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Amazon, Walmart and the crumbs - A new world order in retail

Posted by Stéphane Nasser | Aug 27, 2018

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This article was written following a presentation I gave at the Digital Signage Expo 2018 in Las Vegas on March 27, 2018. Originally named “Orbiting the GAFA’s galaxy: Get smart or get left behind”, the goal was to give a high-level view of what makes the GAFA (Google, Apple, Facebook, Amazon) so unique, how they have impacted the retail industry and what traditional players can learn from them to survive and thrive.

 

WTF is GAFA?

GAFA is an acronym for Google, Apple, Facebook, and Amazon. The term was presumably coined in France in 2012 and became popular in Europe. It was originally used in a negative way, to describe those “scary tech giants” that were going to disrupt our local champions and economies.

GAFA means Google, Amazon, Facebook, Apple 

The term GAFA is blurry, to say the least. What exactly makes you a GAFA? Why don’t Salesforce and Airbnb make the list? Many other acronyms popped up to fill the void, including the “GAFA’s 2nd generation” NATU (Netflix — Airbnb — Tesla — Uber), the “Chinese GAFA” BATX (Baidu — Alibaba — Tencent — Xiaomi), and the FAMGA, adding Microsoft to the lot. To add insult to injury, Google changed its name to Alphabet in 2016, so AAFA would actually be more accurate…


New GAFAs are appearing such as BATX, NATYU and FAMGA 

The term “GAFA” shows no consistency, yet, people keep using it. They feel those companies share something in common. Let’s ignore the fact that Google is an advertising company. Let’s ignore the fact that Amazon is an e-commerce company. What are we left with? What are the working principles that the GAFAs share that make them such incredible successes?

NB: Due to time constraints during the presentation, I focused exclusively on Amazon and Google. From this point on, the article will not look into Apple and Facebook's merits in retail. That would be worth another conference entirely.

The 4 superpowers of GAFA

In 2014 and 2015, FABERNOVEL released two studies called the 4 superpowers of GAFA. They identified 4 working principles that are foundational of the success of the GAFAs: the magnet enterprise, the real-time enterprise, the infinite enterprise, and the intimate enterprise. Let’s look at them one by one and their applications in the retail industry, illustrated with Amazon.

GAFA have 4 superpowers to win retail 


#1 The Magnet Enterprise

The first superpower is the magnet enterprise. This is the capacity that the GAFA have to aggregate small units of value that are almost worthless when taken individually, and turn them into an insanely valuable asset when put all together on the same platform. Think about all the empty rooms in Paris or Barcelona. Taken one by one, they are not worth much and you would certainly throw your efforts in vain to try and rent them the old way. But put them all on Airbnb and you unlock untapped potential. The same goes in retail. When Amazon opens up their platform to third-party sellers, they allow the latter to tap into their considerable online traffic. In return, third party sellers made up 51% of Amazon sales in volume in 2017. You could think about it as Walmart letting third-party sellers sell stuff on the parking lot, in return for a commission.

 


#2 The Real-Time Enterprise

The second superpower is the real-time enterprise. Not only are the GAFAs really good at setting up a feedback loop, but also at reacting and adjusting their product and operations in real-time, not monthly, quarterly or yearly. The most obvious example in retail is Amazon’s pricing algorithm. While Best Buy and Walmart change their prices about 50,000 times each month, Amazon does it 2,500,000 times each day. A lesser-known, but more exciting example is the Amazon patent on anticipatory shipping. Filed in December 2013, it basically says that based on your past purchase patterns and current on-site behavior, Amazon will start shipping a product even before you ordered it. This is an ultimate application of the real-time enterprise.

