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.
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| 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
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
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 |
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.
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