Beyond the drone hype, leveraging Amazon’s success will be the key differentiation between brand winners and losers as the digital revolution completes its march down the grocery and other retail aisles. One of the best articles I’ve ever read about Amazon was recently written by a former employee, Eugene Wei in Salon.com. If you are an investor or consumer products producer, this is the must read article explaining in a deep way the nature of the greatest force in retail outside of Apple. (In fact they are quite symbiotic but that’s for another post…)
Amazon is often criticized for not making a profit. Wei clearly explains that you need to follow the cash flow which is positive and reinvested in growing the business. Of course cash flow is harder to follow than the simple p&l statement so not many take the time. We are firm believers that Amazon is THE force to be reckoned with in retail.
How Amazon Impacts Retail Businesses
How will their success impact our business? The article does not touch upon it, but packaging and pricing by retail channel are critical issues to address. The key for us is developing packaging and products that ship efficiently. It’s that simple. Heavy and cheap does not make online profits. Light and expensive works. So bar soap wins over body wash. Laundry Pods crush traditional bottles of heavy laundry detergent. Think higher price per pound as the guiding principle.
When you include the fees associated with channels such as Grocery and Drug, Amazon is cheaper and can deliver the customer a BETTER value than Grocery and Drug distribution channels. Then it’s easy to pass along the savings except…….. After packaging concerns and savings relating to the online world’s unique supply and delivery model, the greatest hurdle for both the P&Gs of the world and smaller companies such as ours, is to price product effectively on Amazon without incurring the wrath of existing customer base in the legacy retail channels.
Smaller Businesses Gain Market Share
The need to protect legacy (and dying) distribution channels is the Achilles heel of the larger companies. It creates an enormous opportunity for younger companies (like ours) to gain market share by selling Amazon and or other online retailers (including the rising Walmart.com) items that ship efficiently and are substantially discounted without regard to prices offered in the “legacy” Drug and Grocery retail channels.
We are not as dependent on these channels. Because Grocery and Drug are extremely inefficient with their pricing and slotting fees (the legal bribe to get onto the shelf), our lower price on a direct to retail site such as Amazon is not at the cost of lower margins because we remove many of the affiliated costs associated with certain of these legacy channels.
Adam’s Smith’s invisible hand is still ever-present and helpful to those who can leverage these enormous trends in the jungle or, more appropriately, in the “Amazon”!