The Shop Local Initiative: The Amazon Effect

This blog is the fourth of an ongoing series of featured posts on shop local initiatives in the United States.  This post, The Amazon Effect, reviews the effect of Amazon on small businesses and shop local initiatives.

Amazon is by far the largest online marketer in the world, with more sales than the next twelve US online retailers combined.  Using its market clout, deep-pocket financing, and aggressive price-cutting, Amazon dominated one market and forced hundreds of large and independent bookstores to shutter their doors.  Now, using the same approach they conquered the book business with, Amazon is pursuing millions of customers from neighborhood shops and suburban malls.

The Amazon Effect, a phenomenon whereby Amazon lessens the competitiveness of other retailers by providing the convenience and immediacy of cheap retail, is ubiquitous.  And what they did to books, Amazon and other large online retailers are doing to other items. For example, let's look at cameras.  Buying a camera from your local shop can cost you $100.  Buying from Amazon can cost you $80 plus free shipping.  Most consumers choose the latter and this is happening for products across the board.

People are using Amazon more and more to search for products in comparison to other search engines

The Amazon Effect is a threat to small businesses unprepared for the new competitive landscape.  Amazon has developed several competitive advantages:

1. Lower prices.  Amazon receives a government subsidy in form of tax breaks in the majority of states in which it transacts.  Amazon’s tax breaks have been key to its ability to offer lower prices.  The lower prices undercut those of local retailers who are obligated by law to collect city and state sales taxes.  Sadly, these tax breaks have shortchanged local communities by eliminating billions in tax revenues that cities and states desperately need for schools, infrastructure, parks, and other public services.
2. Convenience.  Being open 24 hours a day was not enough.  Amazon also offers its ‘Amazon Prime’ service which allows subscribers to receive their products in two days without any additional cost. This service coupled with its aggressive pricing and large selection makes Amazon a convenient choice for consumers to buy goods online as opposed to local shops.
   
3. Capital.  Amazon’s capital has been critical to its ability to market its own version of competitors’ products which it then sells at a loss in order to squeeze competitors, including many local shops, out of business.  In other cases, Amazon uses their capital to buy its competitors to eliminate competition.
4. Large customer base.  Many small businesses are attracted to Amazon by its database of 280 million customers.  But once in the Amazon marketplace, they face unrelenting pressure to lower what they charge Amazon for their products.  Many feel compelled to give Amazon much better deals than other retailers.  This pricing pressure erodes the profitability for these businesses.
5. Better SEO.  Many sellers rely on search engine optimization (SEO) to bring shoppers to their website and into their store.  Since Amazon has better SEO than most businesses due to its scale and capital, their version of the same products come up first in search results often with lower prices leading to reduced traffic and lost sales for other sellers.
6. Showrooming.  Showrooming is the practice by which people come to the local store to see and test the product but purchase it for cheaper online.  Amazon popularized this practice by offering rebates to shoppers who scan items at stores then buy from them online.  This predatory practice is draining the lifeblood from hundreds of local shops.
7. Product selection.  Amazon’s large selection of products makes it an easy place for consumers to shop.  Its large product selection is also altering consumers’ search behavior.  People are no longer just searching for items on Google.  In fact, many people aren’t using search engines at all to look for products.  Today, more than 30 percent of online shoppers begin their search at Amazon, freezing out potential competitive products.

Because of these highly competitive features, many small businesses fear that they will soon be pushed away by Amazon.  Sandy Piper is an example of one such merchant.  Sandy, a local jewelry and gift boutique merchant in Baltimore, said that because of Amazon customers are spending less in her shop and more on Amazon.  She fears that it may not be long before she is out of business.

This is the vicious cycle of less revenue and increasing expenses.  According to Ms. Piper, every time someone goes on Amazon that is a lost sale for a brick and mortar store.  She also mentions the problem of showrooming.  With all of these pressures, her sales have been cut by 20% - a huge loss for her business.

