Amazon Taking the Fight to Stores

Amazon, the undisputed leader in online retailing, is offering rewards to consumers who check offline prices through Amazon’s price check app but buy the goods through Amazon, thus taking online retail competition directly to bricks-and-mortar stores.

On Saturday, 10 December, Amazon released a promotion which aims to undercut bricks-and-mortar prices. Amazon has traditionally been very price competitive online and offline and in its latest move it is approaching consumer buying behaviour in yet another innovative way. Through its price check app, ‘Price Check by Amazon’, it offers consumers up to US$5 off purchases made online while shoppers browse goods in physical stores. The app works by reading product bar codes to provide price comparisons on the spot. While the incentive might seem insignificant the campaign has created quite a stir thus far. There are a few reasons why this is a very significant move for the company. Firstly, it reinforces Amazon’s position as a price leader. Secondly, it encourages consumers to check prices even while in stores and, thirdly, it provides the company with a significant amount of information about offline prices.

Price Check by Amazon

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Source: Amazon

A good year for Amazon

Amazon has enjoyed a truly successful 2011. According to Euromonitor International’s internet retailing research, Amazon is expected to finish the year with an 11.6% value share of the global internet retailing market. In other words, Amazon is expected to generate retail sales of US$46 billion. While the company has been enjoying strong growth it is also growing faster than the market. Between 2010 and 2011, Amazon has increased its share of internet retailing by 1.6 percentage points, making this a better year than any other since 2004. The only other time Amazon achieved similar stellar growth rate was during the ‘Great Recession” between 2008 and 2009 when it gained 1.5 percentage points.

Amazon has played to its strengths in its efforts to keep increasing its share of consumer spending. The company has invested in a wide product range, has remained focused on delivering good customer service and has maintained its price competitiveness, often striving for the best online price.

The fact that the two surges in Amazon’s sales coincided with weak economic performances in both North America and Western Europe, regions in which Amazon is strongest, speaks volumes about consumer behaviour. Consumers on both sides of the Atlantic have taken a more cautious approach to their spending and have searched the internet for bargains and the cheapest prices.

Mobiles bridging the gap

An additional and important benefit for Amazon is that the price check campaign seeks to encourage consumers to use their mobile devices while in stores. Amazon started developing iPhone and Android apps way before its competitors. The company generated the first US$1 billion from mobile sales during the second quarter of 2010 and with the current steps the company is taking it is clear that it expects an even bigger share of its sales to be generated by mobiles.

Mobile phones in general have the advantage of being with the consumer all the time, while smartphones offer almost universal access to the internet. Retailing must change as this  new ‘always connected’ consumer group is growing at a rapid rate, with smartphone sales projected to account for the majority of phone sales in both North America and Western Europe in 2011. This has had a significant impact on online purchasing behaviour. Previously, consumers had to shop either online through their PCs at home or at work or browse in bricks-and-mortar stores, with very little overlap of the digital and physical channels. Now, by having a smartphone, the consumer is just a click away from Amazon regardless of location. The internet connection smartphones offer, combined with applications which can read product barcodes, can and have been turned into a powerful price comparison tool, the essence of which Amazon is now promoting.

Smartphones Overtake Feature Phones

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Source: Euromonitor International, Consumer Electronics

While the discount offered is modest, 5% or up to US$5, it is likely to attract a fair proportion of the increasing number of price-conscious consumers. It has already sparked concerns from retailers which are worried that consumers will browse their physical stores but then order the same product, albeit cheaper, from Amazon.

Bricks-and-mortar stores getting nervous

While bar code scanning and online price checking remain limited consumer behaviour, promotions such as this are likely to educate consumers about the benefits of checking online prices while in stores, and how this can be achieved. The timing of the Amazon campaign is particularly appropriate given the run-up to Christmas and the current uncertain economic environment prompting consumers to actively search for bargains.

Some retailers are worried by the resulting price transparency. Store-based retailers are perceived as charging higher prices and this direct comparison will play to Amazon’s advantage.

While physical stores have arguably higher running costs, such as rent and labour, it can be argued that chained retailers enjoy a better bargaining position compared to pure play online retailers and hence can offer better savings to consumers. Tax is also an argument in the on-going discussion between store-based and online retailers, particularly in the US where pure play online retailers are not required to collect sales tax in states in which they do not have a physical presence.

To avoid price competition with online retailers, some bricks-and-mortar stores are going to such lengths as using different SQUs and covering up barcodes to prevent product comparisons, blocking internet access or discouraging consumers from using their mobile phones in store. While such tactics will offer a certain degree of protection, this is only a short-term solution and one that is likely to turn consumers against the stores which engage in such practices.

In these current times of austerity and penny pinching, consumers want to know what they are paying for, so if there is a premium because of an extended guarantee or gift wrapping, for example, it must be clearly communicated. Physical stores offer certain advantages which online stores cannot replicate easily, for example the immediate gratification of making a purchase, enjoyment of the product right away, personal advice, returns and exchanges in- store. All of these additional benefits need to be communicated.

Taking advantage of mobile connectivity

While some retailers are concerned about how the Amazon price check app could affect their business, others are taking a more proactive approach and are looking at ways in which they can benefit from the increasing use of smartphones. John Lewis, Tesco and House of Fraser are some of the UK retailers which offer free Wi-Fi in their stores. John Lewis, for example, offers fast and free Wi-Fi access to allow consumers to find better information about products, and is not afraid to compete with online offers. Using its ‘never knowingly undersold’ pricing promise, the retailer promises to match a competitor’s price. The chain is known for its good service, helpful staff and additional benefits such as extended guarantees on some of its products. By allowing customers to compare prices online it demonstrates that it is prepared to compete with online stores on price, while bringing the extra benefits the bricks-and-mortar stores offer.

Amazon has been a champion of competitive prices and has already substantially affected at least one retail channel, media product stores for example. The lessons are clear. The longer retailers take to adapt to the reality of the highly connected and savvy consumer the harder it will be for them to adjust later on. While bricks-and-mortar stores are taking time to react, Amazon is winning business. What may be even more important in the long run is that with its price comparison app the company is on its way to dramatically increasing its knowledge of the offline pricing landscape, a gap that it is currently filling in at little to no cost.