Hey, if orange is the new black, then anything is possible. Given the impact of Amazon.com and online on traditional retailers, maybe bankruptcy is the new black.
Will it help or hurt Amazon to drop reference pricing from their website?
A Brief History
When Walmart was 20 years old in the early 1980s, it represented about 3 percent of non-restaurant, non-bar retail sales and took about half of all new growth in retail sales. Amazon is about 20 years old, is about 3 percent of non-restaurant, non-bar sales and takes about half of all new growth in retail sales. To me, both Amazon and Walmart grew based on incredible convenience versus their competition, as well as because of customer trust that their prices were as low or lower than anyone else’s. When I visited my first Walmart (full disclosure, I stocked shelves for its grand opening), Number 26 in Sikeston, Mo., a customer could drive up to the door, find a selection of goods that was much broader than what was offered at other retailers, and find prices that were significantly and noticeably cheaper than any other store she had visited.
The Lowest Price Bought the Customer
Once the consumer figured out that Walmart had the best pricing, even without any promotional reference pricing offered, she went there in numbers never seen before in the history of retailing. The store was “convenient enough,” it was “clean enough,” and it had the lowest price points that she had ever seen. So, the consumer figured that Walmart was a better deal without Walmart self-promoting these competitive advantages. There were no signs saying compare at, or 30 percent off regular prices. Once that value image was intuitively set in the consumer’s mind, Walmart figured that they did not have to be the cheapest player on everything that they sold as long as they were cheaper on enough things, and as long as consumers believed they were getting better deals than any place else. And she believed that because almost every time she compared a Walmart price to the price at another store, Walmart was cheaper. Walmart was careful to be cheaper than any other store on the 100 most recognizable items.
Amazon Has Arrived
I think Amazon has reached that point today in the mind of the average consumer. The shopper thinks, “if I go to Amazon I will find what I want, it will come to my house on time, and I will not have to overpay for it.” The consumer does not need reference pricing. And if she does, it is one click away on her phone. If I were running Amazon, I would not provide any reference pricing. They have the consumer, and the consumer finds them convenient, trustworthy, and well-priced. Just like Walmart used to be, Amazon is the reference price.
Neither Walmart nor Amazon has fallen into the excessive promotion trap that traditional retailing has fallen into. Does an everyday low-pricing strategy work for players other than Walmart and Amazon? It didn’t work for JCPenney, but that’s another story in the genre of leadership missteps. And it’s questionable whether an everyday low-price strategy is fundamentally better than a high-low promotional pricing strategy if both are executed well. But we have certainly reached the point of excessive promotion over the last few years, partially driven by the arrival of fast fashion retailers and most certainly driven by online competition, primarily from Amazon. How can retail at large get off of the promotional treadmill? This is an addiction that is a disease. More importantly, how can any company wean the customer from this expectation? Walmart never aided low-price dependency. It stayed with “everyday low price” because they have consistently provided the best prices for more than 20 years. Amazon never joined in, either. The company consistently provided the best prices, and frequently provided half a dozen prices from various providers of the same product so customers could see the relative pricing. Amazon has never been promotionally driven, so not providing reference pricing is not a big deal, Other retailers not only push excessive price referencing, but they are driving the race to the bottom.
The Promo Trap
Here’s the problem: Everyone else has fallen into the trap of trying to convince the customer that a $35 item is really worth $50. If Macy’s started selling $35 items at $35, would the consumer figure it out? Yes, and they would have figured it out at Penney, too. The off-price guys don’t have the addiction. While they do show reference pricing, they are really selling at the “everyday low price.” So far that strategy has worked well in off-price. But as the off-price guys become even more off-price (about 80 percent of what they sell now is bought directly to be sold at off-off price), their reference pricing becomes less realistic. That results in more lawsuits regarding “fake” prices. Customers will catch on that the reference prices aren’t real. At the very least, it will result in reference prices being less compelling as the consumer makes her purchase decision.
Promotions Work … Until They Don’t
I have (somewhere) some of the first advertisements that May Department Stores ran in Denver newspapers in the late 1800s. The company was already selling on promotion. The philosophy was to make the customer feel like she was getting a deal, that she was special and there was something just for her. Actually, that has always been the case since the Macellum provisions market in ancient Rome. For the last 100 years, it worked to tell the customer that she was getting a great deal on an expensive item. But once such promotions appeared in your face, every day, at every retailer, on every item, it was not special anymore. Heck, it isn’t rocket science. It is just retailing. If it is amazing, or it is fun, or it feels like a deal, she will come shop. Once it is not fun, is not amazing, or no longer feels like a deal, she heads to another retailer.
If Amazon is the new Walmart, what is the old Walmart? Is there room for both? And more importantly perhaps, if there is room for both, is there room for anyone else? The fact that Walmart bought Jet.com probably answers that question. Even though Walmart is almost five times as large as Amazon when measured in sales volume, Amazon is already bigger than Walmart as measured by Wall Street’s valuation.The Street thinks Amazon has already won, and we are now are just waiting for the referee to
say time has run out.
Those of us in this business, as opposed to those in the investment business, understand the tenacity of Walmart and the power of size. Walmart has been growing its omnichannel business aggressively. It has learned to distribute from store and to let its customers order online and pick up in a store. As it adds the expertise of Jet.com, it will have a shortcut to compete directly with Amazon online. Even though the sale price for Jet was $3 billion, that’s pocket change for Walmart. The company currently holds about $6 billion in cash and cash equivalents that are yielding very little. Walmart will put its purchasing power behind Jet.com and it will use all 3,000 of its stores as distribution centers for its online business, eventually integrating Jet’s business. At the same time, Amazon will be opening 350 brick-and-mortar locations to showcase its offerings. Everyone else in retailing, whether brick and mortar, online, or omnichannel will have to learn to compete with two extraordinarily low-cost and low-price retailers that can offer an almost unlimited product range. They also have the confidence of the consuming public, and both will be serious players online and in brick and mortar. And they will now both be able to offer third-party sellers platforms for online selling. Yes, Amazon and Walmart will look more alike, price more alike, and sell more alike everyday as Walmart incorporates Jet and Amazon opens brick-and-mortar locations.
Prediction: by 2030, 50 percent of all non-bar, non-restaurant retail sales will be online. Rest assured, Walmart and Amazon will have a huge share of that pie.