Assessing The Damage Of 'The Amazon Effect'

Since I anticipate being labeled a Luddite, a Socialist and a hypocrite by some, let me acknowledge that I firmly believe that Amazon has done a lot of good for consumers by expanding choice, making shopping far more convenient and by delivering extraordinary product value. I recognize that many retailers were long overdue for a swift kick in their strategy. I also remain a very good and loyal Amazon customer. And I anticipate that the Whole Foods acquisition will ultimately result in lower prices, an enhanced shopping experience and maybe even improve the availability of more healthful food options. These are all good things.

Yet, we can't--and shouldn't--ignore the profound effect that Amazon is having on just about every corner of the retail world they set their sights on. Amazon is the proverbial 800-pound gorilla. Their entry into a market segment reshapes shopping dynamics, upsets the supply chain and exerts tremendous pricing and margin pressure. Books came first and we know how that played out. But, one by one, other categories followed and the dominoes continue to fall. Store closings. Bankruptcies. Once proud and dominant retailers teetering on the brink. Now you can add small "natural" grocery chains to the list of established retailers that may well get Amazon-ed (which is the most polite way to say it.)

To be fair, we should not blame department store woes on Amazon. Clearly many malls and quite a few retailers were well on their way to oblivion before Amazon cracked the $25 billion mark. And the grocery market share that Amazon will pick up with the Whole Foods acquisition is a drop in the bucket, even when combined with Amazon's existing volume. We also know that not everything Amazon touches turns to gold (I'm guessing you are unlikely to be reading this on your Amazon Fire).

Still it's hard to underestimate the magnitude of the Amazon effect. E-commerce represents about 10% of all U.S. retail and Amazon is by far the largest player, with an estimated share of 43%. Last year, Amazon accounted for 53% of all the incremental growth of online shopping, which means they are only growing their dominance. To underscore how much Amazon has infiltrated the shopping zeitgeist, one study indicates that more than half of all product searches start on Amazon.

It's also hard to underestimate the fundamentally different rules Amazon plays by. First and foremost, Amazon isn't required by its investors to make any real money. In fact, despite being in business more than 20 years, Amazon only recently surpassed Kroger and Priceline (not the sexiest of retailers) in total annual profits.

As a core strategy to gobble up market share, Amazon (or more accurately its shareholders) provides huge subsidies to its delivery operation. According to one analysis, Amazon lost $7.2 billion on shipping costs last year alone. While this is clearly great for consumers, it puts many retailers in the untenable position of choosing between ceding market share to Amazon or lowering their prices to uneconomic and unsustainable levels. Most have chosen the latter strategy and are paying the price. The fallout is far from over.

It's hard to argue against innovation. It's hard to argue against greater choice, more convenience and lower prices. And clearly, long-term investors in Amazon have few arguments, while those that have hung in with Macy's, JC Penney and the like are licking their wounds.

Maybe Amazon can sell all this stuff at a loss and make it up on volume. Maybe once they help put many, many retailers out of business and play a big role in the "rationalization" of commercial real estate, Amazon will continue to reduce prices, rather than exploit their emerging monopoly-like power. Maybe we'll all be happy with fewer choices in retail brands. Maybe Amazon's dominance will encourage a new wave of different and more interesting retail models to counter-act the homogenization of retail we are in the midst of.

Maybe.

On the other hand, perhaps we should all be careful what we wish for. Perhaps we should consider that the problem with a race to the bottom is that we might win.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here. 

My blog is Reinventing Retail In the Age of Digital Disruption