US discount retailer Target’s decision to stop selling Amazon’s Kindle e-readers has been seen as an attempt to stem the growing trend of consumer “showrooming” whereby online consumers try before they buy in the physical stores of the etailers’ traditional rivals. Indeed, Target’s CEO Gregg Steinhafel sent a letter to his company’s suppliers stating plainly:
“What we aren’t willing to do is let online-only retailers use our brick-and-mortar stores as a showroom for their products and undercut our prices without making investments, as we do, to proudly display your brands.”
The extent to which this affects Amazon’s short-term headline sales may be negligible, but the advantage it could give other e-reader producers is almost certainly not being underestimated by the online giant, which has actively encouraged the kind of consumer behaviour that’s so enraged Target by promoting its PriceCheck app. The app, designed to be used in store to compare prices against Amazon’s online offering, has even see customers incentivised with a 5% discount on items price-checked in a competitor’s shop and bought through Amazon within 24 hours.
The crux of the matter for Amazon is that all Kindle sales are needed, with loss-making Kindle Fire’s penetration the key to maintaining lucrative e-book and other digital media sales. In this scenario, any market share gains for competitors in the form of Barnes and Noble’s Nook e-reader or multi-function devices such as Apple’s iPads, Samsung’s Galaxy Tab 2 or other tablets will hurt Amazon’s long terms growth and profits. Here we see a company whose albeit impressive recent gross margin improvement to 24% marks it out as a powerful volume sales etailer with little scope– or indeed appetite – for a costly move into physical retailing. Indicating the lack of room for error in taking such a risk in the physical space, Barnes and Noble – a rival which has struggled for years to move the other direction – can turn a healthy gross margin of 26.7% into a pre-tax loss for the quarter compared with Amazon’s 1.6% pre-tax profit in the same period (Amazon’s profit would have been greater but for heavy inward investment).
Compare this with Apple’s immensely successful – and historic – vertical integration into retail selling and you can see why the value of consumers touching, playing and feeling has seen such wrangling between Amazon and Target . The key difference of course is that Apple’s profits are incomparably high and an immensely strong cash position offered scope for risk even before the lucrative explosion of its Apple Stores. And of course Amazon’s visionary, inimitable CEO Jeff Bezos has made it clear where he feels the company stands in terms of strategic positioning and the relationship between tech and profits:
“We think it’s a unique approach in the marketplace—premium products at nonpremium prices. We’re a company very accustomed to operating at low margins. We grew up that way. We’ve never had the luxury of high margins, there’s no reason to get used to it now.”
So finding a way to harness the power and immediacy of a physical environment whilst maintaining the absolute faith in e-commerce, which has marked out the Amazon-inspired online sales e-volution, is a strategic challenge even for someone of Bezos’ vision.
The recent development of AmazonSupply as a challenger in the B2B office and building supplies environment proves Amazon understands what it takes to move into new space, but physical retailing would still represent a much larger leap.
Resisting the pull into physical retail may not be easy, and finding ways to put Kindles into the hands of consumers before they commit is a major challenge which may yet have a say in the overall success of the company in the coming years. Of course Kindle devices aren’t the only way to encounter the ‘Kindle’ reading experience as Amazon also pushes into apps, but the fact remains that Target’s decision is likely to provoke yet more innovation to help Amazon reach those consumers who demand to feel.
Well far be it for me to proclaim great innovation in the space of one blog, but I have faith a solution will be found which doesn’t leave Amazon at the mercy of its somewhat peeved traditional rivals. Whether it be hot-dog stands, automated credit-card release kiosks in the mould of RedBox, permanent product road shows, select high-end showrooms, “Amazon ladies” birthing an Avon strategy for tech, or a genuine stride into the physical retail space, I’m sure it will as fascinating to observe as Apple’s own groundbreaking retail manoeuvres.
Target, Unhappy With Being an Amazon Showroom, Will Stop Selling Kindles nytimes.com/2012/05/03/bus…—
Meridian Packaging (@MeridianSP) May 03, 2012