 

#3 The Infinite Enterprise

The third superpower is the infinite enterprise. The GAFas are first and foremost software companies. As such, they enjoy near-zero marginal cost i.e. the cost for serving every new user is almost zero. So, once the critical mass has been reached, every new client is virtually 100% profit. This superpower provides the GAFA with incredible scalability. Amazon, for instance, processes 200M clients per month on their websites, when Walmart “only” receives 34,000 customers per month per store. In other words, Amazon is the equivalent to 5,900 Walmarts stores — and there is no technical limit to how much it can grow. The Amazon Prime membership program is another brilliant application of the infinite enterprise principles. Since it launched in 2005, Amazon kept adding advantages to it, from the original free two-day delivery shipping to unlimited video streaming (Amazon Video), unlimited access to an ebook library (Kindle Store), unlimited streaming of audiobooks (Audible) and now 2-hours Whole Foods delivery in select locations. Today, Amazon Prime is one of the most powerful tools that Amazon has to acquire and retain clients.

As Amazon CEO Jeff Bezos said: “We get to monetize [our subscription video] in a very unusual way. When we win a Golden Globe, it helps us sell more shoes. And it does that in a very direct way.”
 

#4 The Intimate Enterprise

The fourth and last superpower is the intimate enterprise, in other words, the ability of mass-customization. If I visit a Target store in San Francisco with an American friend, we will be presented with the same aisles and the same products. And yet, we are different. As a French man, I pretty much only care for the cheese, wines, and baguettes. Quite the opposite, Amazon can and will show me the products I am interested in. Amazon knows my purchase history and can assume my preferences. This recommendation algorithm is estimated to generate 35% of Amazon sales in value. The underlying principle behind the intimate enterprise is the combination of software and personal data — two fields where the GAFAs excel.

 

A new world order in retail

Over the last two decades, the GAFAs have used their superpowers to challenge the established order in retail.

At least in the US, the traditional order in retail was Walmart at the top, your mom and pop store at the bottom, and the usual suspects in between: Costco, Target, etc. However, retail has been through a series of transformation and this order is currently challenged. Geoffroy Moore describes the “tornado” as the hyper-growth phase where innovation is adopted by a massive amount of users in a short span of time. Also called “land grabbing”, this is the moment where new champions can emerge.

Once the tornado dies down, a new world order has taken place, with 3 types of players. First, the gorilla is the new market leader. He sets the industry standards by innovating and paves the way for the others. Second, the chimps are players that could have been a gorilla, but didn’t make it. They have no choice but follow the rules set by the gorilla, and try to execute as fast and well they can to keep up. Third, the monkeys are small, agile players who found a niche that was not interesting for the gorilla, and where they can thrive. Consequently, the monkeys’ main advantage resides in marketing i.e. the ability to find the right positioning.

(To learn more about Moore’s theory on innovation, tornadoes, and gorillas, check out this article).

 

Having said that, and assuming that retail is indeed in the middle of a massive tornado phase, the first question that comes to mind is: who is going to be the new gorilla?

Looking at the market caps, it seems that Amazon is well on the way to claim the gorilla title. As of March 20, 2018, Amazon was worth 3 times Walmart, and more than Walmart, Home Depot, Costco, Lowes, Walgreen, Target, Kroger and Carrefour combined. But there is more to it than just numbers. Let’s dive a little deeper into the strategies of each player and where they stand in the retail jungle.

 


Amazon is building the perfect retail experience

First, Amazon. If you asked me the question “What is Amazon doing today?”, I would reply “They are building the perfect retail experience”. One look at Amazon’s recent moves makes it obvious.

 

To deliver a perfect retail experience, you need to be present on all channels. With the acquisition of Whole Foods, Amazon is entering brick-and-mortar and with Echo/Alexa, Amazon is entering voice shopping.

To deliver a perfect retail experience, you also need to deliver an amazing customer experience — which is exactly what Amazon is working on with its seamless payment solution Amazon Go, its numerous AR and VR patents, and its acquisition of smart doorbell company Ring. With the latter, Amazon wants to gain access not only to our doorsteps but also deliver groceries directly into our fridges and freezers.

To deliver a perfect retail experience, you need to offer a large inventory of products. True to its mission of “everything store”, Amazon is now beefing up its media category with significative investments in Amazon prime video and audiobooks. Even more disruptive, Amazon announced a strategic partnership with financial giants JP Morgan and Berkshire Hathaway to enter the healthcare market.