Amazons exponential increase in revenue comes at the cost of decreasing sales at small local businesses

Amazon’s recent announcement of same day delivery service will cause an even larger negative impact on local businesses.  Amazon subscribers can now purchase and receive their products on the same day, which negates the the need to come to a brick and mortar store.  Because of this, local stores may face sharper cuts in their revenues as more and more of their customers turn to Amazon.

How can local stores combat the Amazon Effect?  In the past, there were two main strategies that a store could use in order to combat the Amazon Effect.  The first is to sell products that aren’t available on Amazon.  This includes craft goods that are handmade and not mass produced in the market.  Having these unique items ensure that customers can only come to your store to purchase that product.

Athena battling the giant Alkyoneos

Second, local stores can create their own brand of products.. Here the seller can control the price and distribution strategy.  In many cases, the Amazon Effect will not have a large effect on sellers who operate in a niche market and offer a strong and diversified product.

While these strategies help, they simply aren’t enough.  Amazon recently launched Handmade, an artisan marketplace, to compete directly with Etsy.  This adds more downward pressure on local artisans.  Amazon's same day delivery service continues to squeeze local stores who aim to control their pricing and distribution strategies.  The end result is that these stores are still competing alone against a giant monolith.

Amazon always claims that the ‘future’ is closing local brick-and-mortar stores.  But the ‘future’ is not putting these businesses out to pasture.  Amazon is.

The real future for local shops is a seamless, multi-channel shopping experience that benefits local shoppers and their communities.  To get there, local shops need to control their destiny by banding together around a common alternative that provides a turnkey solution that truly levels the playing field while limiting Amazon’s competitive advantages.  Carpe diem!

Sources:
http://www.powerretail.com.au/pureplay/the-amazon-effect/
http://www.alternet.org/corporate-accountability-and-workplace/4-ways-amazons-ruthless-practices-are-crushing-local
http://money.cnn.com/2013/09/04/smallbusiness/amazon-expansion/
http://www.baltimoresun.com/business/bs-bz-amazon-impacts-small-business-20150321-story.html
http://gizmodo.com/5925387/how-amazons-same-day-delivery-plan-will-kill-your-local-stores
http://static5.businessinsider.com/image/5303db0b6da8111445054067-960/2014_02_13_amazon_01%20(1).jpg
http://www.ibtimes.com/amazoncom-retail-predatory-pricing-bully-tactics-squeezing-competition-retailers-1516554
http://marketingland.com/amazon-is-the-starting-point-for-44-percent-of-consumers-searching-for-products-is-search-losing-then-145647

#shoplocal #smallbusinesssaturday #pixiboard

About the Authors

Sean Brown is the founder and Chief of Pixan of Pixiboard and an advocate for making local commerce safe, easy and seamless for buyers and sellers alike.

Barisa Abidin is a marketing intern at Pixiboard and senior at University of San Francisco.

The Shop Local Initiative: The Thing About Demographics

This blog is the third in an ongoing series of featured posts on Shop Local initiatives in the United States. In this post we talk about demographic shifts and how shop local activities need to move with the times.

Over the past few years there have been many changes to the landscape of small business. For example, from 2007 to 2012 the percentage of business owners age 50 and older rose five percent to 51% while business owners age 35 to 49 fell from 39% to 33%. The majority of small business owners are getting older.

In addition, a study by Pew Research Center cited that only 65% of adults aged 50 and above use social media. That means that 35% of older adults have never used social media before in any capacity.  Small business owners are getting older and are less likely to engage in social media.

In the meantime, a large portion of today’s customers are Millennials (people born from the early 1980s to early 2000s). According to Oracle, Millennials will spend $2.45 trillion in 2015 and that by 2018 they will have surpassed baby boomers in spending with $3.39 trillion. Millennials are also relying more heavily on mobile to make their purchases. According to Edelman Media, 41% of them make purchases on mobile devices. For Millennials, the smartphone has become the new hub of shopping.

