June 10, 2014, 11:51 AM

Amazon gears up for e-retail ‘battle’

The first day of the Internet Retailer Conference & Exhibition includes a lengthy look at most every retailer's e-commerce rival.

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If you can't beat it, join it. And you probably won't beat it.

That was one of the early messages sent today to attendees at the Internet Retailer Conference & Exhibition in Chicago during a workshop session entitled "Amazon and Me."

To a room packed with people who sell retail and wholesale goods through the Amazon.com Inc. marketplace—only a few lonely hands went up when attendees were asked who did not sell on Amazon—two Amazon experts gave the crowd a deep look at Amazon's e-commerce cash machine, which last year generated a 26% year-over-year increase in North American revenue. That beats the 17% year-over-year increase in U.S. e-commerce spending last year, according to the U.S. Commerce Department. 

"Deep" doesn't mean a complete look at Amazon’s operations, the speakers noted during the first two sessions of the workshop. "Amazon is the most secretive company you will ever work with," said Scot Wingo, CEO of ChannelAdvisor Corp., which helps retailers sell on some 20 online marketplaces, including the one operated by Amazon.

Why does Amazon keep growing at a faster rate than online shopping overall?

In large part, by subsidizing free shipping and expanding its fulfillment operation, Wingo said. The e-retailer operates more than 100 warehouses around the world and maintains nearly 50 million square feet of fulfillment space in North America, according to Wingo and Colin Sebastian, a longtime Amazon observer and e-commerce analyst who works for Robert W. Baird and Co. Amazon’s growth also stems from it enabling other merchants to sell on its marketplace. The retailer’s marketplace started with books, moved to toys and now includes some 2 million sellers of a variety of products, according to figures from Amazon. 

While Wingo acknowledged that Amazon could use data from its marketplace merchants to bolster its own retailing and merchandising power—the No. 1 e-retailer in the Internet Retailer 2014 Top 500 Guide could spot popular items and sell them itself, for instance—he knocked down the idea that Amazon would want to mess with what amounts to one of its biggest profit channels. For example, take a baseball bat that sells for $100 by Amazon. The e-retailer can expect to make $4 profit by selling the bat to a consumer. But because it doesn’t have to pay invest research-and-development dollars or marketing cash, it might earn $7 when a marketplace seller sells the bat on its site.  

Amazon also accepts low-profit margins on items it sells itself, which the speakers referred to as “first-party retail sales, said Sebastian, who spoke during a session called "Amazon Under the Hood: Where's it's Investing." As Wall Street has not punished Amazon for its declining profit margins in recent years—indeed the company’s stock price has risen as profit margins have fallen, Sebastian said. That, he said, gives CEO Jeff Bezos the "freedom" to make further investments in fulfillment and delivery and other technology designed to keep consumers "locked in" with the retailer, even at the cost of short-term profits.

Amazon Prime represents one likely area of expansion, he added. The loyalty program, which Amazon sells for $99 annually, has an estimated 25 million paid members, Sebastian said. That means Prime probably reaches some 50 million consumers, he added, given that a Prime member can let family members use the service and taking into account free memberships Amazon has awarded to students and other groups.

Still, Amazon has made only an estimated 10% of its products available for Prime shipping, he said. "It's still the early days for Prime."

It's also still early for a host of Amazon’s technical efforts, Sebastian said: The Kiva robotic workers that Amazon is deploying in its warehouses and the drone delivery devices that were widely ridiculed when Bezos described them on the "60 Minutes" news program but that are receiving regular attention from Amazon engineers, stand as two examples, Sebastian said. He also pointed out that Amazon is seeking to hire nearly 350 data engineers, according to online job listings. That dwarfs similar recruiting efforts from Wal-Mart Stores Inc. and other e-retail rivals.  "Amazon is arming itself for battle," he said. 

 

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