Yes! Big Stores CAN Steal Share from Amazon

By Chris Marasco - November 27, 2012 | Tickers: AMZN, BBY, JCP, TGT, WMT | 0 Comments

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Take a look at this chart.

Online sales trends like this one have retailers Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Best Buy (NYSE: BBY) scratching their heads.  They are left wondering how they can overcome the inevitable: More and more consumers are buying their goods online.

Of course this is great for Amazon (NASDAQ: AMZN), whose $46.5 billion revenue in 2011 is a testament to consumers increasing online tastes.  To further cultivate those tastes, Amazon tried a smart strategy in 2012 – starting early.  Amazon ran a “pre-Black Friday” sale, and it is extending the sales season via its “Cyber Week.”

Amazon’s Strengths

Amazon has four key strengths that allow it to be the de facto retailer in the online space.

1. Lower Overhead – by automating its supply chain and using robots to handle its warehouses, Amazon keeps its overhead low.  This in turn keeps its prices low.  Amazon does have lower margins than Wal-Mart, for example, but it also owns a reputation for having the cheapest prices.
2. Pricing Algorithms – Amazon has pricing algorithms that can adjust prices in real-time.  Thus its prices can change far quicker than box retailers like Best Buy, Target, and Wal-Mart, because it doesn’t have to match Internet prices to physical store prices.
3. Personal Selling – Amazon’s algorithms act as personal sales representatives because they deliver personalized product results.  Did you read a book on options trading?  Then perhaps you might like this one also, says Amazon. 
4. Free Two-day Shipping – For just $79 per year, customers can receive their products within two days with free shipping, saving a physical trip to the store.  In addition, Amazon Prime throws in a nice content streaming package.

Retailers’ Solutions

Amazon is a formidable foe, especially considering that younger generations, who grew up with the Internet, are beginning to have increasing amounts of money to spend.  But don’t fear.  With sharp strategies, retailers CAN benefit from the online sales craze and steal share from Amazon.  Here’s how.

1. Design Exclusive Products – Not even Amazon can sell everything.  By making some products exclusive to their own stores, retailers can become the market leader in a specific niche.  General retailers like Target and Wal-Mart will have a hard time doing this, but clothing retailers like JC Penney (NYSE: JCP) can sell niche customer brands.
2. Copy Amazon – Amazon’s recommendations make its service very personal.  While retailers do recommend products, they can increase the relevancy of recommendations.  For example, if a consumer buys a Bluetooth device from Best Buy, it can explicitly recommend that the consumer buy additional units of the same product for family members.
3. 1-Day Deals – Why not include a little Groupon in the strategy?  Some retailers are experimenting with daily deals.  They should not make this a new business model.  Such a change would cause retailers to lose focus on their core business.  However, the retailers could grab additional revenue by targeting people of specific ages and genders that are most likely to use daily deals.  For example, retailers can use this tactic to move “clearance” merchandise from shelves and then market “impulse purchases” once consumers are already in the store.
4. Joint Venture – Target has been collaborating with high-end designers, like Neiman Marcus, to put new products in its stores.  Another example is JC Penney.  Penney cut its coupons in favor of consistent low prices, but the strategy is not working well.  However, it could see success if it continues to build specific brand stores, like Levi’s Jeans, within its overall store.  Then everyday low prices for niche items could draw more foot traffic.

Hard Battle

Fighting Amazon at its own game is never easy.  Tactics like starting Black Friday sales at 8pm on Thanksgiving and having one or two-week “Cyber Week” periods are great ideas.  But they only fight Amazon on its own turf.

To succeed in beating Amazon’s growing online presence, the retailers need to steal Amazon’s best tactics and then create new ones of their own.  Only then they can stop worrying about losing their hard-earned market share and stand a chance at beating Amazon at its own game.

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