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Thursday, 24 April 2014

Amazon: Imagine...

Imagine.

Fast forward fifteen years. Imagine every rule and assumption you currently hold about retailers, manufacturers, brands and own labels being swept aside.  This new dawn is fast approaching.

Let's start with a general observation and a governing hypothesis:
  1. First the observation: Grocery retailers are just aggregators. They have, over the last fifty years, provided the most convenient and efficient ways to connect brands and consumers. During this time, realising their lack of self identity and feeling the need to differentiate from other brands, retailers developed loyalty devices - the most powerful being retailers own labels. 
  2. The hypothesis: Our children and their children will see no utility in driving to a hypermarket to peruse aisle after aisle for everyday groceries. Mobile will be their point of purchase. Others will do the physical hard yards. 
On top of these points, consider the Amazon factor....and three implications of their operating model and the broader changes impacting the industry: (1) No listing/slotting fees; (2) Portfolio neutrality; (3) The supply chain of everything

No slotting fees
In the world of grocery, listing/slotting fees are a core part of the retailers income stream. In fact, across the world, it is a general truth that most retailers make a loss on their trading activties with shoppers. The margin comes from supplier income and listing fees are a core element. The more innovation, the more fees are generated. Some retailers even charge delisting fees to cover the costs of markdowns associated with failure.

In the Amazon world today, suppliers manage their own catalogue: list whatever you like. It's unclear whether this is a deliberate, long-term strategic choice - but it would be unwise to assume it is a quirk of immaturity. For suppliers, no slotting fees is innovation nirvana. It will make launching with Amazon a deeply attractive proposition and put pressure on established retail business models.

Portfolio neutrality
Although there are some muttering of Amazon wanting to develop their own retail brands, they would be delighted to list everyone else's. Imagine, Tesco Finest or M&S Gastropub being delivered via Amazon. This would revolutionise our understanding of retail own brands.
  1. Today, you can only buy Tesco Finest in Tesco...but imagine if the rules changed. Retail own brands would become brands - succeeding or failing on their market merits. Instead of Tesco, Sainsbury, Asda toilet rolls competing with Andrex head to head in individual outlets, they would all compete. The shopper gains total market visibility and accessibilty. Let battle commence.
  2. But retailers don't make their own brands. The unspoken truth of M&S food is the array of companies manufacturing for M&S. Able to compete directly these companies may quickly become branded players themselves. Whose Lasagne do you prefer: Greencore vs 2Sisters? With higher velocities and the same quality standards, these companies will produce beyond M&S quality at below Aldi prices via Amazon.  Will retail brands survive?
The supply chain of everything
In the days before Hypermarkets and centralised distribution, UK high streets were clogged with large delivery vehicles dropping off small orders every day to local supermarkets. Tomorrow we face the prospect of our suburban roads being perpetually obstructed by a steady stream of retail delivery vehicles trying to home deliver our on-line orders. We trade one convenience for a new inconvenience.

In a portfolio neutral world, with all products available by Amazon and unencumbered with physical retail operating costs, their structural advantage will be untouchable. Amazon can become everyone's supply chain. Fewer delivery vehicles, less congestion. The aggregation of aggregation.


As John Lennon might have put it;
Imagine there's no Walmart, 
It isn't hard to do
Nothing to queue or drive for, 
And no Clubcard too
Imagine one supply chain, 
Delivered home by drone
You may say I am a dreamer
Bezos' not the only one
Just one click you can join us
And the world will Amazon
Imagine.

(Go on, admit it..you sang the verse didn't you?)

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