RBC hosted a very interesting and insightful call last week with Retail Expert Miya Knights, to discuss Amazon and the growth of omnichannel retailing. Miya is co-author of the books “Amazon: How the World’s Most Relentless Retailer will Continue to Revolutionize Commerce” and “Omnichannel Retail: How to Build Winning Stores in a Digital World.”
RBC: How do you expect online penetration to trend post the pandemic? Will this vary much by age group?
Miya Knights: This is the perennial question which retail executives have always been asked and it has become even more prevalent during the pandemic. The future remains uncertain; however, we saw a 25.7% surge in global ecom sales in 2020 and we are looking at 16.8% in 2021. Therefore there has not been that much of a contraction as stores have re-opened. Store sales and footfall haven’t rebounded quite as quickly as some hoped and as a consequence online sales have not dropped off quite as fast as anticipated. Several industry commentators, eg, Ascential, expect that by 2025, around 40% of retail sales will originate online.
Also the gaps between Gen Z, Millennials, Gen X and Boomers in terms of what they are shopping for online and why they are doing it, is narrowing. 68% of Gen Z use their mobiles to shop online. This was 77% for Millennials, 72% for Gen X and 52% for Boomers. Millennials are the ones that are staying home, are the ones in middle-management roles, the ones looking after the kids. As such, they are more cash rich at this stage of life and are more likely to stick with the habit of shopping online now.
RBC: Do you think online retailers have lost some of their competitive advantage over omnichannel retailers? Eg, due to higher labour costs and shortages, or due to the relative convenience of omnichannel retailers?
Miya Knights: Online retailers have lost some of their competitive advantages because of these reasons, even in the face of stores being closed. As ecommerce has become a bigger proportion of retail sales, consumers are becoming more prone to trust the brands that they know. On the high street, that level of trust was a prerequisite. Through 2021, the disparity between the growth of omnichannel retailers and online-only retailers has widened, with omnichannel retailers being the winners. Omnichannel is what the consumer wants as it offers great levels convenience and service. As such, the online-only players are going to have to look into opening physical sites.
RBC: Is Amazon helping to cause cost inflation for other retailers by expanding aggressively and paying relatively attractive rates for warehouse staff?
Miya Knights: This is causing upwards cost pressure. Taking a step back, the ‘Amazon effect’ indicates that online retail has resulted in more uniform pricing. Dynamic pricing (being able to change pricing multiples times a day) has in the past, been shown to have a downwards effect on prices and to offset inflation. Now, all retailers are having to raise prices and Amazon is reacting to the same issues as other retailers. Amazon has a 41% share of US ecommerce but only 4% of total US retail sales, so the Amazon effect is disproportionate. Amazon has scale and much deeper pockets to offset cost pressures.
RBC: How can retailers best deal with cost inflation next year?
Miya Knights: Retailers need to be sustainable and be able to do more with less. This has to start with knowing who the customer is. Nearly ¾ of retailers told Adobe (in its annual survey) that they had seen unusual growth in digital customers over the pandemic. 37% have also seen higher rates of churn. It will be important for retailers to identify where those net new customers have come from and which ones are shopping across channels. Retailers need to engage and nurture those customers. The retailers need to build demand profiles to rightsize planning and help with forecasting their buy, rationalize their store estates and look at store fulfilment. Information is power for retailers. Owned channels will become key for this. Customer service can be digitized with live streaming, and video chatting can increase conversion rates and basket sizes almost as much as click & collect can.
RBC: What impact do you expect selling price inflation to have on the sector next year? Eg, will we see trading down or a switch from non-essential to essential products like food and fuel?
Miya Knights: We will likely see some trading down. The rising cost of living is going to have a negative effect on consumer spending but it is yet to be seen how much of an effect this will have. Retailers are slimming their ranges and checking their prices. Retailers are trying to move customers up into equivalent ranges that are slightly more expensive. We will likely see a lot more aggressive marketing strategies. Retailers will likely look to capitalize on the digital growth that they have seen in order to secure consumer loyalty and get the frequency of buy back.
RBC: Is Amazon now having more success pushing into newer areas like Fashion and Grocery?
Miya Knights: In 2020, Amazon grew its US retail sales by c.40% and topped the list of global ecommerce companies by revenue. Pinduoduo in China grew 97% in 2020 so some companies are outstripping Amazon in terms of growth, but Amazon remains the largest player. Amazon has maintained growth by selling more of what it does well and has offset losses through 87% growth in advertising revenues. Amazon Grocery has been growing at a CAGR of 16.3% vs 3.5% for Tesco, so it has been making massive gains but off a small base. In the UK some commentators think Amazon sales will exceed those of Tesco by 2025. The pandemic has given it a big boost. It is intending to open 265 stores in the UK by 2025 so we shall likely continue to see aggressive growth in this category. When a player like Amazon grows aggressively in any category, it takes market share.
Amazon became the number 1 apparel retailer in the US by 2021. It is now looking to open a physical Clothing store in California and I expect it to grow its Clothing offer at the same rate as Grocery. Conditions are looking in Amazon’s favour in terms of growing share in these categories but the question is how quickly can it do it.
RBC: Do you expect a change in tax to favour store based retailers over their online counterparts, eg, a reduction in business rates or the introduction of a digital tax?
Miya Knights: I do not expect to see any movement beyond the current business rates relief already in place, from a physical retail store perspective. The plans for a digital tax are more likely and there is a good chance that this will target warehouse space. If that is tabled this year, it will only be in consultation. Plans might be outlined in 2022 with a view of something happening in 2023-24 so it is still a while out.
RBC: How will increased online penetration during the pandemic affect the type and location of new store openings?
Miya Knights: Landlords are facing pressures to offer shorter and more flexible terms. Traditionally, the market is a lot softer in the high footfall urban locations and out of town locations. Retailers have been opting for smaller, more local stores which plays into the idea of stores being a fulfilment hub (eg Aldi and Lidl are shrinking their store formats). We shall likely see retailers having to factor digital shift into the type and location of stores.
RBC: What do you think of Amazon’s new formats? How scalable do you think they are?
Miya Knights: An Amazon Style store is set to open later this year in California. In the UK, it is calling its convenience format ‘Amazon Fresh’ (this is a slightly larger format store).
Its own brand strategy is very important to its range in these stores. Amazon has been collaborating with local producers for these stores in the UK as well. All of the stores are within 0.5km of a transport hub, close to high density residential or office locations, and less than 200 yards from another supermarket or convenience store.
Amazon is not as good at ranging in stores as others, it is quite utilitarian in style, but it offers good convenience. Amazon needs high ceilings to get all its kit into stores, and they need 5G access for their walk-out systems, which limits their locations slightly. I expect transit/travel locations to be more of a focus for ‘walk-out’ technology stores in future.
RBC: Have you noticed AMZN ramping up in any categories where they can exploit their fast delivery advantage, eg, furniture?
Miya Knights: Prime Now is the 1 hour delivery offer – Amazon has to balance the ability to exploit fast delivery and the changing economics and as such, has doubled down on its one day delivery. One day delivery could be a winner for Amazon. Amazon does not have much own brand in furniture and so is not likely to expand heavily into this area. Usually, for specialist items, a consumer would be buying from a merchant and would have to wait a few days.
RBC: Do you expect AMZN’s retail strategy to change much now that Jeff Bezos has stepped back?
Miya Knights: The key thing will be, who Amazon brings in to manage Clothing and Grocery, which are the focus areas for growth.
This is not a promotional/sponsorized post. Thanks RBC for inviting me to this interesting expert call.
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