One pet retailer says that he first realized that Amazon.com was a threat to his business when his wife came home about two years ago and said that she saw the perfect television for their newly-remodeled den. “Why didn’t you buy it?” he asked her, knowing that she usually made impulsive purchase decisions. “I knew I could get a better deal at Amazon,” she replied.
That is the strength of Amazon.com, the well-known Internet commerce site, which opened for business as a seller of used books in 1994 and is now a retail giant with more than $27 billion in annual sales. Those days of being a quiet bookseller are long gone. Today, Amazon’s tentacles reach well beyond books to include a growing variety of products—from apparel to toys to consumer electronics to baby food products—and, of course, pet products.
“Every generation in retailing has a disruptive player,” says one retail chain veteran, “and Amazon is the disruptive player in this generation.”
Of course, how is Amazon impacting the retail pet industry? Fortunately, at this point, the impact has been relatively minimal, mostly because consumers are still venturing out to their favorite pet stores for the purchase of pet food, treats and pet care products. This, however, could change as Amazon gets more serious about certain categories where consumers are more willing to buy in bulk and seek other ways to save money.
Besides the book segment, where its Kindle line of electronic books has played havoc with the once-flourishing retail book business, Amazon is most dangerous in larger-ticket or harder-to-get categories. The consumer electronics market has been among the hardest-hit segments, for example, though many industry officials say that commodity items like paper goods are also rapidly gaining market share at Amazon.
Could dog food, cat litter and pet treats be next?
Some in the pet industry think that day is already here. A number of retailers have contacted Pet Business magazine in recent months to complain that suppliers are undercutting them on pricing by offering Amazon (and perhaps the larger chains) a better pricing structure because of volume discounts.
Perhaps the most glaring sign of Amazon’s threat to brick-and-mortar stores is the phenomenon of “showrooming”—where shoppers go to a store, scope out products, surf the Internet for better prices than are available in the store, and make the purchase online.
The growing use of smart devices such as cell phones and tablets—including, most notably, Amazon’s own Kindle—has further compounded the showrooming problem for brick-and-mortar retailers by enabling consumers to do their showrooming right in the store. This spurred Walmart and Target to stop selling Kindles, which for many consumers have become standard equipment for showrooming. In an article on Forbes.com posted in September, staff writer Jeff Bercovici described the Kindle as the “Trojan horse” that converts Walmart shoppers into Amazon customers.
Showrooming has led mass retailers to other moves besides taking Kindles off their shelves. In January, Target sent a letter to its vendors asking for aid against Amazon and other websites in its battle against showrooming. The letter—signed by Gregg Steinhafel, chairman, president and CEO, and Kathee Tesija, executive vice president of merchandising—said such help “could include providing a differentiated guest-focused assortment from online-only retailers that still includes best sellers ... pricing the same as online-only retailers (and) developing membership- or subscription-based pricing online to compete with online pricing models in the market.”
A research note on the letter, prepared by Deborah Weinswig, a retail analyst with Citi Investment Research & Analysis, predicted that other brick-and-mortar retailers would demand that vendors support them in similar ways in their fight against showrooming.
Brad Thomas, retail and home furnishings analyst with Keybanc Capital Markets, says showrooming is the most dramatic evidence of how Amazon “has removed the road-trip part of shopping. As Americans, we’ve gone from having one computer per household to one computer per person to many connected devices per person,” Thomas says. “Shoppers are connected to the Internet 24 hours a day.”
Showrooming is an especially strong threat to retailers that carry commoditized products, says Sucharita Mulpuru, retail analyst with Forrester Research. “At the end of the day, Amazon is out-Walmarting Walmart,” he notes.
Showrooming is also a clear indicator of the love connection Amazon has established with shoppers. Articles and consumer surveys indicate just how deep this connection is. In Stores magazine’s annual “The Favorite 50,” in which consumers ranked their favorite e-commerce websites, Amazon finished number-one this year, the sixth year in a row. In Brodeur Partners’ 2012 survey of retail relevance, consumers rated Amazon as the most relevant retailer of any kind—a ranking based on the company’s practicality, values, and sensory and social appeal.
