Why Amazon Is Leaving Legacy Retailers in the Dust

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Wharton's Barbara Kahn and Columbia's Mark Cohen discuss what's behind Amazon's continuing success.

A recent article in Barron’s noted the stock price of Amazon could eclipse $1,000 per share over the summer. The news is not surprising, considering Amazon’s stock has increased by more than 400% in last five years. What’s more, the digital giant is poised to become largest retailer of clothing in the western hemisphere, analysts predict.

What is the secret to the unparalleled success that keeps Amazon growing while so many traditional retailers are shutting their doors? Wharton marketing professor Barbara Kahn, director of the School’s Baker Retailing Center, and Mark Cohen, director of retail studies at Columbia University, recently joined the Knowledge@Wharton Show on Sirius XM channel 111 to discuss what’s driving Amazon’s success. (Listen to the podcast at the top of this page.) Following are key takeaways from the conversation.

  1. It’s not the product; it’s the experience.

Amazon has expressed a mission to take over the retail world, and it seems to be working. While the company’s chief executive officer, Jeff Bezos, was criticized years ago for plowing profits back into the digital platform, that strategy has given the company the ability to sell virtually anything that can be shipped anywhere.

“Their model is [that] the product is almost a commodity,” Kahn notes. “They can control those products, but what they’re differentiating on is the retail experience and technology. So, they take out all the pain points in shopping, and they lock you in. Amazon Prime is the perfect example.”

She notes that Prime, a subscription service that offers free or low-cost shipping to members, creates incredible loyalty among customers who prefer the ease and convenience.

Another way Amazon builds customer loyalty is through pricing. Its staggering assortment of goods enables it to offer everyday low prices, so shoppers don’t have to watch for a sale.

“What [Amazon is] differentiating on is the retail experience and technology. They take out all the pain points in shopping, and they lock you in.” –Barbara Kahn

“They take out the cognitive dissonance that’s increasingly infecting department store customers who shop and wonder whether today’s the day they should buy something because tomorrow or the next day they might see it at a lower price,” Cohen says.

  1. Amazon is annihilating the competition with customer service.

There’s a persistent belief that when it comes to clothing, customers prefer to try, touch and feel the garments before they purchase. But more and more consumers are willing to forgo that option for Amazon’s ease.

“The old thought is, ‘retail is detail,’ and they are practicing that at an extraordinary high level,” Cohen says, referring to Amazon’s customer service. “They’re killing legacy retailers who basically have been dropping the ball for years on the basis of poor assortment, poor price strategy and terrible presentation. I think customers, for the most part, will want to touch and feel and try things, but the experience in stores is so abhorrent to so many customers that they’d just as soon not.”

Kahn notes that the outliers in retail are stores that have managed to stay successful by hyper-focusing on improved customer relations. Nordstrom is one such retailer; Costco is another. If customers are going to spend precious time trudging through a store, they want the process to be pleasant and the sales associates to be attentive.

That’s simply not the case in most brick-and-mortar stores anymore, Cohen says.

“Too many of our legacy retailers are full of dispirited employees,” he says. “The stores don’t look crisp and clean, and they’re not well-merchandised, so the malaise that is expanding is really frightening.”

  1. Legacy retailers need a new strategy, and they need it fast.

More than a dozen clothing retailers that have traditionally populated the American mall landscape have announced bankruptcy, shuttered locations or closed down completely in the last several years, including Macy’s, The Limited, Wet Seal, Bebe, Guess, Payless ShoeSource, BCBG Max Azria, Abercrombie and Fitch — the list goes on. Those who haven’t shut down or scaled back are stagnant, such as Target and Kohl’s.

“The legacy retail business is in terrible shape,” Cohen says. “For big players like Macy’s — who are not in imminent danger of bankruptcy but, frankly, don’t have a strategy to go forward — this is breakage that is just starting to reveal itself. We’re looking at a paradigm shift that’s just getting started.”

“We’re looking at a paradigm shift that’s just getting started.” –Mark Cohen

But it’s a fool’s game for these retailers to try to compete with Amazon at this point. They need to chart their own path and figure out what will work.

“If you are not willing to change, you are going to lose in this market,” Kahn notes. “For these legacy retailers, it’s very hard for them to change because they’ve had so much infrastructure, they’re so big and they’ve had this established way of doing things that it’s hard for their systems to change, it’s hard for their people to change.”

The experts add that some smaller boutiques and retail clothiers have enjoyed success because they offer their products online, have good customer service and appeal to certain types of shoppers. Cohen calls these stores “green shoots,” while Kahn describes them as disruptors.

  1. It’s a myth that all the lost retail jobs will be replaced.

Both Cohen and Kahn caution against news reports that for every job eliminated by a store closing, Amazon is adding one. While it is true that Amazon is adding a significant number of positions, the assumption that those jobs will be filled by laid-off retail employees is not.

Cohen points out that Amazon’s fulfillment centers typically are not in major metropolitan areas with a large population, and laid-off retail employees may not be able to pick up and move to where these centers are. The nature of the work at fulfillment centers is also very different than the customer-centric jobs that traditional store employees are used to. In addition, there are few job-retraining programs available.

“The retail industry is shedding jobs a lot faster than e-commerce like Amazon is adding them,” Cohen says. “I think there are going to be far more retail workers out of work than, for example, coal miners.”

“If you are not willing to change, you are going to lose in this market.” –Barbara Kahn

  1. Amazon seems to be unstoppable.

It’s fair to say that Amazon now provides the largest cloud computing service in the world. The company is continuously investing in technology and infrastructure, including its fleet of delivery jets, trucks and drones. Amazon is also refining its formidable ability to collect and aggregate data about customer preferences.

“This is an outfit that doesn’t consider any boundaries as insurmountable,” Cohen notes.

Kahn recently peeked at Amazon’s first grocery store in Seattle, in which customers can walk in and out with nothing, but all their purchases are uploaded to their account and delivered.

Amazon’s goal is “to lock you into their universe,” she says. “They can recommend such personalized products [that] you’ll never want to leave.”

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"Why Amazon Is Leaving Legacy Retailers in the Dust." Knowledge@Wharton. The Wharton School, University of Pennsylvania, 15 May, 2017. Web. 22 July, 2017 <http://knowledge.wharton.upenn.edu/article/why-traditional-retail-is-slumping-but-amazon-is-surging/>

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