L2 Announces Amazon Prime Model Analysis

L2 on April 21, 2017, announced availability of its latest business intelligence analysis:  “Amazon Intelligence:  Prime Assortment.”  “Amazon Prime’s industry-leading fulfillment services are changing how consumers shop for everyday items, encouraging replenishment and subscription-based shopping across a wide range of CPG categories,” L2 said. “By tailoring their distribution strategies on the platform to focus on Prime members, brands can significantly boost their visibility, win customer loyalty, and promote recurring conversions,” it told its members.

Cooper Smith, Director of Research at L2 (https://www.l2inc.com/), at the recent PostalVision 2020/7.0 event referred to Amazon as the “fourth horseman,” telling the audience that Google, Apple and Facebook are the other three.

Holiday Great for Amazon…but Not For All Large Retailers

Referring to the 2016 “holiday carnage,” Smith said that while Amazon had its best holiday season ever, that was not the case for a lot of large retailers.  Typically this is a period when they go from red to black, but even the holiday sales are not saving many large retailers, he said, and things are even worse for Macy’s, Kohls, J C Penney, Hudson Bay and others, Smith said.  What is the force causing this?

Smith said ecommerce is growing 16% year to year, with top ecommerce companies like Amazon – as well as its third party market place – growing just as fast.  And Amazon’s Prime subscriptions are growing at 43% year over year.   Comparing the 5- and 10-year stock appreciation of Amazon vs. other large retailers, Amazon is the outlier in terms of growth.

Amazon is now America’s Retailer

“Amazon is now Amercia’s retailer,” Smith said, showing slides comparing year to year ecommerce growth of Walmart vs. Amazon and the percent of Americans who shopped at Amazon vs. Walmart.  Smith said to better understand Amazon, one needs to understand that what they care about is not net profits (which are modest compared to Walmart), but the share of the consumer’s wallet.   Amazon focuses on capturing more of that share, and works to condition customers to come back over and over.

L2 on the Amazon Prime Model

“Loyalty drives repeat customers,” Smith told the PostalVision audience, noting that Amazon now has over 300 million active customers, which it retains from previous years and adds to.  Amazon focuses on building loyalty through convenience, which it establishes in 3 ways, Smith said – by price, by selection, and by convenience.

Under convenience, Amazon offers customers fast, cheap and convenient fulfillment with tactics such as one-click buying, and Echo which Smith said is like a cashier in your house.  By price, Amazon beats Walmart in many categories.  In terms of product selection, Amazon in 2016 had over 405 million products online, compared to Walmart’s 16 million.

Amazon’s Prime subscription combines convenience, price and selection to drive consumer behavior, Smith said, because consumers sign up for prime, which is a loyalty program that then gives them the most convenience, best prices and best selection.  “Prime is a very effective loyalty program in retail,” he said, “because once you sign up, you are less likely to shop elsewhere.”

C Smith slide on loyalty

The percentage of Amazon prime members cross-shopping at other ecommerce retail sites is much lower than that for non-Prime members (see slide).  And Amazon has a lot of Prime members – about 65 million according to its Quarter 4 2016 filing, Smith said.

And Prime revenue offsets other cost centers for Amazon, Smith told the PV2020 group, reporting that in 2016 Amazon received $6.4 billion from Prime subscriptions, to offset $16.2 billion in total shipping costs.  He said Amazon also uses other cost centers to offset its costs.

 

The eCommerce Tipping Point

Smith said that in predicting what ecommerce product categories Amazon will go after, L2 thinks 20% is the tipping point – once the product category reaches 20% of sales online, that is when Amazon pursues it.  So what product groups are likely to come next?  Smith said L2 predicts jewelry, apparel and footwear.

Amazon Set to be Apparel eCommerce Winner

Smith said he believes that this will be the year of apparel ecommerce in the U.S. and “Amazon is set to be the clear winner.”  Looking more closely at apparel, Smith said that in looking at Amazon vs. Nordstrom, more than half the brands on Amazon are also sold by Nordstrom.  Using jeans as an example, Smith noted that the top retailers selling the top 10 most-searched jeans brands on Amazon include Macy’s, JC Penney, Kohls, Sears, and others.

Smith said that looking at the top best-selling Amazon apparel listings by category reveals low to mid-end price range products, so L2 thinks retailers the most susceptible will be department stores like Sears, Kohls, and others.  “The market is still young,” Smith said, noting the fairly low percentage share Amazon currently has in best-selling clothing categories.   He said consumers shop on Amazon for apparel differently, in that people search for specific brands for some clothing categories.  For non-branded search terms, consumers most use gender, style, size or color/material.

Amazon is also working to become its own clothing brand, Smith said, with manufacture of its own branded clothes such as men’s shirts, bras, etc.

In Conclusion

Smith told the PostalVision 2020 crowd that L2’s key findings in this analysis is that Amazon is U.S. ecommerce at this point, and that it cares more about capturing customer spending and building loyalty than it does about margins.  Not all product categories are equal when it comes to ecommerce disruption, Smith said, and to better understand the market is to better understand Amazon’s strategy.  Lastly, he said, when it comes to partnering with Amazon, there’s a thin line between “friend” and “enemy.”

“Our advice to brands,” Smith told the group, “depends on which of the 3 types of relationships they have with Amazon.” Those include: first party sellers, who keep products in Amazon’s warehouses and sell on Amazon.com; third party sellers who sell on Amazon.com but do their own fulfillment; and wholesale sellers who are required to fulfill through Amazon.  Amazon is incenting brands to sell wholesale through them, making their products automatically eligible for Prime.  Third party seller products can’t be eligible for Prime unless Amazon says so.

“I would not try to out-Amazon them if you are in product categories past that 20% threshold,” Smith advised, noting that retailers with the best chance are those in grocery/supermarket categories.  For Walmart, 50% of its sales are groceries and they have a large fulfillment operation.  Amazon is only dipping its toes in groceries, Smith said, with only 5% or less of online grocery sales.  But Amazon’s Go concept stores will be game changers, he said, noting that Amazon’s brick and mortar efforts are further along than people think.  Groceries are the largest market in U.S. retail spending, he said, but compared to other categories, there is time for Walmart to replicate what Amazon is trying to do.

“This will be a great year to watch what Amazon does in this space,” Smith told the PostalVision 2020 audience at the recent event.

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