Community Economic Development Fund

amazon

Be ready to wrestle the bear

In recent months, this column has addressed competition with Amazon from a couple of different perspectives. While current statistics still show the majority of sales on the site are made by third party sellers (who might actually be a small business owner),there’s a conspicuous trend toward the giant taking over more and more of the pie.

This New York Times article detailed the challenges, frustrations and dependencies that come along with selling through the platform. I can think of two clients who have fought the bear and walked away after being bitten.

One client, selling a proprietary product directly to Amazon and on the site through approved dealers made the hard choice of cutting off the grizzly. You see, Amazon won’t agree to minimum advertised price (MAP) policies and instead it makes sure it “wins the box.” That is, by showing the lowest net price it places its own listing ahead of other sellers.

This results in the price of the merchandise spiraling downward, undercutting the dealer network. So, our client effectively walked away from millions in future Amazon purchase orders to protect the integrity of its primary distribution chain. Who can blame them? How can you justify betting it all on one outlet (even one named Amazon) when the dealer distribution chain that helped you grow your business would be at risk?

Another client who manufactured personal care products found his supply chain leaking. He suspected a distributor was selling merchandise to unauthorized dealers who were reselling on Amazon and undercutting the brick and mortar dealer network. While this diversion wasn’t Amazon’s fault, our client hit the Amazon brick wall trying to get help to control it. He worked for months to prove to the Amazon bureaucracy that he owned his own trademarks and was classified in the right merchandise category and therefore qualified to invoke an Amazon policy that would allow him to shut off those unauthorized sellers. Business is tough when you can’t get anybody on the phone to discuss your protests. Eventually, this client realized that even selling direct to Amazon was no dream. For every item purchased by one Amazon warehouse, another would ship back his unsold goods. The slow payments and return fees effectively canceled each other out.

Now, if you’re thinking of making a late entry for your business into e-commerce, don’t be discouraged just because Amazon seems to outsell the next seven largest competitors combined (yes, including Wal-Mart). And don’t think that just because your industry’s products are already on the site (and cheaper?) that there’s no response you can make.

Yes, commerce is shifting online. Yes, customers are beginning to expect to shop this way. Yes, Amazon is a formidable, perhaps even a predatory competitor. Remember, there’s more to selling on the internet than on the one dominant platform. Sure your sales volumes will be lower, but keep your eye on the long term and look for a way to satisfy customer needs beyond price and speed.  Emphasize service and experience and you’ll have a better chance to survive your walk through the woods.

-- Frederick Welk
CEDF Business Advisor

 

 

Could you use the Golden Triplet?

A recent article in these columns discussed the response a small business has to take to compete effectively against the Amazon steamroller. It isn’t price certainly and it isn’t selection. The answer is customer experience and trust.

In the meantime I ran across another article with a different take. The title was particularly compelling. Its author called his theory the Golden Triplet of small business.

Now it’s one thing to read about theory but another matter to put it in to practice. I’ve been witness to a retailer doing exactly that, and who happens to be a CEDF client. I’m not going to name him to allow his business to stay confidential, although he’s very forthcoming and helpful to his industry colleagues and even competitors outside his market which includes locations in two of Connecticut’s wealthier communities.

You might think this makes his business easy but it actually means there’s more competition because he customers all have enough money to shop where they want and to demand the instant gratification of next-day online fulfillment, whether through Amazon or any other source that fills the order.

Here’s how he goes up against the giant.

First, my client epitomizes the idea of excellent face-to-face service emphasized by the article’s author. His staff are at your side and available when needed on the sales floor and they are knowledgeable about the products and genuinely happy to be of assistance. Naturally, they can’t always fulfill every request because there are limits to what a local store can carry. But they know the logical substitutes and they are willing to bring inventory from the other location on request. 

The second element of the Triplet is an online presence.  But it is just enough of an online effort to be in the race without exhausting precious resources trying to out-Amazon Amazon. What’s important to my client is to provide an adequate informational substitute for being in-store when the local customer can’t conveniently make it there-- Maybe because of a snowstorm, or just because they are shopping off hours from home in pajamas. So he uses a product feed from an industry service to populate his website with a catalog of what he carries. But instead of trying to build a nationwide customer base and get beat every time by you know who, he offers local delivery in a manner that particularly appeals to his time-impoverished customers.

The third part of the Triplet is targeted volume but premium price. This means pricing your goods to recognize the value of the in-person, personal shopping assistance but never gouging your customer. The crucial point is too always generate enough gross profit to support the bricks and mortar that makes face-to-face service possible.

And as a sweetener, it helps that he has pretty decent selection too.

-- Frederick Welk
CEDF Business Advisor

How to compete against Amazon

There has been so much hand-wringing over the difficulties caused to Main Street retailers by the rise of Amazon, but the reality remains that there's still plenty of angles on which to compete.

 

First let's examine the giant, which is not just one big opponent, but thousands of little soldiers in the Amazon army. In the latest survey I've read, 58% of the sales were handled by third party sellers. Uh, that would be other small merchants. Some have storefronts, some don't.

 

How are they competing? Price. But they don't all have the same price. The lowest net cost floats to the top of the list and "wins the box" as the lingo goes. A Main Street business might need to stay out of this fight.

 

Perhaps convenience? If you need something now, there's no beating the opportunity to drive down the road and get it. (Gee, I hope the store keeps it in stock.) Even two-day Prime or next day might not be good enough sometimes.

 

What about selection? The great river seems to offer nearly every SKU in the world. And thanks to decisions by national retailers to seek efficiencies that resulted in the streamlining of their merchandise mix and the homogenization of their stores, a lot of items one used to find around town are nowhere to be seen anymore. RIP Radio Shack.

 

This leads to one of two areas where a local retailer can still shine. One is experience. If shopping at your store creates an unmatched thrill, a shot of joy, excitement, discovery, pleasant feelings and that increasingly rare human connection, then that will beat rummaging through endless pages making guesses about the quality or utility of the online offerings. This might involve making an investment in wide selection. Or it might be the physical shopping environment (which is what national retailers do because they feel they can't afford selection). Or, more likely it might require finding the right people for the staff and adopting the right policies.

 

The other factor that can lead to a winning hand for a Main Street retailer is trust. This article gives a helpful discussion of the way this round can be won or lost. Note the study that gives small business a statistical edge over large operations in trust. But Amazon is right on top of this fight by being willing to guarantee the satisfaction and performance of all of their third party sellers. Just don't bother trying to get anyone from Amazon Customer Service on the phone.

 

 

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