And the list is not exhaustive. We could mention the strides of amazon in logistics (with the deployment of their 8th generation of fulfillment centers and the expansion of the third party program to Chinese sellers), in products (Amazon private label clothes and shoes) and more. The bottom line is: Amazon keeps pushing the limits of the retail experience at a breathtaking pace.

Walmart is pushing hard to catch up with Amazon

Second, Walmart. If you asked me what Walmart is doing today, I would reply that they are stepping up to the challenge thrown down by Amazon.

Now, the interesting thing about Walmart is that they are the only player that is really big enough to give Amazon a run for their money. Apart from Amazon, only Walmart can play the game of billion-dollar acquisitions such as the one they did when they acquired Jet.com for 3.3 billion USD in 2016. This acquisition was a stepping stone for Walmart’s e-commerce strategy. Jet.com brought an additional yearly 500M USD in online sales to Walmart. It also brought a more premium distribution channel, expanding Walmart’s reach in new populations.

 

Most importantly, Jet.com came with its founder and CEO Marc Lore. Marc Lore is sometimes considered the second-best in the world when it comes to e-commerce — the first one being obviously Amazon CEO Jeff Bezos. Marc first came to prominence when his company Quidsi.com got acquired by Amazon in 2010 for 545M USD. Marc spent some time at Amazon, then went on and founded a new venture, Jet.com, that got ultimately acquired by Walmart. Now at Walmart, Marc Lore became the head of their e-commerce department, and within 12 months, worked wonders. Under his leadership, Walmart introduced membership free, two-day delivery on Walmart.com for orders above $35, expanded the inventory from 10M to 67M references, accelerated on M&A, including the acquisition of Bonobos for 310M, and set up a partnership with in-home delivery startup August. In a few year’s time, Walmart has geared up and is now ready to fight an uphill battle with Amazon.

Google rallies “the rest of retail”

But what about the others? In November 2017, CNN released an online article entitled “Amazon vs Walmart: rest of retail fight for crumbs”. Indeed, the future looks gloomy for smaller retailers, who have neither the technology advantage of Amazon nor the money advantage of Walmart. Are there the designated victims of the touted “Retail apocalypse”?

 

But a new player joined the game and may very well change the situation. In March of this year, Google announced a massive improvement in its Google Shopping program. Not only can users seamlessly access the inventory of 70+ partner retailers, but they can also shop all of them in one universal cart and pay once for all of it. Companies such as Ulta, Costco, Target, The Home Depot, Bed Bath and Beyond and many more are part of that alliance. What’s more, Google will not invoice ads for showing goods. Instead, they will take a cut out of each sale. It is a dramatic change that brings Google from the advertising world straight into the retail world.

 

It is also a move that makes a lot of sense. Google has online traffic and technology, the traditional retailers have inventory and distribution channels. To put it another way, it’s the brains and the muscle coming together. It is also noteworthy that Walmart is part of that alliance in a very “Googly” way: an open, non-exclusive platform. Although it is too early to say if this partnership will pay off, it is definitely a force to reckon with.

New players invent their own version of retail

So far, we focused on the big guys, the Walmart, Amazon and such. But there are also smaller, younger players that are flying under the radar and finding their own unique path to the customer, reinventing at the same time what retail is about. Companies like Etsy, Casper, Warby Parker, StitchFix, Groupon or Instacart are all less than 20 years old, and worth 750M to 5bn USD. What is so special about them is that they all do retail “with a twist”: Groupon is about bulk purchase, Warby Parker and Casper are DNVB (Digitally Native Vertical Brands), Etsy is a niche platform for handmade and vintage items, etc. The keyword here is “niche”. None of those players intends to confront Walmart of Amazon head-on. Instead, they found their own sweet spot and took control of it.

 

Who is the gorilla in the jungle of retail?