Making matters more complex, Millennials are not as susceptible to advertising as previous generations. A staggering 48% of Millennials rely on casual conversations with friends, view postings on social media such as Facebook, read shout outs on places like Twitter, or just 'google' names on the internet before purchasing a product. Sixty-two percent of Millennials actually want to engage with the brand on social networks (alas, not so much for the older generations).

According to Forbes, this hyper-social behavior creates extreme brand loyalty. Social media is an important part of advertising and promoting business. Not using it for your small business puts you at a huge disadvantage in today’s competitive market.

However, not many small businesses are ready to take advantage of the spending power of the Millennial demographic. According to the Small Business Association, 93.3% of small businesses websites are not mobile compatible. This makes it difficult for the average Millennial to shop for your goods on their mobile device.

While you are digesting those numbers, think of the other struggles the small business demographic is facing. More than 22 million of the 28 million small businesses in the U.S. are self-employed and have no additional employees. They are known as non-employers. These individuals form about 75% of all U.S. businesses and are continuously growing with approximately 543,000 new businesses starting each month.

However, this growth is not necessarily a positive sign as more small businesses shut down than start up each month. The new businesses that are popping up are essentially just replacing the ones that have closed down.

Forbes pointed out that 7 out of 10 new employer firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more. Half of all new businesses tend to close down after 5 years, which is not a sustainable number for a continuously evolving economy. These businesses shut down for many reasons including competition, lack of sales, lack of awareness, and, most importantly, lack of customers. Larger e-commerce companies are kicking out these small businesses by creating better deals or a better convenience!

So how can small businesses make themselves more attractive to Millennials?

First, they need to get online.  According to the marketingtechblog, 8 out of 10 small businesses do use social media to drive their business and gain new consumers. Digital is becoming a crucial part of the shopping experience and businesses need to be in position to engage consumers where they want and at any time they want.

Second, they need look for a cost effective way to create a mobile presence.  Many small business owners simply turn away from going online because it is too complicated or it is too complex or they think local foot track will keep them going.  By engaging online, small businesses will be able to further their sales, increase awareness among the Millennials, and remain competitive.

The one constant in this world is change.  Today's demographic is tomorrow's statistics. Small businesses need to continue to react and evolve to their ever-changing customers and a solid online and social media presence is a great way to keep up with your demographics.

Sources:
http://www.forbes.com/sites/jasonnazar/2013/09/09/16-surprising-statistics-about-small-businesses/
https://www.americanexpress.com/us/small-business/openforum/articles/small-business-owner-demographics-are-changing-sba-report-says/
https://www.sba.gov/content/demographics
http://www.pewinternet.org/data-trend/social-media/social-media-use-by-age-group/
http://www.forbes.com/sites/danschawbel/2015/01/20/10-new-findings-about-the-millennial-consumer/2/
https://smallbusiness.yahoo.com/advisor/22-shocking-stats-millennials-help-chart-tomorrow-change-112531305.html
https://www.marketingtechblog.com/2014-statistics-trends-businesses-social-media/
http://www.slideshare.net/DataNCharts/slideshare-online-vs-offline-word-of-mouth-what-drives-consumer-purchase-decisions

#shoplocal #smallbusinesssaturday #pixiboard       

About the Authors

 Sean Brown is the Founder of Pixiboard and an advocate for making local commerce safe and seamless for buyers and sellers alike.

Barisa Abidin is a marketing intern at Pixiboard and a senior at University of San Francisco

The Shop Local Initiative: Why Shop Small Saturday is Not Enough

This blog is the second of an ongoing series of featured posts on Shop Local initiatives in the United States.  This post, Why Small Business Saturday is Not Enough, reviews the limits of current efforts.

Small Business Saturday (SBS) is a shop local initiative that is done in many cities to promote the local businesses in the area. SBS was created by American Express in 2010 to help local shops get more customers.  Targeting the Saturday after Thanksgiving, it serves as a counterpart to Black Friday and Cyber Monday.

