One of the stories of the last two decades has been Amazon.com’s relentless roll-out across the world, leaving delighted customers and despairing merchants in its swathe.
Traditional on-ground retail patterns have been disrupted. Christmas shopping isn’t what it used to be in the US, and won’t likely be so ever again. And these days, a month before Christmas, not that many line up outside superstores for super deals on Black Friday.
The pattern is being disrupted around the world too. Diwali shopping in India has declined and the footfalls in malls are just not spending that much. And the common wisdom is it's because people have moved online. China’s biggest shopping day is now 11/11, owned by another online giant, Alibaba.
The question has been asked often, in conference after conference – how does one stop this online juggernaut and make a fight of what was once a booming $10 trillion offline retail opportunity?
Amazon has now crossed the $135 billion mark in sales – while that is 1/3rd of Walmart’s numbers, its market cap is already twice that of the Arkansas giant that once pooh-poohed it, and growing faster.
Learn from Amazon on the ground
The answer may actually come in not aping Amazon online – many have tried and continue to do so, with varying to minute degrees of success.
But, instead, to learn from Amazon’s preliminary adventures in on-the-ground retail.
I did so a few weeks ago when, by happenstance, I found myself outside an Amazon Books store in a suburb of Boston. I went in and spent a lot of money. More than I ever have, in a traditional bookstore in 10 years.
I was excited. Full confession - I’m a long term Amazon fan, having helped design its website and launch campaign some 20 years ago (remember “Earth’s biggest bookstore”?). Jeff Bezos was my client then – and one I’ve learnt loads from. And I’ve been a teeny-tiny Amazon shareholder too for some of those years.
Breaking the rules of traditional retail
It was a short trip to Boston – but I made sure I spent hours at the store across two visits.
Here’s what I figured. The store broke many of the rules of traditional retail.
Let’s start with the most basic one.
There’s an oft-quoted observation of retail called The Long Tail – that a very few products, say about 3% of everything available, will end up contributing a massive majority of the volume of sales. Yes, it isn't the Pareto Principle's 80-20 - it's more skewed than that.
The curve looks like this and extends all the way to the right. In fact, if you're curious, there's an interesting book on the subject.
So retailers mostly tend to stock those popular items at the left. These are called the “fat head” or the “short head” of the long tail.
These are the “hit” products. In books, it’s J K Rowling and the other best-selling authors. In soaps, it’s what Unilever and Proctor & Gamble make. In shaving paraphernalia, it’s Gillette. In movie theatres, it’s the self-proclaimed big-budget blockbusters.
Everyone aims for the head
Now, all retailers want to sell what they believe people want to buy – and all want to stock and sell 'the hits'. Given that they all end up stocking pretty much the same thing, they then figure they need to compete.
And they do so by discounting. Either across the board with sales. Or selectively, to super-discount the milk in supermarkets and stock it way at the back of the store, knowing that you will come in regularly to buy it and end up buying more of other full-priced stuff on your way back to the cashier.
Yet another way is to put up huge displays, end-caps and other promotions to push even more best-sellers to the same customers who can otherwise always buy it elsewhere.
But here’s the first observation –there was almost none of this at the Amazon store. In fact, if there was even a pile or stack of best-sellers, I missed it entirely.
Stepping aside from the short head
The Amazon bookstore was a small place – perhaps 4,000 square feet or so. A fraction of the size of Barnes & Nobles. But the books were different.
They’re what I would call Upper-Mid Tail. Not the short, fat head. (No obvious titles and authors you’d see at any airport bookshop). And not the long tail either. (No obscure Portuguese translations of medieval German poetry either.)
They were books highly recommended by Amazon customers. In fact, items were categorized by their Amazon review score – and many titles were scored 4.8 or more out of 5 by thousands of people each. So enough readers had bought, read and reviewed them – not as many as best-sellers, perhaps – but sufficient numbers for them to be higher on the tail than others.
I discovered a graphic novel series I perhaps wouldn’t have otherwise come across. And an amazing set of books I thought my 6 year old would like that I’d never heard of before either. (He did love them.)
And some others were things you perhaps had to hold in your hand and see in person to appreciate. A book on molecular gastronomy for the home that was big and fat and wonderfully produced – and that would have escaped my attention in the standard merchandising online of a 100-pixel by 100-pixel photograph. Another large format book on space for kids, with lovely pop-ups and cut-outs and moving parts that I wouldn’t have been able to appreciate fully on a website or mobile screen. Yet another paperback with red-edged pages that made me pick it up and add to my real shopping cart.
And more discoveries too. But what about the pricing?
Pricing – the membership option
All the books were priced at MRP (or MSRP as it's known elsewhere), like they would have been in any other bookstore. But here’s where Amazon made it different again.
If you were already a Prime member – something that costs $79 or $99 a year in the US and Rs. 500 to Rs. 1000 a year in India depending on when you signed up – you wouldn’t have to pay retail, you’d instead pay the same price you get online.
That was a straight 35% off the top, and made it a no-brainer for me. Buying from on-ground, at the online price? Sure, count me in.
I think the store is likely to be successful – though we’ll have to wait for their annual report to see if the famously secretive Amazon spells out their numbers from this adventure. Given that they’ve expanded from one on-ground store to several already, they must be seeing some positive signs here.
