In its second-largest acquisition, Amazon buys the company for $970 million.
Amazon.com Inc. writes the rulebook that governs web retailing today and has the winnings to show for it. Learn how some e-retailers are fighting to keep it from monopolizing all of e-commerce.
Amazon.com Inc. casts the longest shadow in e-commerce, and that shadow is only growing longer, larger and more ominous for other web retailers.
Amazon has steadily increased its share of North American e-retail sales. It accounted for 8.6% of total online sales in the United States and Canada in 2009, 10.2% in 2010, 12.5% in 2011 and 14.2% in 2012, according to Internet Retailer estimates based on U.S. Department of Commerce data and Canadian sales estimates from eMarketer Inc. Its market share in Europe is smaller, but also growing, from 5.5% in 2010 to 6.4% in 2011, according to Internet Retailer's Top 400 Europe.
Analysts say there are no signs Amazon will slow down. If competitors looking at Amazon's 2012 financial performance interpret its $39 million net loss as a signal Amazon is weakening, they are wrong, the experts say. Amazon's loss stemmed from increased spending in areas that, in the long run, will likely help it win more market share. It increased spending on fulfillment 40.3% year over year, and on technology and content by 57.2%. Those investments strengthen Amazon's Kindle electronic reader and tablet business, its warehouse network, and the Prime two-day shipping and streamed content program—some of the main ways the largest e-retailer in the world locks in customers, experts say.
"A number of these investments are fixed costs, meaning that as consumers shop on Amazon more frequently and make larger purchases, Amazon should better leverage the costs which should translate into higher operating margins," says financial analyst R. J. Hottovy, a research director at Morningstar Inc. "I don't believe the loss in 2012 represents any vulnerability."
From 2001 to 2011 Amazon's sales grew an average of 31% per year, outpacing the 9% average of Wal-Mart Stores Inc., the largest retailer in the world today. Using these historical rates, Internet Retailer projects Amazon will overtake Wal-Mart as the largest retailer in the world in 2023.
That's not to say Amazon doesn't have weaknesses. Several high-profile retailers, including Macy's Inc. and Gap Inc., have stopped selling on Amazon's marketplace, which cuts product selection. Retailers who've stopped selling through Amazon often say they stopped because they had to give over too much control and sales information to Amazon. Nor does Amazon always offer consumers the lowest prices. A 2012 study by Kantar Retail found that a basket of 10 non-grocery items cost $176.76 on Amazon, but only $145.74 on Walmart.com. Even a Wal-Mart store was cheaper than Amazon at $151.08.
What's more, such powerful competitors as Wal-Mart and eBay Inc. are working hard to counter Amazon's dominance. Wal-Mart has put together a 1,500-strong e-commerce team based in Silicon Valley that's rapidly introducing social media and mobile commerce features tied to the chain's stores. It's introduced a homegrown site search engine for Walmart.com designed to deliver highly relevant results and plans a test of shipping online orders to lockers inside the chain's stores, matching a similar program Amazon already has in place.
In March, meanwhile, eBay revised merchant fees in ways that make selling on eBay cheaper for some merchants than it is on Amazon. The online marketplace operator also made it easier for sellers to dispute customer complaints. The target seemed clear to many experts. "It looks like eBay is really coming out swinging against Amazon's marketplace," says Scot Wingo, a longtime eBay observer and CEO of ChannelAdvisor Corp., a vendor that helps merchants manage stores and list on marketplaces such as Amazon and eBay.
Even Wal-Mart and eBay, however, haven't noticeably slowed Amazon's growth. And there aren't many other e-commerce players Amazon can't swat like a fly.
For the rest of online merchants this means competition is only getting tougher. Some are adapting, moving to sell in niche product categories or developing private-label products that they can control. Others are duking it out with Amazon, but becoming more creative and aggressive in battling for web shoppers' long-term loyalties. Whether these are winning long-term strategies or stopgap measures is a question surely keeping more than one e-retailer up at night.
Among those going head to head with Amazon is pet food and pet products e-retailer PetFlow.com, which competes directly with Wag.com, part of Amazon's Quidsi Inc. subsidiary. PetFlow.com carries 10,000 SKUs, half the number Wag.com offers, but data from Kantar Media Compete show PetFlow.com is neck in neck with Wag.com for traffic each month. Amazon doesn't break out Quidsi's sales and declined to make executives available for this story.
So how does PetFlow.com compete? First, it makes sure to match such Wag.com services as free, fast shipping and a "pet food finder" tool that lets consumers quickly find products and automatic reorders. But it also capitalizes on social media—a marketing channel Amazon.com and Wag.com largely ignore—to build awareness and draw traffic to PetFlow.com. A big chunk of PetFlow.com's traffic, 30%, comes from Facebook, whereas 2.84% of Wag.com's traffic comes from Facebook, according to web analytics vendor Alexa Internet Inc., an Amazon.com subsidiary. And just 3.67% of Amazon.com's traffic comes from Facebook, Twitter and Pinterest, according to Internet Retailer's Social Media 300, which ranks online retailers by the percentage of traffic to their sites from the top social networks. For PetFlow, that social traffic is profitable. Consumers arriving from Facebook last year bought $10 million in pet goods from the e-retailer, comprising a third of its total annual sales.
PetFlow.com markets to consumers on Facebook with targeted ads and cute pet photos and videos that are widely shared. It posts between 20 and 24 messages to its Facebook page daily—compared to one or two for Wag.com—which then show up on the news feeds of the 815,000 consumers who have Liked the e-retailer. PetFlow.com also makes use of display ad retargeting, so consumers who've visited PetFlow.com see ads for the merchant as they browse the web.
"Staying top of mind, and building a strong social awareness has been extremely important," says Joe Speiser, the e-retailer's co-founder. "Each time we interact with our fan base, they are reminded that we exist to serve one purpose, delivering their pets' supplies right to their door."