Amazon has enjoyed phenomenal growth during its short existence and was the second fastest growing retailer in 2010, beaten only by Apple. However, it is not just its pace of growth that is astounding. The company generated an additional US$5.3 billion in new sales during the year, also making it one of the leading retailers in this respect.
Amazon has benefited from operating in comparatively less competitive channels than other retailers, a situation, however, which is changing rapidly. Global retailers such as Wal-Mart and Tesco are working on strategies to extend the reach of their websites and specialists of all product types are increasing their online presence, while pure play competitors like eBay and Netflix are competing harder for consumer loyalty. As the competitive landscape intensifies for Amazon, Euromonitor International reviews the company’s strategy in 2011 to investigate whether its phenomenal sales growth can continue.
Fastest Growing Retailers in 2010
Amazon widens its product range
In recent years Amazon has been expanding the range of products it offers to consumers. Product-specific landing pages are extending the company’s breadth of range, while through its own efforts and those of third parties it is also adding depth. The acquisitions of Zappos, Quidsi, BuyVIP, LivingSocial and Lovefilm have extended the company’s reach into new product areas and ways of interacting with consumers, with Amazon learning from the initiatives of these companies in order to cement consumer loyalty over the longer term. The introduction of a grocery service in Germany and the UK in mid-2010 highlights how Amazon is looking to compete with retailers in every channel.
Meanwhile, with Amazon Prime in the US and the UK, it seems that the company has hit upon a service that consumers like and which engenders strong brand loyalty. Amazon Prime consumers pay up front (US$75 in the US, £49 in the UK) and have been shown to be loyal shoppers, using Amazon more often than other consumers, spending more per visit and shopping across a wider range of products. It is these sorts of services that Amazon hopes will tie in consumers to using it for all their shopping needs as it expands into products like groceries or services enabling consumers to download films from its site.
While other retailers do not generate the expected returns when extending into new product areas, with shoppers not believing that that company has the expertise to sell that item, this does not appear to be an issue for Amazon, with consumers trusting it to be able to sell almost anything. Consumer belief in the brand will strengthen Amazon’s position into the medium term.
Private label and proprietary products
The launch of the Kindle 3 in 2010 was a notable step for Amazon, bringing it into line and competition with Apple, with both companies looking to control the distribution of a wide range of media. To support the launch of the previous incarnation of the Kindle, Amazon made 460,000 books available for download, up from 250,000 the year before, offering consumers the opportunity to download quickly from a huge range of titles.
However, the launch of Apple’s iPad, and subsequently the iPad 2, has taken some of the shine off Amazon’s move into the e-reader market. With the number of tablet computers growing strongly in 2010, a trend that is set to continue in 2011, so Amazon’s plain e-reader, while popular, may quickly be overtaken by the competition. If this were to happen, an avenue of growth for Amazon would be closed off. As a result, Amazon may have to learn to live with competing formats, but in launching the Kindle, the company’s key objective is to promote the growth of its e-book business. With e-books now outselling both paperbacks and hardbacks, it is clear that Amazon’s strategy is starting to pay off.
Amazon has also been innovative with private label, introducing and developing a number of different lines, for example Pinzon (kitchen gadgets), AmazonBasics (electronics accessories), Denali (tools), Pike Street (bath and home products) and Strathwood (outdoor furniture). In 2010, these ranges covered thousands of products. The benefits of private label are well known – better margins, control of the supply chain and product development – and Amazon’s continued support of its private label ranges underlines how it is evolving as a retailer, mirroring the successful strategies of store-based retailers. Longer term, its private label ranges are likely to support Amazon’s margins, which will enable it to invest elsewhere in its business.
New country-specific sites
In November 2010, Amazon launched its first new country-specific website, www.amazon.it, giving it a stronger position in the Italian market. The Italian internet retailing market is expected to expand by US$3.4 billion over the 2010-2015 period, and the presence of a local site should enable Amazon to benefit from this growth. The launch of the Italian site supports Amazon’s international operations in markets like Japan, the UK, France, Germany and fast growing China. Amazon is expected to expand into the Spanish market in 2011. The pace of Amazon’s launch of new country-specific sites has been slow up to 2011 and so this is something that the company will need to look at in the short to medium term as global retailers launch rival services.
Amazon – country dedicated web site coverage
Euromonitor International, Amazon
Long-term outlook remains positive, but more competitive
Amazon, therefore, is taking many of the right steps to ensure ongoing sales growth over the medium to longer term. Wider product ranges, further internationalisation and building a loyal consumer base will all benefit the company moving forward. However, in the short to medium term, Amazon is likely to face increasing levels of competition from a growing range of retailers.
Apple’s move with its iPad into selling magazines, books and films will provide Amazon with a strong challenge, while US-based Netflix has announced plans to expand into new markets. Both companies’ moves, however, underline the emergence of new technologies from which Amazon, with its Kindle, has benefited, but in the future may enable others to take the lead. In order to remain the world’s largest internet retailer, Amazon will have to continue to invest in technology and remain relevant to consumers, despite changes to the way shoppers interact with it.
Meanwhile, store-based retailers are likely to also hone their internet strategies, raising the stakes once more for Amazon. Wal-Mart, for example, in 2010 offered free shipping to FedEx locations in many US cities for goods bought online, while the growing trend of shipping goods to physical locations could give bricks-and-mortar retailers an advantage by enabling consumers to pick up products more quickly.
However, as has been clear through Amazon’s evolution since its launch in 1994, the company is able to adapt quickly to changing markets. With many of the strategies it is adopting in 2010/2011, Amazon looks likely to continue to grow strongly over the longer term despite the forthcoming challenges.