Amazon Drives Discount Double Check in Retail Industry

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Originally posted at Briefing.com

Our offices are located on Michigan Avenue, otherwise known in colloquial terms as "The Magnificent Mile," which is paved with one retailer after the next.  You can find Ulta; you can find Nike; you can find Gucci; you can find Crate & Barrel; you can find Gap, Nordstrom, Ralph Lauren, Tiffany & Co., and the list goes on and on.  

Oh, and you can also find lots of "sale" signs.

What we see in terms of "sale" signs on Michigan Avenue is probably no different from what readers see in their own shopping districts and/or malls these days.  Many brick and mortar retailers, and especially the apparel and accessories retailers, are hurting for traffic as consumers have increasingly embraced e-commerce for their spending activity, partly because it is convenient, partly because it takes less effort, but mostly because that's where lower prices can be found.

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The fact of the matter in the apparel and accessories world, where true differentiation and competitive moats are hard to come by, is that full-price selling doesn't sell for the average consumer. What sells as a traffic driver are big discounts.

Amazon, in effect, is ruling the retail universe with an invisible hand and retailers have no choice but to perfect an operating strategy that combats Amazon's ever-present, always-on, competitive threat.

This past week provided another prime example of how Amazon is "killing it" and how some retailers are killing themselves trying to deal with that.  

The hard truth, though, is that brick-and-mortar retailers were already suffering death by a thousand price cuts.  The influence of e-commerce and increased access to the Internet have simply made the cuts run deeper.

Late to the Party

It's no surprise these days to see retailers in their earnings press releases place an emphasis on the growing contribution of their e-commerce business to total sales.  It's a necessary approach so as not to look "old school," yet it's also necessary for many instances to take the sting out of the weak growth — or lack thereof — for their brick-and-mortar operations.

In the same vein, many emphasize the investments being made to grow their digital and mobile businesses.

Those investments are necessary, yet the newfound emphasis on communicating the increased attention to their e-commerce strategies comes across in many instances as an admission that they are late to the e-commerce party.

It's not easy — or cheap — playing catch up to a company like Amazon, whose established a position ahead of the competitive curve has enabled it to capture an increasing amount of both mindshare and consumer spending.

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Accordingly, the palliative in the interim for retailers, while they build out their e-commerce business, is to protect what market share they can by cutting prices in their stores. 

Some do that as part of an overall marketing strategy; others, however, are forced to do it by inventory levels that have gotten bloated because their customers are shopping elsewhere.

The price cuts of late are significant, too, as sales advertising 50%, 60%, and 70% off are a common sight and seem to be happening with more frequency these days.

Guys and Dolls

I spent some added time walking Michigan Avenue this past week and it was a labor of love — figuratively and literally.  I was shopping for my daughter, who turned 10, and for my wife, who married me 15 years ago. Coincidentally, July 13 is both my daughter's birthday and my anniversary.

Truth be told, I'm more of an "old school" shopper than a new-age shopper.  I have bought plenty of items online, but I prefer the brick-and-mortar shopping experience where I can see, touch, and try things on at that very moment.

This past week, though, I wasn't shopping for myself.  Hence, I made my way to Mattel's American Girl store where the prices of their dolls will make any father of three daughters (like me) cringe whenever a birthday or Christmas rolls around.  

Notwithstanding the fact that I passed numerous "sale" signs on my jaunt up Michigan Avenue, I knew already that I would not have such discounted fortune at the American Girl store.  Their dolls are full price — $115.00 to be exact.  That is outlandish to this dad, but it's a price I'm willing to pay for a special person on a special occasion.

I was struck, however, by how few shoppers there were in the store and that there was a sprinkling of "sale" signs for some of the outlandishly-priced outfits and accessories that go with the dolls.  I have been there enough times over the last 13 years to know that the light traffic and the "sale" signs are quite unusual for the American Girl store on Michigan Avenue.