But it was a learning for me. And I tried to see if there was a more general pointer here.
It made me put together a set of four guidelines.
First, don't sell the things everyone else sells
There are only a few companies that can pull off a strategy to sell what everyone else sells profitably - Wal-mart for one. Or TJ Maxx. Or Tesco.
You need to have massive size and distribution, and the ability to sell at razor-thin margins. And you'll constantly be undercut by the store next to you, or by some venture-subsidised online firm.
There's a better way here - to flank the 'short head' products.
That is, to sell the Upper-Mid Tail.
Second, do so with explanations, content and product cues
Let's say a Wal-mart stocks Head & Shoulders Shampoo. And you open a store that stocks a much wider range of brands in hair care. Offer content and explanations. Look at products which are physical more than digital and where seeing is believing - or at least where holding the product in your hands offers more value than seeing a small picture of it online.
Why is Brand X a great conditioner. What makes Brand Y awesome. Give people cues, give them knowledge, give them reviews. In fact, borrow from Amazon directly. You'll be surprised.
Did you know, for instance, that the above are some of the best-reviewed watches on Amazon? These aren't brands and models that you can find in one place at most retailers. Could you read the reviews and tease out why they're popular? And tell prospective buyers about each of them?
Or this for instance. Did you know these are some of the best-reviewed models in men's shoes in the world? Could you build a category-killer vertical in watches, or men's shoes, or indeed soaps or shampoos or athletic garments or indeed any other niche, where you offered content and reviews and built more of a hands-on experience?
You wouldn't stock just the best-sellers, like every one else did. You'd have a different 'curated' selection.
You'd inform and educate more. You'd let people touch-and-feel. People would trust you more. And come to you to get the best. That is, if you were a retailer.
And if you were someone who wanted to build products for such a retail environment, you'd look differently at your packaging. You wouldn't do just the fashionable 'imagery + brand name' like perfume bottles or fashion brands or interiors brands do.
You'd use words, offer explanations. Go deep into why this fabric or that ingredient or that technology or this soap fragrance is better. Give people something to latch on to, believe and remember. This is how you build brand awareness and preference.
And whether you're a retailer or producer, because of all this, you could sell at higher prices and higher margins, and you will need to discount less, because no one else stocks the same set you do, and there is less commodity pricing pressure.
But there's yet another interesting pricing strategy to offer.
Third, bring in membership pricing
Or you could learn from Amazon or Costco here too. You could take a annual subscription fee in advance.
And for those who paid up, you could then offer discounted or same-price-as-online pricing. This is especially useful if you have an omni-channel strategy, where you sell both online and off - and you could do so at different prices on different channels.
So people would come to your stores on ground regularly just to 'get value' for what they've already invested in - and the fact you charged a membership or club fee would in fact bring you more usage than if you didn't.
Amazon, by the way, earns about $6 billion only on membership subscription fees for Amazon Prime from 65 million people around the world. This is almost all margin.
Try it, you'd be surprised how willing people are to becoming members of your club. While actually paying for it.
One microbrewing company I'm an investor in, Doolally, in fact has done quite well by charging an up-front membership fee of around $50 a year that lets you buy $6 worth of beer for $4.
People need to quaff 25 mugs a year to break even, but are happy to be part of a community in doing so. I imagine that most don't even count the number they need to drink to technically break even.
Creating a community of returning and re-purchasing customers is one of the stronger things your business can do.
Fourth, build a large Upper-Mid Tail business
There's loads of room for new vertical category killers.
See how far Whole Foods and Trader Joe's have taken the new-age, healthy food markets.
It's a combination of not selling what others sell, and selling what others don't sell - along with large doses of education, information and community.
Or how Sephora has done this for the cosmetics and make-up market.
A much wider range of items, colours and shades than a buyer can find at any typical supermarket.
Along with a lot of information on offer from salespeople and demonstrators on what to buy and why.
Is there scope still here? Loads, I think.
Let's look at the male equivalent of Sephora. What are the personal care items guys buy most of? I'd guess shaving goods. Yet just one brand dominates distribution here: Gillette. Can there be a business making blades, razors and shaving creams other than by Gillette? And selling them at premium prices by explaining why they're better?
For sure. (I for one think this is a high-potential category. I'm bored with buying Gillette - and now regularly scour shops around the world just for different shaving creams.)
Or fashion? Can you just do off-mainstream jewelry from around the world and out-accesorise Accessorize? I think so.
Can you do a pop-up only featuring torn jeans? Or another only around hairclips and hair bands? Or one only on ear-rings? Why not.
If you were smart, you could pick a vertical, pick reviews and content from Amazon and the goods from Alibaba or AliExpress, and create your own niche and store without too much of an effort.
The on-ground retail game isn't over
People like shopping on-ground. It's not just a need. It's entertainment.
So online won't take it all away - unless you lie back and let it.
What retailers and producers need to do is to make the on-ground experience worthwhile.
I believe a strategy that involves non-head products, information and community along with membership pricing can make a big impact.
Till, of course, the world changes again.
This article originally appeared on LinkedIn.