5 ways to compete with Amazon, and why its model isn't 'profitless'
After almost two decades in online retail, Amazon is still the
punchline to jokes about profitability.
“Amazon, as best I can tell, is a charitable organization being run
by elements of the investment community for the benefit of
consumers,” Matthew Ygleisias famously wrote on Slate earlier this year.
But while journalists and Twitter pundits take its investors for
fools, they’re missing the bigger picture, argues Eugene Wei, Flipboard’s Head of
Product, who worked at Amazon from 1997 to 2004. Amazon
turns a profit on the vast majority of its products, as well as its
marketplace, Wei illustrates; its losses are due to its
boundless ambition, and a focus on building fulfillment centers
everywhere. If quick shipping is Amazon’s secret sauce for making
customers buy more, fulfillment centers are its essential
ingredient, he explains.
“I'm convinced Amazon could easily turn a quarterly profit now,”
Wei writes, but for the fact that Bezos is an “apex predator,”
gunning for a very, very long term kill.
Maybe the critics have a point that with too large a global
footprint, Amazon won't reach enough revenue to realize its vision,
Wei acknowledges. But that doesn’t mean it isn’t currently
profitable.
That crucial difference might seem even more clear in Middle East
e-commerce, where reaching profitability is difficult. As a sector,
e-commerce is a decent longterm bet, one that has accounted for
85% of investments made in the past year, all by investors
from outside the region. Shopping appetite in the region is
voracious, online shopping is growing steadily, and credit card
use- and smart
alternatives- are improving, but providing fast delivery is
difficult outside the Gulf (in the Middle East,
Quartz reports
that Amazon's own delivery times reach 2-4 weeks; with Aramex's
Shop & Ship from the U.S., I've seen deliveries as quick as 4-5
days).
Amazon hasn’t opened a fulfillment center in the Middle East yet;
you could say that its predation has not reached this difficult
apex. But its focus on scaling has meant that it’s now larger than
the top 12 global online retailers combined, Jeff Jordan of VC firm
Andressen Horowitz
wrote recently (and the LAUNCH Ticker cited).
(image from
Jeff Jordan's blog, using data from Internet Retailer)
In the Arab region, it might seem as though Souq.com is more
relevant local competition than Amazon (or bookseller
Jamalon for those focused on Amazon's original vertical), and
yet, 90% of the region’s online transactions are done abroad, with
companies in U.S., Europe, and Asia, according to PayPal’s recent
report. So it’s not just faster delivery times that will lure
customers to buy locally; it’s also the merchandise sold, the
payment gateways offered, the curation, etc.
Jordan lists 5 ways that retailers can weather competition from
Amazon. His points in a nutshell (read his full descriptions on
his blog):
- Find a niche vertical in which you can out-do Amazon, especially in soft lines (apparel, accessories, footwear; most of the region’s e-commece sites are in one of these verticals).
- Develop your own fashion line.
- Create a better curation/ browsing experience (i.e. improve upon “those who viewed this also viewed these”).
- Get in front of the customer differently, with emails or shipped test boxes (like BirchBox/GlamBox, or the sample boxes of fashion items).
- Leverage unique advantages (a partnership with an offline retailer? A crowdsourced last mile delivery model?).
Several retailers in the Arab region are already following this advice, in hopes of convincing customers to come online, and then- once they’re online- stick with a local e-commerce company.
Another way to reach profitability in this space? Serving the
e-commerce players. In a market where infrastructure lacks, helping
to build it could also situate companies well for building revenue
in the near term- without as much fixed cost- and the possibility
of an acquisition in the longterm.
Now that Amazon has launched Amazon Payments, it could, one day,
look to acquire a payment gateway in the region that has already
built the necessary legal framework. In the meantime, the existing
demand in the region will keep e-commerce service providers like
Gate2Play, PayFort, and
ShopGo busy.