What really got my attention, though, was that I had to pay $0.07 to buy a bag to put the doll in.  To me, that was the most outlandish expense of all.

I just bought a doll (a doll!) for $115.00 before taxes and the store won't put it in a bag for me unless I pay another $0.07?  The analyst in me made me think American Girl (and Mattel) must be hurting if they're not willing to assume the cost of a shopping bag on the heels of a $115.00 purchase.  It also registered with me that it was likely a little coincidence that the store was empty in the current environment given its high starting price points.

I am anxious to see Mattel's next earnings report.

Now, the gift I bought my wife for our 15th anniversary was a tad more expensive.  The catch is that I didn't buy it in a Michigan Avenue store.  I browsed several stores, but ultimately I opened a browser and bought her gift online where the price-quality dynamic sparkled more than what I was seeing in the stores.

My recent shopping experience is an anecdotal one, but considering myself an average consumer, I don't think it's a foreign one for most consumers.  We'll pay up on special occasions, but at the end of the day, low prices fuel our discretionary spending appetite, especially when they get matched with higher-quality items.

Amazon's Prime Day was a perfect example of that and a stark reminder of the uphill battle the brick-and-mortar retailers are facing.

What It All Means

Amazon's Prime Day actually lasted 30 hours.  It was held on July 11 and it soon became Amazon's biggest sales day over surpassing the sales made on Black Friday and Cyber Monday.  It did so with "incredible deals" that only its Prime members could take advantage of — and tens of millions did according to Amazon.  Many were brand new members, too, as July 11 saw the most new Prime memberships than any single day in Amazon history.

Retailers did what they could to attract customers on Prime Day with big sales of their own, yet Amazon ruled the day.

The success of its Prime Day, which has become an annual event, exposed some inconvenient truths for the retail industry:

  • It will never have true pricing power for any extended period of time
  • Brick-and-mortar retailers need to expedite their shift to e-commerce, close more stores, and increase their marketing efforts
  • Customer loyalty programs need to be enhanced
  • The initial markup on merchandise needs to be marked down (perhaps a lot) as sale signs advertising 50%, 60%, and 70% off provide a visual cue for consumers that suggest they are getting fleeced paying full price in stores
  • Trying to price match Amazon will more often than not come with a price of reduced profitability

Having said all of that, Amazon's share of the retail sales pie still isn't a monstrous one.  In the first quarter it recorded net sales of $35.6 billion.  In comparison, Walmart recorded first quarter net sales of $117.5 billion.  

Walmart is effectively the low-price leader in the brick-and-mortar world, but it sure is putting a whole lot of effort and money into winning that label in the online world as well.  One can see then how pricing power is likely a thing of the past for most retailers when the world's biggest retailer feels threatened by Amazon whose total net sales are roughly 70% less (but growing quickly) than its own.

Amazon is a dynamic company with monstrous mindshare right now.  It's in the mind of every retailer who fears its growing influence; it's in the mind of a growing cache of consumers who see it as a conduit to low prices and convenient shopping; it's in the mind of investors who have driven the stock to an all-time high this year.

Amazon

Amazon has left a host of fallen stock prices in its wake in the retail industry, leaving many to wonder if the fallen retail stocks are value plays right now or simply a value trap. They will likely prove to be good trading vehicles, but with the competitive dust that Amazon has kicked up, the investment road ahead for most brick-and-mortar retailers isn't clear.

It seems Amazon's biggest obstacles right now are the high expectations surrounding it and the capitalist principle that excess profits attract increased competition.  Amazon is still doing the chasing in many respects, but at the same time, it is also being chased more and more because it has made a name for itself as an industry disruptor and a market share thief.

Amazon's rise has been magnificent and its influence can be felt in the "sale" signs throughout the country and along The Magnificent Mile that have led all consumers to do a discount double check.

Now, if only Amazon could work its magic to lower the cost of an American Girl doll.

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About Patrick O'Hare

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