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September 21, 2018 • Volume 25


Amazon Go @3,000 stores?

Bloomberg reported this week that Amazon is considering a plan to open 3,000 of its Amazon Go format, ‘just walk out’, stores by 2021. Amazon Go uses all sorts of innovative technologies -  artificial intelligence, computer vision, you name it - to allow customers to swipe into the store with their mobile phones, then just grab what they need and walk out.

The first location reportedly cost over a million dollars in just computer hardware expense,  countless dollars in software, and, of course, rent. Software investments will scale infinitely, hardware costs will come down with scale, but rent in each market will not. Put another way, these stores will cost a heckuva lot more than your neighborhood urban bodega or Subway franchise. Which means that each location will need to generate a lot of revenue to break even.

The focus of the Amazon Go stores seems to be providing upscale, quick food for relatively affluent urbanites that desire, and can afford, more expensive, higher-quality foods than are currently available. There is undoubtedly a need for this – I can’t imagine how many times I’ve picked up McDonald’s because it was convenient despite a desire to avoid the ‘skinny fat man’ fate that seems to afflict the Cassar men.

As usual, anyone that competes with Amazon saw their stocks beaten up with this news, from drugstores to mass retailers to convenience stores to grocers. In this case, though, Amazon’s stock price didn’t shoot up, as we’ve seen in the past. Investors usually assume that anything that Amazon tries will work out well for Amazon and crush competitors. 

Can they meet their lofty Amazon GO-als?

I have no doubt that Amazon will roll out 100 or so of these stores by the end of 2019, but the idea that Amazon might open thousands by 2021 seems insane. Yes, these stores are very cool and the idea of automating the checkout is truly revolutionary. And I would love to have convenient access to healthier, better food. But the idea that there is a market for upscale to-go food served from 3,000 high fixed-cost facilities in such a quick time-frame is inconceivable to me. Yes, there are 27,000 Subway restaurants in the US, but the cost of opening a Subway restaurant is around $200,000. They don’t have to be extremely busy all day to break even.

If I’m a competitor of Amazon (other than a fast food restaurant or convenience store) there is nothing I’d like to believe more than that Amazon might divert its resources to procuring leases at 3,000 locations and investing a few million in each. Reports have circulated about Amazon’s challenges integrating Whole Foods. This would be a distraction of infinitely greater proportion - the retail equivalent of invading Iraq while still at war in Afghanistan.
It is possible that Amazon has come to believe that the idea of strategic focus doesn’t apply to it, and that Amazon might believe that it can open up 3,000 stores in three years without missing a beat. If so, it would be a gigantic mistake. Amazon has been surprising me, though, for 20 years. This might just be the most recent and audacious surprise of them all.

What's driving e-commerce growth?

In case you missed our webinar this week (Under the Hood: What’s fueling the online growth engine?) that we did with our friends at RetailWire (playback available here), I thought I’d share a few of the high points. Basically, we did a quantitative teardown of e-commerce channel growth in the U.S.. Here’s what we found:

At the highest level, e-commerce has grown at a compound annual growth rate [CAGR] of 20 percent over the past two years (we looked at the 36 month period between August 2015 and July 2018). Most of that growth was driven by increases in spend per buyer per year (+9 percent CAGR], but some of it [+6% CAGR] was driven by buyer growth. I’d have expected that spend per buyer was an important driver of growth, with fast developing consumer comfort with the channel. I was quite surprised though, to find that there were still people that had only recently begun buying: 36 million people started buying online in the past three years. 

What is more interesting--to me anyway--is the drill down to the category level, where we see that buyer growth is a more significant driver of growth than increases in purchase history.  The chart below breaks down the key statistical drivers for the biggest categories (sorted by three year CAGR in online sales, from fastest-growing to slowest-growing). The orange bar shows growth in spend per buyer, the blue bar tracks buyer growth. Across every category buyer growth was a bigger driver of growth than spend per buyer.

How is this compatible with our finding that spend per buyer is the key driver of the channel? If I am an online buyer just dipping my toe in the online water, I’m probably just buying from a category or two. Maybe I bought a watch from QVC and a sweater from L.L. Bean last year.  Assuming those purchases went well, I’m probably going to expand my spend into new online categories next year. Apparently, there are a lot of us who are in that process of moving into new categories.

Pet products (mostly dog and cat food) grew by 49 percent last year[!!]. That growth was driven by a 28 percent increase in buyers and a 17 percent increase in spend per buyer. Both metrics were higher than in any other major category, so this is the most extreme example.

The implication here is that if you are in the Pet category, whether a retailer or a brand, you ought in hardcore investment mode, ensuring that you get more than your fair share of new category buyers at the same time. For those of you in the pet category [I won’t name names] who are popping along happily enough with a 25 or 30 percent growth rate, you need to understand two things: Thing One: You are losing. Thing Two: There are a lot of new buyers out there for the taking, so it’s not too late.

And this isn’t just the case in Pet – it seems that this is the story in e-commerce, 25 years since the inception of the channel. Things don’t get dull here – thank goodness.

About Ken

Ken Cassar is vice president, principal analyst at Rakuten Intelligence, where he looks at trends in the e-commerce industry armed with Rakuten Intelligence's robust set of online sales data.

Ken brings a rich online retail background to Rakuten Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.

Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Rakuten Intelligence's profile. He also has the appropriate jacket for every occasion.