Future Forces: The Amazon effect

Center store profits could be at risk as consumers do more of their research and buying online.

By Patrick Kiernan

As our industry continues to change and thrive, Amazon could easily be dismissed as yet another retailer using grocery items as loss leaders to attract customers. Others might suggest Amazon is just another category killer to books, music and electronics. Certainly our industry has nothing to fear from this new competitor, having survived the Walmart effect and numerous category formats such as Petco, Trader Joe’s, Aldi, dollar stores and Big Lots. But what if e-commerce is not a channel, but rather a new way that shoppers think about their purchase decisions?  While we still think about category management and shopping occasions, e-commerce retailers have added “path to purchase” to their shopper knowledge.

Several years ago, I wanted to buy a new truck. However, my path to purchase did not start with a test drive at the local dealer. In late 2008, with General Motors in bankruptcy and my GM MasterCard sending me emails that I had maxed out my reward dollars, a new purchase model emerged.

My first step was to go to the Consumer Reports website for reliability information on GMC trucks, followed by a review of the GMC web site to see truck inventories for just the right model. Then I visited Costco’s website for additional member discounts. The final step in the process was a visit to the dealer, who actually had no part in the purchase path except to take the check and hand over the keys at a 40% discount.

The grocery industry is built on a foundation of product and distribution knowledge. Amazon is building its brand on customer knowledge. Black Friday and Cyber Monday, despite their success, are retail inventions that move merchandise without Amazon’s customer intimacy. Yes, “bricks and clicks” are important if one-stop shopping is to remain a retail goal. Certainly, the eBays and Amazons will test seasonal pop-up stores with QR codes but no registers—just electronic sales.

Based on a recent Symphony IRI Times & Trends report, we still seem to think path to purchase is merely an escalation of channel and consumption migration between the bricks while Internet shopping is seen as merely coupon searches. Yet, on-line purchases of consumer packaged goods are expected to more than double to $25 billion by 2014. While we build more bricks, Amazon buys more clicks such as Diapers.com and Soap.com.

Amazon continues its mission to be the earth’s most customer-centric company and is on a pace to become a $100 billion sales company. It took Walmart 18 years to reach $1 billion in sales and Amazon only five years to do the same. Amazon’s growth pace can match Walmart to $100 billion by using the Internet and technology to create real value.

Today, Amazon competes with Apple’s iTunes for music, Barnes & Noble for books and Netflix for movies. Tomorrow, Amazon can hollow out many other retail formats such as Target and Best Buy in electronics as well as many center of the store grocery, HBC and Nonfood categories.

Amazon’s “Subscribe and Save” program began in grocery by offering 15% discounts on bulk club-size items. Next up are categories that represent high frequency auto replenishment. Think categories such as paper towels, diapers, formula, pet food and cleaning supplies.

What will happen to your center store profits and trips per month if Amazon Mom converts its targeted one million moms to a “subscribe and save” program?

CPG companies now see Amazon becoming a Top 10 customer in the next few years; a customer that does not deduct, divert or charge for unsaleables and requires no resources to maintain a retail presence. As the Amazons, eBays and Overstock.coms grow their sales of both shelf-stable fast movers, and “long tail” slow moving items, CPG companies will have to learn their customers’ path to purchase or face the same business threats as today’s retailers.

CPG companies are also awaking to both the need and opportunity to have a one-on-one relationship with every consumer worldwide. Procter & Gamble is on a mission to become the most technologically enabled business in the world by using digital technology to create indispensable relationships with its brands.

So as you head into this New Year, I would offer a few thoughts for your consideration:
Shoppers are changing their purchase decision process with new technology.

Center store profits are at risk in this bricks and clicks world.

Social networks such as Facebook, Twitter and Google+ may become new path-to-purchase competitors with their member relationships.

Free shipping equals be paid to shop.

Both high-research SKUs and “long tail” hard-to-find SKUs are moving to e-commerce.

Patrick Kiernan, managing partner of Day/Kiernan & Associates, is affiliated with The Center for Food Marketing at St. Joseph’s Uni­versity, Philadelphia; the Institute for the Future, Palo Alto, Calif.; and Encore Associates, San Ramon, Calif. He can be reached at KiernanPat@aol.com.

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