Black Friday and Cyber Monday feature big box retail and e-commerce stores respectively. By contrast, SBS encourages holiday shoppers to patronize brick and mortar businesses that are small and local.  Shopping small and local leads to a number of benefits for the community, as depicted in the graphic below.



Source:CapeGazzette.com

For example, many small businesses experience an increase in their sales and customer base through the yearly SBS initiative. BeBodySmart.com, an eCommerce retailer that sells athletic apparel and fitness equipment, reported an increase of 900 customers due to Small Business Saturday. Other stores such as Kidz Enterprise Toys increased their sales by 126% due to the initiative.

However, SBS does have its limitations.  First, SBS only takes place once a year.  While traditionally Black Friday was when many businesses finally turned a profit, businesses would like to spread sales out year-round.  Second, the initiative exclusively features only small businesses that accept American Express.  Many small businesses do not carry American Express due to higher transaction fees or can’t afford to give rebates to new customers to promote the event.  Finally, for those who participate, much of the sales activity and interest disappear once the SBS promotion ends.  It would be nice to have customers think about local stores all around the calendar.

So what is next?

Is the SBS initiative alone really is enough to continuously support small businesses?

If so, how can this initiative be expanded to include more small businesses?

To answer those questions, we must understanding the factors currently at play.  Small businesses face tough challenges today due to competition from large retailers that have expanding in major cities and towns and online retailers that are open 24x7.  These "mom-and-pop shops" depend mostly on word of mouth and actual store visitation in order to make profits, which is different compared to other major retailers who use online ads and personalized websites to promote their products successfully online.

In 2015, 21% of the revenue from the $63.5 billion online advertising industry is coming from the retail sector.  This shows that large retailers are spending a good chunk of their resources on advertising their products online and thus effectively pushing the “little” guy out of the market.  At the same time, only 51% of small businesses have a website online.  And 93.3% of those small business websites are not mobile compatible.  Small businesses are losing out to larger retailers due to the lack of online presence and awareness!

Small businesses need to have the tools to fight back.  To expand participation and frequency of the SBS initiative the following steps must be taken:

• Offer cost-effective, online marketing capabilities that enable small businesses to promote their brand/products to compete with online retailers
• Democratize and simplify the ability to create online storefronts enabling all small businesses to have a web/mobile presence
• Create a new medium that make it easy for consumers to find small businesses in each market regarding of which channel they use
• Create a transactional platform that allow small businesses to participate regardless of what credit cards they accept
• Expand/create a new small business initiative to encourage local purchase on monthly or weekly basis

Small Business Saturday and other similar campaigns are great initiatives that bring meaningful impact to small, local businesses.  But they are only a start.  These initiatives must be improved upon and expanded in order to compete with the aggressive advertising tactics of large retailers and the encroachment of online retailers.

By expanding the SBS initiative and helping small businesses create an affordable, seamless, cross-channel presence as suggested above, businesses can ensure that they reach potential customers who can only be tapped online or start their shopping experience on the internet.  In doing so, small businesses can create a sustainable customer base which will allow them to operate and help their communities for the years to come.

So in the spirit of Small Business Saturday, go out there and support your local businesses today!

Sources:

http://www.connectionnewspapers.com/news/2014/nov/19/editorial-why-shop-small-shop-large-locally/

http://blog.wedeliver.us/wedeliver-for-business/what-we-hate-about-small-business-saturday/

http://grasshopper.com/resources/articles/small-business-saturday-statistics/
http://www.statista.com/

#shoplocal #smallbusinesssaturday #pixiboard

About the Authors

Sean Brown is the Founder of Pixiboard and an advocate for making local commerce safe, easy and seamless for buyers and sellers alike.

Barisa Abidin is a marketing intern at Pixiboard and a senior at University of San Francisco.