 14% for the first nine months of 2010, according to the U.S. Department of Commerce, Amazon reported this week that its sales in North America increased by 45% in 2010 over 2009. That means Amazon is growing at roughly three times the rate of online retail sales as a whole in the U.S. and Canada. And Amazon likely accounted for more than 11% of North American online retail sales last year, by Internet Retailer estimates.
What’s more, far from slowing down, Amazon’s growth rate is speeding up. Its 40% growth in worldwide sales in 2010 was the retailer’s highest growth rate since 2000, chief financial officer Thomas Szuktak pointed out to investment analysts on a conference call after the release of Amazon’s financial results.
There were plenty more statistics to unsettle competitors. For instance, Amazon says it had 130 million active customers at the end of 2010, that is, consumers who had bought from Amazon in the past year, up nearly 24% from 105 million a year earlier.
Pretty astounding numbers. Yet, Amazon’s stock price is down about 8% today, the first day after the release of its financial results, despite the extraordinary revenue growth. That’s because Amazon’s profits only increased 25% last year (to a paltry $1.41 billion), growing more slowly than sales.
That’s disappointing to Wall Street, but offers cold comfort to competitors. As Amazon CFO Szuktak pointed out to analysts yesterday, Amazon kept on investing heavily in its business in 2010, and not all the new investments have paid off yet. He pointed, for instance, to the growth in fulfillment centers: Amazon added 13 distribution facilities last year and now has 52 around the world.
Those investments may cut into profits in the short term, Szuktak said, but will pay off over time. Indeed, the vast global web of fulfillment centers is one of Amazon’s many competitive advantages, along with its massive buying power, deep experience in building and maintaining web technology, and its increasingly powerful brand.
How can anyone compete against Amazon?
One answer is to find a niche so specialized that it’s not worth Amazon’s time, and do a great job of serving your customers. That’s a strategy that’s working for thousands of small but successful online retailers.
But Amazon keeps on moving into new niches. Amazon’s recent acquisition of the parent company of Diapers.com is an example. And the more products Amazon sells, the more it can spread the costs of its vast infrastructure, so I expect the No. 1 e-retailer to continue to move into new product categories.
Amazon’s Achilles heel, some competitors hope, is that it has no physical stores. Despite the ongoing shift of retail spending to the web, many consumers do like to touch and feel certain items, and ask questions of knowledgeable salespeople when considering complex purchases. Is there a strategy that combines the benefits of bricks and mortar and of the web?
E-commerce technology and service provider GSI Commerce is betting that there is, and is making that strategy part of how it’s building out its ShopRunner program that offers consumers free shipping across many retailers (64 at last count) in exchange for a $79 annual fee. It’s unabashedly aimed at the Amazon Prime program, which offers free shipping on items bought at Amazon.com for $79 a year.
Because many of the retailers participating in ShopRunner—including Sports Authority, PetSmart and General Nutrition Centers—have many stores, there is the potential to use this free shipping program in a way Amazon can’t, as ShopRunner president Mike Golden explained to me recently. Suppose you’re in a store shopping for a gift. You could buy it, take it home, wrap it up, take it to the post office and mail it to the recipient. Or, the store clerk, recognizing that you’ve asked for a gift receipt, could explain that if you joined ShopRunner on the spot the store would ship the gift free—and you’d get free shipping for the next year at all the other retailers. Or if the store doesn’t have a shirt in your size, or you buy something that you want monogrammed, again, the store employee could offer to ship it to your home for free, if you sign up with ShopRunner.
If many big chains really pushed that strategy it’s conceivable ShopRunner could in a couple of years catch up with Amazon Prime, which has enrolled some 5 million consumers, according to Lazard Capital analyst Colin Sebastian. And once consumers are signed up with a program like that they’re sure to be more likely to patronize participating merchants when they shop online in order to get the free shipping consumers so dearly love.
There are plenty of downsides to owning stores, which the retail chains will continue to deal with as they compete with increasingly powerful online-only retailers like Amazon. Perhaps, the big winners from ShopRunner will be the web-only retailers that have signed up, like Newegg and drugstore.com, that can benefit from whatever marketing ShopRunner does in stores, without bearing the costs of all that brick and mortar.
The ShopRunner coalition has a long way to go to show it can succeed. But at least they have a plan. Everyone else better get a plan, too. Because Amazon shows no signs of slowing down.