So back to our “gorilla — monkeys — chimps” framework, who is who? As of today, it seems that because Amazon sets the tone in terms of retail innovation, they would be the gorilla. Walmart, Google Shopping and all the traditional retailers are running behind Amazon, making them de facto the monkeys. Finally, a few agile players such as Casper and Etsy have claimed the smaller branches, and can be considered the chimps.

Is it still possible to challenge Amazon’s rule, or is it too late already? As long as the tornado is still raging, change remains possible. Let’s keep in mind that Amazon grew on average 24% per year over the past 5 years, and is expected to keep growing on average 16% per year over the next 5 years. For a company that size, it’s an insane growth rate. Catching up and outpacing Amazon won’t be a small feat.

So what now?

We can all agree that the GAFAs have superpowers and they have used these superpowers to challenge the existing order in retail.

The question now is "what should we do about it?".

#1 Plug into the GAFAs

The first thing to do is to position yourself in the GAFA game: Plug-in, Partner, Compete head-on or Differentiate.

The first option is to PLUG IN. If you own a store, you will put your address and opening hours in Google MyBusiness. It’s free, it’s useful, it’s simple, you should just do it.

The second option is to COMPETE HEAD ON. This is what Walmart tries to do by offering an alternative to Amazon. But as we mentioned before, confronting a GAFA is an uphill struggle.

The third option is to PARTNER. Google Shopping is the perfect example of what a powerful partnership between a GAFA and traditional retailers may look like.

The fourth option is to DIFFERENTIATE like the monkeys do when they adopt a unique positioning that puts them beyond the gorilla’s competitive reach.

 


#2 Do your digital transformation and acquire superpowers

The second thing you can do is acquire superpowers yourself.

This is, however, no small feat. The reason why GAFAs are so good is not purely technical. You may very well put sensors in your stores and implement AI algorithms, but this is just superficial changes. If you really want superpowers, you need to transform your organization at the deepest level i.e. talent, culture, and money.

Talent means that you need to hire and retain a new kind of people, and re-train your existing staff. Culture means that you need to create the right environment for your collaborators, where they can thrive, innovate, the risks and challenge the status quo and beliefs. But transforming your talents and your culture will cost a lot of money. Leadership needs to accept to reinvest money in the so-called “digital transformation”, and they need to convince the shareholders that this is in the best interest of the company. Just like corporate social responsibility has become an understood and accepted cornerstone of long-term sustainability, so should innovation.

 

#3 Love your customers

The third thing to do is always the same: focus on your customers. If you look at the picture below, the gentleman with the glasses holds two brand new iPhone X, which means he just spent a little over 2000 USD. And yet, he couldn’t be happier. This is the face of someone who is loved.

I personally believe that the future of retail is “transactions with love”.

By "love", I mean everything that goes beyond the functional, operational and contractual, and creates a deeper connection with the customer. And the GAFAs are really, really good at loving their customers.

 

Love comes in many ways and shapes.

When you deliver a package, it’s not love, it’s transactional. But when you deliver it two days earlier than planned, then it’s love.

When you refund a customer, it’s not love, it’s transactional. But when you refund the customer without asking for any receipt because you trust her, then it’s love.

When you open a new store, it’s not love, it’s transactional. But when you turn this store into a town hall where communities gather and people spend time together, then it’s love.

If every customer that crosses the threshold of your store is treated with the same care and attention as a parent, then no matter what Amazon does, nothing beats family.

 




I talked a lot about the competitors but at the end of the day, what matters is delighting the customers. Jeff Bezos says it best:

“It’s not about competitor’s obsession, or business model obsession, or product obsession, or technology obsession. It’s about customer obsession.”

So yes, retailers should worry less about the GAFAs and worry more about their customers. Because if you give your customers reasons to love you, then something magic happens: they love you back.


Acknowledgment: I would like to express a very special thank you to David Keribin, CEO at Citymeo, Maxime Luce, CEO at Touchify, and Cyrille Bourdeaux, Senior Analyst at FABERNOVEL, whose insights, advice and suggestions made this work possible.

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