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× Growth Creating New CE Retail Paradigms, Challenges

SEATTLE – Like the river that founder/CEO Jeff Bezos named it after, has become a force of nature in its 19 short years, wending its way through countless product categories and forever altering the retail landscape.

Through Bezos’ steadfast focus on customer service, and his ability to look beyond short-term earnings hits and investor rancor to plow cash back into the business, Amazon has become a hyper-efficient selling machine.

One-third of consumers now begin their online shopping expeditions on the site, comparing models, specs, prices and customer reviews for an expansive assortment that spans not just Amazon’s inventory but that of its more than 2 million third-party Marketplace affiliates, which comprise nearly 40 percent of the company’s unit volume.

Other features like one-click ordering, tailored product recommendations, a no-hassle return policy and free two-day shipping with a $79 membership in the Amazon Prime program has made it the go-to merchant for more than 200 million regular shoppers worldwide.

To further cement its customer base and build a bottomless databank of consumer preferences and profiles, Amazon has also amassed a vast library of movies and television shows that consumers and Prime members can stream via hundreds of TVs, Bluray players, set-top boxes and gaming consoles. Video content as well as books, newspapers, magazines, games, apps and MP3 song files are also available through PCs, mobile phones and tablets – including the company’s proprietary Kindle family of handhelds, which features four of its best-selling products across the board.

Of course, the biggest attraction for consumers besides convenience and selection is price. Absent the overhead of retail stores and sales associates, and buoyed by its income from Marketplace commissions and cloud computing, digital advertising and ecommerce services, Amazon is able to aggressively price its products to achieve its volume or market share goals, sometimes at or below cost, and can change pricing on the fly in response to competitive conditions.

Bezos himself acknowledged that the Kindle Fire HD tablet, the company’s No. 1 best-seller worldwide, is priced near break-even, and that the e-tailer, taking a page from the old razor and razor blade model, hopes to recoup its investment over time through recurring sales of books, music, movies, games and apps.

As a result, the $61 billion business has become a disruptive force in every industry it enters, and no less so in consumer electronics. Sixteen years after entering the category it has become the world’s third-largest CE seller behind only Best Buy and Walmart, with $12.9 billion in U.S. hardware sales in 2012 and average annual growth of 42 percent over the past five years, according to TWICE’s Top 100 CE Retailers Report.

Rightly or wrongly, the company has been blamed for leading TV and other core categories down the road of diminishing returns, which in tandem with the recession has proven disastrous for some vendors and retailers.

But manufacturers arguably control their own destinies – and the production and distribution practices that have undermined prices and margins, while Best Buy’s new management team blames the dearth of investment in distribution, customer service and multichannel platforms during the boom times for its current sales and earnings woes.

Amazon has also been lambasted for promoting the practice of showrooming thanks to its Price Check mobile app for iPhone and Android. Brick-and-mortar ire reached a fever pitch in December 2011 when the company offered customers a one-day, 5 percent discount of up to $5 on CE, DVDs and other items that were price-checked in stores and then purchased on its site. The Retail Industry Leaders Association (RILA), a trade group representing some of the nation’s largest brick-and-mortar chains, condemned the action as “an aggressive promotion [that] shows the lengths they are willing to go to exploit [the] tax loophole.”

Yet studies by The Stevenson Company presented last year by the Consumer Electronics Association (CEA), and a March 2013 report by market research firm ClickIQ, dismiss the showrooming phenomenon as overstated and suggest that big-box stores lose more mobile sales to other chains than they do to Amazon.

What’s more, as the e-commerce tax clause continues to close, Amazon’s sales tax advantage is now limited to about half the trading areas in which it does business, while some studies indicate that the impact of tax collection on the company’s sales volume is minimal at best .

Meanwhile, figuring if you can’t beat ’em join ’em, independent CE dealers have developed a rich new revenue stream by piggy-backing branded “storefronts” onto Amazon’s Marketplace, where the site’s high profile and comScore-busting traffic volume help generate tremendous cash flow. Such established brick-and-mortar and online-only retailers as Abt Electronics, Adorama Camera, Car Toys, Beach Audio, DataVision, Electronic Express, J&R Music and Computer World, OneCall, TigerDirect, Video & Audio Center and World Wide Stereo all maintain an online presence with their competitor-turned-partner.

“Retailers must consider Amazon in their go-tomarket plans,” acknowledged Dave Workman, president/ CEO of ProSource, the $3 billion buying group for independent A/V dealers. “Amazon has a pervasive presence 24/7, and you can’t ignore the opportunity for massive customer visibility.

“But you’re also in competition with the host,” he continued, “so in some respects Amazon is both friend and foe.”

Forrester Research concurred. In a recent report, “Why Amazon Matters Now More Than Ever,” the consultancy noted that while the Marketplace has become a key sales channel for many companies, “merchants have serious concerns … that products and categories that do well in the third-party Marketplace quickly become products that Amazon itself owns and sells at prices that undercut Marketplace sellers.” Forrester’s advice: compete in the Marketplace selectively, using the platform to launch new products, liquidate old ones or drive loss leaders, while shielding strategic products and categories from Amazon’s sales and performance data.

In an ironic twist, many of Amazon’s authorized third-party CE dealers suffered when new UPP and MAP strictures were put in place by vendors to restore profitability and level the on- and offline playing field. Electronics Expo for one, which is organizing under Chapter 11 bankruptcy, described Amazon in court papers as a significant sales channel for the chain, and said the new vendor restrictions led to mounting operating losses.

Conversely, with all things being equal, specifically prices and taxes, consumers looking for immediate gratification are becoming more inclined “to just go pick it up in a store,” Workman noted. In certain categories, this is prompting a shift back to brick-andmortar, where attachment rates have traditionally been higher for add-on sales, he said.

Still, margin issues aside, Amazon’s unique technological platform, its relationship with tens of millions of loyal customers, and the discipline of it merchandising teams have also been a boon to manufacturers. Deena Ghazarian, global sales VP for Monster Products, said Amazon, through its comprehensive line reviews, “challenges you as a manufacturer to constantly get better.

“We sit down with their product teams and go through everything,” she said. “What worked, what didn’t, what they’d like to see more of and what the consumer is asking for. It helps us improve with them as well as our dealer customers.”

Ghazarian is also passionate about Amazon’s prelaunch evaluation program, which puts soon-to-be released product in the hands of a cross-section of consumers to elicit unfiltered feedback.

“It gives us, the buyer and the customer an accurate, unbiased view,” she told TWICE. “If they don’t love the product they let you know it. When they do love it, it validates for us when we kick it out of the park.”