Amazon’s New Customer
19th June 2017
Ben Thompson’s blog Stratechery is one of my go-to places for understanding the tech world.
As you might expect, given a goal as audacious as “taking a cut of all economic activity”, Amazon has several different strategies. The key to the enterprise is AWS: if it is better to build an Internet-enabled business on the public cloud, and if all businesses will soon be Internet-enabled businesses, it follows that AWS is well-placed to take a cut of all business activity.
On the consumer side the key is Prime. While Amazon has long pursued a dominant strategy in retail — superior cost and superior selection — it is difficult to build sustainable differentiation on these factors alone. After all, another retailer is only a click away.
One of Amazon’s key features (that everybody knows implicitly but few realize explicitly) is informational — people go to Amazon not just to buy stuff bot to find out what stuff there is to buy. I catch myself doing it multiple times a day: I have a need, and go to Amazon to find out whether somebody out there makes a product that will fit that need, and roughly what that product might cost.
This is the ‘network effect’ writ large; he bigger the Amazon ‘marketplace’ becomes, the better an approximation of the entire market it is, and the better the informational function that it can serve. I don’t know whether this was a conscious decision on Bezox’ part, but it may have been — when Amazon was Just Books, it dumped a universe of information on its site about books, many of which it didn’t even sell; old geezers of my generation may recall when Amazon was castigated by the Usual Suspects for doing so. But it got us accustomed to going to Amazon to find out what books were out there, even if they couldn’t be bought from Amazon, and eventually we got used to buying them from Amazon when we could, and that habit expanded with the expansion of Amazon’s stock.
This, though, is the brilliance of Prime: thanks to its reliability and convenience (two days shipping, sometimes faster!), plus human fallibility when it comes to considering sunk costs (you’ve already paid $99!), why even bother looking anywhere else? With Prime Amazon has created a powerful moat around consumer goods that does not depend on simply having the lowest price, because Prime customers don’t even bother to check.
Absolutely.
Today, all of the logistics that go into a Whole Foods store are for the purpose of stocking physical shelves: the entire operation is integrated. What I expect Amazon to do over the next few years is transform the Whole Foods supply chain into a service architecture based on primitives: meat, fruit, vegetables, baked goods, non-perishables (Whole Foods’ outsized reliance on store brands is something that I’m sure was very attractive to Amazon). What will make this massive investment worth it, though, is that there will be a guaranteed customer: Whole Foods Markets.