Four Ways to Compete and Win Against Amazon

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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 2017 it generated revenues of $178 billion.   Long known for its focus on growth over profits its investments are paying off.  Amazon generated record net income of $2.5 billion in the second quarter of 2018.  While still relatively small it is telling that Amazon’s profits are driven by its non-retail businesses: Amazon Web Services and 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.   From providing customer service that keeps customers coming back for more to using artificial intelligence to figure out what customers want, these retailers are winning.

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 in order 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.  300 advisors across the US travel to customers’ homes to provide the service.  

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. Best Buy also provides support for appliances and tech devices even if the product was purchased outside of Best Buy. Subscription services are a great way to provide recurring revenue and provide an incentive to purchase additional products and services.  With over 100 million Amazon Prime members, Amazon can attest to the benefits of this type of program. In 2017 Best Buy’s comparable sales were strong, up 5.6% over 2016 and in the second quarter of 2018 comparable sales were up 6.2%.

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 feel 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 80 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 the 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, made nearly $1 billion in 2017 and has nearly three million active customers in the US.  In the third quarter of 2018, Stitch Fix's net revenues were up 29%. 

3. Risk or opportunity? Kohl's embraces change by partnering with Amazon

Kohl's put 1,000 sq. ft. Amazon Smart Home Experience stores in 10 of its locations in October of 2017. At these stores customers can buy Echos, Fire TVs, Kindles and more.  During the same month 82 Kohl's stores began accepting returns of items bought at Amazon.  The goal of these initiatives for Kohl's is to increase traffic.  Kohl's comparable sales, in the last two months of 2017 after they launched these initiatives, rose 6.9%.  In the second quarter of 2018 Kohl's revenue was up 4%.  

Partnering with Amazon is not without risk. Toys “R” Us signed a 10-year deal with Amazon in 2000 to be the exclusive vendor of toys, games and baby products on Amazon.com.  Not long after the deal was in place Amazon decided it wanted more competition on its website and allowed other vendors to sell on its site. Toys “R” Us sued Amazon in 2004 for breach of contract and a settlement was reached in 2009 where Amazon paid the retailer $51 million. 

 Photo credit: Kohl's

Photo credit: Kohl's

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 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.  

The shipping battles continue with Walmart offering free two-day shipping on orders over $35.  Unlike Amazon Prime where two-day shipping is free as part of the membership there is no subscription fee to access Walmart's service.  Finally, in an attempt to compete with Amazon’s Prime Now free two-hour delivery service (only on selected items), Walmart offers curbside grocery pick up at 1,200 stores and an additional 1,000 stores will be added by the end of 2018.  Walmart’s strategy is working, its US eCommerce sales grew by 44% in 2017. In the second quarter of 2018 Walmart's US eCommerce sales were up 40%.  

Call it personalization or enhanced customer service what the strategies from Best Buy and Stitch Fix have in common is the focus on an individual customer and their specific wants and needs.  It may sound easy to execute but it is not.  The retailers that are able to do this have an advantage.  As Walmart and Amazon continue to battle it out in delivery the fallout is new industry standards that are challenging to meet.  Finally are the risks of partnering with Amazon worth the rewards? Only time will tell. Out of all of this the customer is the clear winner which is good for everyone.
 

Check in weekly for articles on digital transformation and customer experience innovation to learn what strategies businesses are using to accelerate their sales growth.

Sources

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Tricia McKinnon