What is Amazon's strategy

The Amazon strategy

Amazon is putting all the competition in online retail in its pocket because the group is constantly reinvesting in technical innovations. The price for this: profitless hypergrowth.

Why do some businesses succeed while others fail? Retailers have been asking this question for generations, with different answers. At the end of the 19th century, architects were used. Successful retailers like Marshall Field built shopping palaces so grand that customers poured in on their own. In the early 20th century, mailing became the "killer app," with Sears Roebuck at the forefront of the movement. Towards the end of the 20th century, super-efficient suburban discounters like Target and Walmart took over the business.

Now the fight is being fought on the net. A winner cannot yet be clearly identified. Giants like Walmart and small retailers like Tweezerman.com all run their own websites to serve rapidly growing customer demand. In 2012, online retail in the US grew 15 percent - seven times as much as traditional retail. The price war, however, is merciless and the profits, if any, are minimal. This $ 186 billion market is like a poisoned gift: too big to ignore, too deceptive to get involved with.

Even the leader in the industry, Amazon, pursues a business model that leaves some at a loss. On the one hand, the online retailer has a turnover of 75 billion dollars this year. On the other hand, he's in the red: In the past quarter, Amazon posted a loss of $ 41 million. Founder and CEO Jeff Bezos does not contest that. When asked that Amazon was only profitable for a short period of time in 1995, he joked that it was "probably a mistake".

If you take a closer look, however, a strategy becomes apparent. Amazon is constantly shoveling money back into its business. This goes, for example, to the company's secretive research department, Lab 126, which works on the next-generation Kindle and other mobile devices. Amazon also spends a lot of money building the most modern warehouses, making customer service even smoother and developing other ideas that will further increase market share. Former Amazon manager Eugene Wei recently summed it up in a blog entry: “Amazon's core business generates a profit with every transaction. The reason you don't see it is that it is investing heavily in expanding the sales base. "

Most of the investments go into technology. Because for Amazon, retail is essentially a gigantic task for engineers. Algorithms determine everything from the way the digital storefront is set up to optimal delivery. Other large retailers, on the other hand, spend a lot of money on advertising and rely on a few hundred engineers to keep the business running. But Amazon is on a measly advertising budget while employing thousands of engineers who are hired straight out of college from MIT, Carnegie Mellon University, and the California Institute of Technology.

In the meantime, word of that has got around among the competition. Walmart, the world's largest retailer, opened a research center in Silicon Valley two years ago that is developing its own search engine. The group is also constantly on the lookout for startups to buy out. If you want to compete with Amazon, you have to do more than offer a digital shop window and an app. In order to take on Amazon's smooth supply chain, Walmart recently came up with the idea of ​​hiring customers in its shopping malls as deliveries for online customers.

The fact that Amazon is, and must be, an innovator is due to three deficits that it has in comparison to traditional retail: There are no shopping centers where customers can pick up the goods; there are no salespeople who can take care of customers; and there is no way for customers to take possession of their goods immediately after paying. Everything that Amazon engineers invent ultimately serves to make these fundamental deficits forgotten.

Amazon's growing patent portfolio shows how clever Amazon is. Since 1994, Amazon.com and its subsidiary Amazon Technologies have filed 1,263 patents. For comparison: Walmart has 53 patents in the same period. Every Amazon invention should make shopping on the website a little easier and a little more seductive, or at least help reduce costs.

One example is US Patent No. 8,261,983 for “generated customized packaging”, granted at the end of 2012. Dave Clark, who manages the Group's 100 warehouses, explains what it is all about: “We try to close packages with less and less air The idea of ​​packing everything in a bulky standard package and paying a few cents extra to the deliverer for it, Clark disgusts. Because with a billion deliveries, these extra cents add up to a handsome sum. Instead, Amazon has developed 40 different package formats and is still not satisfied with them. This is where the Amazon patent comes into play: When a customer buys a particularly strangely shaped product, software calculates the best way to pack it and produce the right box within 30 minutes.

It is very difficult to compete against it. Thousands of online retailers therefore prefer to book into the Amazon ecosystem. Companies like EasyLunchboxes.com have moved all of their inventory to the Amazon warehouses, where they pay a commission for the delivery of their goods and other services. This system is now developing into a highly lucrative business for Amazon, says Heath Terry, an analyst at Goldman Sachs. In 2014, Amazon will generate sales of 3.5 billion dollars from such delivery services. Terry estimates the value of this side business at $ 38 billion, or 20 percent of Amazon's market value.

It gets tougher when you step into the ring with Amazon. According to calculations by Internet Retailer, Amazon's sales exceed those of the next twelve largest competitors put together. The third largest retailer Target admitted this year in a government issue that "the digital revenues represent an intangible part of the total revenues". The best strategy for retailers who are also entering the online business is to look for niches that the top dog has not yet occupied. This includes "flash sales", with which one can surprise impulse buyers, or difficult categories of goods such as groceries online. Most newcomers to the market, however, lose money.

Meanwhile, Amazon's profitless hypergrowth is a problem in itself. The Amazon developers want to solve that too. For example, the “Buy this, too” patent from 2000 has been expanded to include almost a dozen additional ideas over the past two years in order to lure customers even more money out of their pockets. The shipping charges are one of the factors: you propose a paperback book to the customer, with the purchase of which he exceeds the threshold above which the shipping charges do not apply.

The idea is old in itself, even in classic shops the salespeople knew how to ask whether the customer might want a tie with a suit. However, in Amazon's 24/7 empire, this ancient strategy is taken to extremes with the precision of a game theorist. A few weeks before the start of the pre-Christmas business, Amazon announced that $ 25 would no longer be enough for free shipping. The new threshold is now $ 35. (nbo)

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