It’s no secret that Amazon is the ecommerce titan. According to a 2020 survey, over half of U.S. adults say they begin their online shopping search on Amazon. But the larger Amazon gets, the more competition arises. Time and time again, history shows that big players have weaknesses. But with a little creativity other players can shape marketplace dynamics.
It’s not just possible but inevitable that retailers can thrive on Amazon and compete with it at the same time. If smaller brands and third-party sellers can get creative and replicate the same customer-focused digital experience, there is an opportunity to find a balance between competing with the giant and succeeding despite it.
Amazon: the Consumer-First Platform
Amazon has completely upleveled what a high quality ecommerce experience looks like for consumers. A business model that was only possible with their unparalleled investment in the systems and shipping, fulfillment and supply chain infrastructure to support it. Each time Amazon added a new feature or sped up delivery times, shoppers’ expectations for all online shopping experiences increased.
Since Amazon Prime’s inception 15 years ago, Amazon has only increased the annual membership cost three times — rising from $79 per year in 2005 to $119 in 2018. While a nearly 40% jump in price seems like a decent increase on paper, the membership value has never changed, and in fact continues to increase. The purchasing power of $79 in 2005 equals about $109.90 today, meaning that in terms of purchasing power, 2021 Amazon Prime members are only paying ~$10 more per year than they were 15 years ago.
The Amazon Effect also is reflected in the in-person shopping experience at brick-and-mortar retailers. One way we see this changing rapidly is the changing model of grocery stores. When Amazon acquired Whole Foods in 2018, analysts expected that Amazon would dominate the U.S. grocery market. Instead, we saw the competitive landscape continually innovate on integrating ecommerce with the in-store experience.
Ordering groceries online and picking them up the same day in the physical store became more and more common. Target, Walmart and Kroger quickly pivoted to start offering online shopping with in-store pickup or home delivery. Then the COVID-19 pandemic hit and stores everywhere pivoted to this ecommerce model. Now 60% of U.S. shoppers buy their groceries online, up from 36.8% the year after Amazon acquired Whole Foods.
But the Amazon Effect hasn’t been all positive for the retail industry, leaving some retailers behind. Brands that are unable to adapt or are less innovative — or even are in denial — have suffered the consequences. Some brands with less differentiation have found themselves more susceptible to unbranded competition on Amazon. The good news is that retailers have plenty of tools in their arsenal to innovate in order to deliver on the changing needs of their customers.
How Smaller Brands are Evolving to Compete
In their own adapt-or-die moment, brands of all sizes have had to innovate to find new ways to reach customers beyond Amazon. For smaller brands, Shopify has been a major driving force for enabling them to go direct to consumers easily, with some economies of scale. And it’s working — Shopify is now the number-two ecommerce destination in the U.S., behind Amazon.
While Amazon is a consumer-facing platform, Shopify is merchant-facing; enabling small businesses, mom-and-pop stores and brick-and-mortar stores to sell online by handling payment and inventory for the businesses. Emphasized in an article from the New York Times Magazine last fall, Shopify’s key to success has been putting the merchant first.
Third-party fulfillment and logistics companies also have emerged to support the burgeoning direct-to-consumer ecosystem. These companies, like Shipbob and Flexport, streamline operations and make ecommerce more accessible for brands. When a brand’s products are warehoused closer to the consumer, they save on shipping and logistics costs. By enabling faster and cheaper shipping, small brands have a better chance of competing with big players like Amazon than if they had to handle fulfilling and warehousing all their goods on their own. With the online checkout and payment flow handled by one vendor, warehousing and fast shipping handled by another, smaller brands are evolving to meet customer expectations and compete with Amazon.
Larger Companies Rely on Physical Stores for Last-Mile Shipping
For larger brands, competing with Amazon means making big investments in retaining customers both online and in their stores. For example, both Walmart and Target continue to utilize their physical store presence as an advantage. They both use their physical stores as fulfillment centers for online orders. Walmart even recently announced that they’re building what they call market fulfillment centers (MFC) — compact, modular warehouses built within, or added to, a store.
Target also fulfills and ships almost all ecommerce orders directly from their stores. Target recently announced that they fulfilled 95% of all sales (in-store and online) from its physical stores in Q1 2021. And 75% of online orders were either picked up in-store, curbside or shipped from a store. For Walmart and Target, their physical stores are a key part of their logistics plan, and it’s paying off.
Other larger brands have completely reimagined what the in-person shopping experience looks like. A few months before the coronavirus pandemic sent stores shuttering, Nordstrom opened its brand new NYC flagship store. With the new store, the retailer sought to combine the in-person shopping experience with the digital by offering services like 24/7 online order pickup and augmented reality makeup shopping. The massive investment shows that Nordstrom knows that their target consumers want the convenience of online, but still value the in-person shopping experience. Before this, Nordstrom also opened two mini-stores in NYC that were solely hubs for picking up online orders and processing returns.
All three companies are perfect examples of brands utilizing physical store presence to their advantage to compete in the digital space.
Walmart Marketplace as an Amazon alternative
Amazon itself sells more than 12M products, not including books or media. But when you include the products sold by third-party Amazon Marketplace sellers, the total product count jumps 2,841% to 353M.
Walmart sees Amazon’s success and wants to replicate it. Walmart Marketplace is the home for third-party sellers to reach consumers online. As of August 2021, there are over 100K sellers on the platform. While the platform doesn’t have nearly the same advertising and targeting capabilities as Amazon, that’s bound to change as Walmart invests in the technology. For now, it’s another way for brands to reach their audiences online.
Amazon Will Reign, but Marketplace Competitors Give Brands and Consumers Options
Looking ahead, analysts and investors alike expect Amazon to continue being the dominating force in the ecommerce space. But we need to keep our eyes on other sizable marketplace competitors that enable entrepreneurs to branch out beyond Amazon alone.
This increased competition, from companies like Shopify, Etsy, and Walmart Marketplace, will force Amazon to become more fair and advantageous to the seller (think fewer fees). But with increased marketplace competition, it will be more complicated for smaller businesses to manage the rules and landscapes of multiple marketplaces, so strong partnerships with those that can help them navigate each platform is key.
It just might really be the decade everything is available online, and this new era will usher in more opportunities for brands big and small. Amazon will always be a substantial piece of this puzzle, but the outlook is also strong for diversification.
Michael Ronen is the President of BRANDED. He is the former Managing Partner of the $100bn Softbank Vision Fund in Silicon Valley. Over the last three years Ronen has invested more than $5bn into some of the fastest-growing consumer and logistics companies such as Flexport, REEF Technology or Cruise. Before Softbank, Ronen spent more than 20 years at Goldman Sachs, becoming the Partner responsible for the operations of Goldman’s Global Technology Investment Banking Group. As an investor and board member, Ronen partnered with CEOs to help them scale up their businesses, raise capital and execute on ambitious targets.