Rules of Retailing and Changing

The $13.7 billion acquisition of Whole Foods by Amazon has thrown a huge monkey wrench into the already crisis-torn world of retailing.

Forbes’ article “The Impact of the Amazon-Whole Foods Deal Will Go Far Beyond Food,” by Neil Stern, presents five major implications to retailing:

1. The impact goes beyond retail food. There are major implications for the Dollar store market, which has no appetite for home delivery.  Forbes’ Stern also predicts the possible acquisition of a major retail chain like Macy’s Niemen Marcus or possibly Target.
2. The battle between Amazon and Walmart goes beyond bricks v. clicks. Forbes’ Stern predicted consumers demanding a “seamless experience.” It predicts, “Sadly, a fairly large number (of retailers) will not make this transition. The stakes have been raised.”
3. Grocer home delivery is still economically problematic. “Without charging the consumers a reasonably premium. These businesses (home delivery) will struggle to make money.  The economies of pick-up are much better, however, and Amazon just gained a very large and convenient network,” writes Forbes’Stern.
4. Supermarkets will be under great pressure to reinvent themselves. “Supermarkets now face a formidable Amazon/Whole Foods combo with better buying powder and innovation and a growing threat from discounters,” according to the Forbes article.
5. Disruptive models will be challenged – Blue Apron, Instacart, etc. Forbes’ Stern points out these concepts are probably looking toward acquisitions or being acquired.

Is Wheel of Retailing Kaput?

Can Amazon Do What Walmart Couldn’t, Stop the ‘Wheel of Retailing?, by Prof. James Haskett for Harvard Business School’s Working Knowledge, showed how both Amazon and Walmart have changed the “wheel of retailing” paradigm.

Prof. Haskett defines the “wheel of retailing” as the concept where retailers enter the market through low-price strategies to build market share.  With the high market share, the retailer would shift its strategy from attracting new customers to increasing profit margins through higher pricing.  In implementing the higher pricing strategy, the retailer opens spaced for a new lower price retailer to come into the market as the wheel turns.

In the article, Prof. Haskett reports on a high-level panel weighing in on the question: “Is Amazon’s growing retail power capable of breaking the “wheel of retailing” theory?

Here are some of the comments he received “I think the notion of entering a market as a low price player to gain market share and then progressing through this wheel of retailing is in the past. Smaller retailers are gaining influence by playing in very special niches where they don’t have to win with low prices …”

“Perhaps it is a function of expanding consumer power and flexibility in fulfillment that has changed the so called cycle, and new games and new rules have overtaken this model? Not sure we can describe this (as a) … new wheel of retailing; rather the new wheels of ecosystems.”

“In Europe the retail industry is more and more moving towards omnichannel and blurring concepts… To conclude the notion of one ‘wheel’ could be a thing of the past, because there are many wheels turning at the same time.”

“The acquisition of Whole Foods by Amazon shows that there still are vast opportunities for Amazon to avoid the mechanics of the wheel… The wheel begins to turn only when volume starts to stagnate and higher tickets and better margins have to keep profits coming in.”

Hackett’s conclusion is that it was Walmart rather than Amazon that has doomed the Wheel of Retailing: “The (Wheel of Retailing) concept fell out of favor with the ascendancy of big box retailers, especially Walmart.  Walmart gained such a dominant share, driving so many higher-priced, higher-margin competitors out of business, that it was believed that the only limit on the company’s growth and profit was the size of the global retail market itself. No competitors could successfully undercut such a retail phenomenon. The wheel of retailing had been stopped.”