In Retail, it used to be about who you knew. Over the last hundred years Retail was about a guy who knows a guy who knows a guy who knows a guy.
I want to sell something, I need to know a guy who imports stuff who knows a guy who exports stuff who knows a guy who makes stuff who knows a guy who sources stuff.
Before that, when retail happened in marketplaces, it was merely being the guy, or at worst, knowing a guy who farms stuff.
Amazon’s success can be attributed to becoming the original (farmers’ market) - they need to only know the guy who makes stuff - or at worst know the guy (affiliate) who knows a guy.
With one critical difference.
In the digital landscape, they did not need to be restricted to a physical geography for many products (like books). And then they used that advantage to enter the markets for products where geography is a factor (like food.)
I am describing the idea of the supply chain: it used to be very short. Then, in an effort to introduce variety and alternatives and to reduce some friction and inefficiencies with economies of scale, the supply chain lengthened.
It lengthened to the point where it introduced sufficient variety but also serious inefficiency. That made it attractive for people to forsake many of those benefits for the sake of a reduction in price and cost.
Think again about how Amazon got started:
What do people who buy books want? They want to:
- Browse/sample to see if they would like it
- Talk to a sales associate who could recommend/inform
- Start reading (as soon as possible)
Bookstores did all of that - at a price of say $30 per book.
Amazon offered them the following:
- You can get recommendations, not from one individual but from many people
- You can browse exponentially more, at any time, for as long as you want
- You can’t start reading for a few days while you wait for delivery (pre- Kindle)
BUT you pay only $15!
People liked the trade-off. Then Amazon went directly to authors. Then they introduce digital delivery (immediate). And they did not even have to reduce the price further because even though their costs declined, there is no competition to force them to charge market rates.
Retailers of course know how important the supply chain is. The major supermarkets have been accused of abusing their market power to wring efficiencies from it. That was the lazy way. The hard way would be to re-imagine what the supply chain looks like altogether, not merely accepting what is and squeezing it harder.
So, Amazon has taught the lesson we never seem to learn: change happens dialectically. That is, you have the status quo (thesis) and then someone comes along and does the opposite (antithesis). Then over time, these two positions are synthesised into a new thesis. (Amazon buying bricks and mortar, more and more warehouses is happening.)
Amazon’s strategy (and a few others) seems to be driven by megalomaniacal founders. Ego is the secret juice, not strategy. How big must the ego be if you can convince investors to accept that “In its two decades as a public company, Amazon has had a cumulative profit of $US5.7 billion? For a company with a market value of nearly $US500 billion, this is negligible. I don’t think they have ever paid dividends as far as I can tell.
Eventually, they will increase their cost base and the supply chain will lengthen and frictions will appear. Landlords. Brokers. Transportation agencies. Suppliers once and twice removed. It is going to happen. So, Amazon also has to learn to know a guy who knows a guy...
Then someone will come along and do the opposite. Just when Spotify’s market value spikes, vinyl record sales just hit a 25-year high.
That is why I love entrepreneurs. They are so antithetical.
There is a lesson in that somewhere.
Or at least a bumper sticker.
Dennis Price: Co-Founder at WWW.YEARONE.SOLUTIONS can be reached at dennis[at]ganador.com.au
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