Amazon is winning with consumers by following the mission established by Jeff Bezos, its founder and chairman. As stated on its website, Amazon’s mission from the day of its founding has been “to be Earth’s most customer-centric company,” offering low prices and fast delivery on millions of items.
Observers note that Amazon’s practices are following through on this promise. “They have an aggressive pricing algorithm that ensures that they win on price,” says Sucharita Mulpuru, retail analyst with Forrester Research.
Describing the pricing algorithm, one vendor executive says it is a model by which Amazon staff can quickly search the prices on a particular item so that it can offer lower prices than any other competitor. (Some industry vendors, echoing their non-Amazon customers, have termed this pricing “predatory.”) By doing so, Amazon has created the widespread and instant impression among consumers that it has the lowest prices.
Amazon’s advantages with consumers go beyond what’s on the price tag to the crucial issue of customer service. “The ability for Amazon to purchase product for direct distribution and shipping from their warehouses means the customer will always receive their shipment and not experience any back-order situations,” says one home furnishings vendor executive. “Additionally, service to customers is typically above expectations, which encourages repeat customers.”
The indications are that Amazon is looking to increase its lead in customer service and sharpen its threat to traditional retailers. In an article on the website Seeking Alpha, titled “How Amazon Plans to Drive a Stake Through the Heart of Retail U.S.A.,” author Kyle Spencer detailed the billions of dollars Amazon is spending on new distribution centers throughout the country. Interrelated to this is the company’s acquisition earlier this year of Kiva Systems, an order-fulfillment company that specializes in automated warehousing through the use of robots.
These moves should also enhance Amazon’s cost advantages. “Amazon pickers with Kiva robots as co-workers are up to three times more efficient than Joe Six-Pack in filling real-time orders,” Spencer wrote. “That makes same-day delivery—a goal Amazon has been chasing since 2009—a viable reality.” In addition, “Kiva robots don’t call in sick, request time off, get pregnant, join unions or hire lawyers.”
Comments from vendors, all of whom wished to remain anonymous, go even further into how big a piece Amazon has become in their customer pie, shouldering aside other retailers along the way. One vendor says that, “in the past 12 months, our sales to Amazon have grown over 1,000 percent.” Still another vendor says the company’s sales to Amazon are expected to be up 80 percent this year over last year. And yet another says his company’s sales to Amazon have risen by double digits each year for the past several years.
Manufacturers like having Amazon as a customer for other reasons besides the extra business. “My margins are better with Amazon than with my other customers,” says one vendor executive. “They don’t ask for opening-order discounts, rebates or sharing advertising costs. They just want to buy the goods. They are more profitable on a percentage basis for me than other retailers.”
Pet retailers definitely have their work cut out for them. Based on his conversations with manufacturers in many segments beyond pet, Thomas has come to the conclusion that Amazon is “a great partner. For most vendors, Amazon is a smaller, but rapidly growing, customer that offers more favorable margins than big-box competitors.”
Another advantage to vendors is the volume of goods Amazon offers, meaning that its need for new products are greater than those of a brick-and-mortar store, and are ongoing. As a website, its shelf space is virtually infinite—and many vendors are eager to stock that limitless shelf space because of what it means to consumers. “The vast array of products has given shoppers the ability to research and purchase from one trusted source,” one vendor executive notes.
So how does the retail pet industry fight back? Putting pressure on suppliers to keep the playing field level is certainly a good first step, industry officials say. But it will take more, and that may mean government intervention. Already, Amazon is being forced to collect sales tax on products sold to customers in its home state of California, which helps local retailers level the field a bit. Lobbying other states to force the Internet retailer to follow that process in other states will also help.
“But it may mean that we have to be aggressive on pricing and do all we can to give the consumers a special experience in our stores,” says one pet retailer attending the annual H.H. Backer Christmas show in October. “In the end, however, it is going to come down to the basic fact that we offer service and expertise in a category that demands it. No matter what Amazon offers in terms of pricing, selection and convenience, they cannot beat us on knowledge. Now, we have to get the consumer to recognize this.”
But this is going to be a tough road ahead. Mulpuru is pretty positive about Amazon’s future. “Amazon will be the force to transform retail in the coming decade the way Walmart and Costco transformed it in the past couple of decades,” she notes. “They are likely to sell more than $100 billion in gross merchandise value over the coming five years.”