How Best Buy, Walmart and Other Retailers are Competing Against Amazon
By Tricia McKinnon
This is the first part of a three-part series on how retailers can compete better with Amazon. This article focuses on four companies that have implemented winning strategies. Part Two looks at Alibaba and how its tech. investments provide insight into what the future of retail will look like. Part Three focuses on what recent product and service launches from Amazon say about its future priorities. You can read Part Two here and Part Three here.
From its humble beginnings as an online book retailer to the everything store Amazon continues to evolve. It is the first search engine that consumers use when searching for a product. It also has 200 million monthly website visitors and in 2018 it generated revenues of $233 billion. Long known for its focus on growth over profits its investments are paying off. Amazon generated record net income of $10 billion in 2018. It is telling that Amazon’s profits are driven by its non-retail businesses: primarily Amazon Web Services as well as advertising. In spite of Amazon’s growing dominance there are a number of strategies that retailers are using to thrive in the midst of dizzying change and innovation.
1. Customer service – the gift that keeps on giving at Best Buy
To compete more effectively with Amazon Best Buy recognized that it needed to improve its customer service. After Best Buy’s CEO, Hubert Joly, joined the retailer in 2012 he increased the quantity and quality of Best Buy’s store labour and trained employees in new categories such as virtual reality and smart home appliances to provide better service.
Best Buy also realized that with the fast pace of technological change that customers needed help determining what products to buy. In recognition of this in September of 2017 Best Buy expanded its In-Home Advisor program to all major markets in the US. Customers using this service can get advice for free on which technology products to buy and how they should be installed. Over 500 advisors across the US travel to customers’ homes to provide the service. By the end of 2018 these advisors provided more than 175,000 consultations. The revenue generated per order for Best Buy from these interactions is much higher than from online or in-store.
Finally, Best Buy launched a subscription service nationwide in April of 2018 called Total Tech Support. The service costs $199.99 per year and allows customers to receive unlimited Geek Squad support across several touch points including online, in-store, over the phone and through Best Buy’s app. Service is available 24/7. Through this service Best Buy also provides support for all of the tech within a customer’s home even if the product was purchased outside of Best Buy. One million customers signed up for the service by the end of 2018. Subscription services are a great way to provide recurring revenue and provide an incentive to purchase additional products and services. Best Buy’s same store sales increased by 4.8% in 2018.
2. Stitch Fix – taking personalization to the next level
One of Amazon’s strengths is the depth of its product offering. But it is also one of its weaknesses. The sheer depth of its offering makes the customer experience on Amazon rather impersonal. Personalization, the ability to provide customers with more tailored experiences can be difficult to achieve. However, Stitch Fix, the online personal styling company has done a great job of using artificial intelligence to provide personalization on a mass scale.
To get started with Stitch Fix customers complete a detailed online questionnaire. The questionnaire covers a wide range of areas to provide an understanding of the customer’s style, size, price preferences and how often they need new clothing for various occasions (i.e. work, dates, events etc). It employs over 100 data scientists with Phds in areas such as math, neuroscience, statistics, and astrophysics. Using over 85 meaningful data points provided by customers, merchandising algorithms based on artificial intelligence are built and used to make personalized clothing recommendations for each customer. Then, enter personal stylists who add an essential human touch. They can override the recommendations made by the algorithms.
Customers then pay a $20 styling fee (no subscription is required). Five clothing items are sent to the customer and if they like them they can keep them, if they do not, they can return them for free. Stitch Fix, founded in 2011, generated $1.2 billion in revenue in 2018 and has nearly three million active customers in the US.
3. Ulta Beauty’s assortment and stores keep it a step ahead of the competition
UBS once commented that Ulta Beauty is one of the “best growth stories in retail” and it was right. With the exception of 2018 where Ulta Beauty grew by a “mere” 14%, Ulta Beauty’s sales have grown by at least 20% nearly every year for over a decade. In the first quarter of 2019 Ulta Beauty’s comparable store sales were up 7%.
The power of the right assortment cannot be underestimated. While the beauty industry has historically sold mass and prestige beauty products through different channels (i.e. high end vs. low end) consumers tend to shop high-low with 77% of beauty enthusiasts purchasing both mass and prestige products. Ulta Beauty has capitalized on this trend or some might say it created it by selling both mass and prestige beauty products within its stores. Speaking about Ulta Beauty, Fabian Garcia, CEO of Revlon, said: “[Ulta Beauty] has completely debunked the old notion that you were either prestige or mass.”
Ulta Beauty’s loyalty program, Ultamate Rewards, has 32 million members, which is double the number of members enrolled in Starbucks’ popular loyalty program. While many companies have a loyalty program how many can say that nearly all sales are linked to it? In 2018 Ulta Beauty’s loyalty program members drove a whopping 90% of the retailer’s sales. For comparison, members of Starbucks’ loyalty program represent 40% of the retailer’s transactions. Ultamate Rewards members receive one point for every dollar they spend.
Perhaps Ulta Beauty should be called the department store for the beauty customer. In addition to selling beauty products Ulta Beauty also provides customers with many services such as in-store hair salons. These salons are a driver of foot traffic with salon customers making twice as many trips to an Ulta Beauty store as those who do not use the service. Customers can also get their brows or nails done, get a facial, have a bikini wax, get new eyelashes or have a make-up consultation all within one visit. These services are a powerful draw for Ulta Beauty and help to Amazon proof the retailer since customers must travel to a store to take advantage of them. Ulta Beauty plans to open 80 stores in 2019.
Finally, Ulta Beauty also prides itself on its many exclusive brand partnerships that are not available at competitors such as Sephora or Amazon. For example, it has an exclusive deal with Kylie Cosmetics. These partnerships attract new customers and keep customers coming back for more.
4. Walmart is trying to beat Amazon at its own game
Walmart is running headfirst at Amazon, or at least it is trying to. After suffering its first decline in sales in 2015 since 1970, Walmart entered into attack mode. It purchased a host of eCommerce businesses including Jet.com for $3 billion, Bonobos for $310 million, Eloquii for $100 million and ModCloth for between $50 million to $75 million. In addition to getting Marc Lore, an eCommerce visionary, out of the Jet.com transaction these brands allow Walmart to cater to a more upscale consumer that might typically shop at Amazon.
Walmart is also making a concerted effort to drive more traffic to its website by adding more third-party sellers. Since Walmart’s marketplace is not as crowded as Amazon’s individual sellers have a better chance at getting noticed. Between 2016 and 2017 Walmart went from having 10 million items on its website to having 50 million. Lord and Taylor products are also sold on Walmart.com now.
Finally, in an attempt to compete with Amazon’s fast delivery service, Walmart added curb-side grocery pick up at 1,000 new locations in 2018 and now the service is available at 2,100 stores. Walmart’s strategy is working, eCommerce sales grew by 40% in 2018.