Can Amazon Do What Walmart Couldn’t, Stop the 'Wheel of
Retailing'?
SUMMING UP Is Amazon's growing retail
power capable of breaking the "wheel of retailing" theory? James
Heskett's readers weigh in.
In 1997, a young entrepreneur visited a class at Harvard
Business School taught by my colleague, Len Schlesinger. The class discussed a
case based on the visitor’s fledgling online retailing company that had rapidly
expanded sales to $100 million. The main issue of the case had to do with
avenues for growth for the company; what would consumers want to purchase
online that would fit into a rapid response distribution model? Students
rejected numerous options involving lower-value items such as dog food, which
would require expensive storage and transport costs.
At the end of the discussion, the visitor commended class
members for the depth of their analysis—then chided them for their limited
vision. Of course, the company was Amazon and the visitor was Jeff Bezos. And
his own view for the company was nothing less than “sell everything to everyone
everywhere.” Including dog food. (Twenty years later another colleague relies
on Amazon for delivery of dog food to a remote location in Maine at a price
comparable to the local supermarket.)
There is no question that Bezos has built a retailing
juggernaut, one that is capturing the largest share of market in product
category after category. His success raises a question: Can Amazon successfully
defy a notion—the wheel of retailing—that has been debated in retailing for
nearly sixty years?
The wheel of retailing was first described by Malcolm McNair, a
distinguished faculty member at HBS beginning in 1920 who, after completing
work in Shakespeare and English, became fascinated with the retailing field. In
1958, he described what was happening in the world of retail after the Second
World War.
He observed that new retailing concepts typically begin with
low-price strategies with the goal of attracting customers. As the number of
customers and the volume of sales increase, the retailer gains a dominant
position in the market. The goal gradually shifts from attracting more
customers to increasing prices and margins in order to achieve higher profits.
That subjects retailers to new competition from low-priced, low-service
startups, thus spinning the wheel of retailing again.
The 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!
Until, of course, the internet came along. Walmart was slow to
react to online retailing, favoring its brick and mortar big box stores
instead. Amazon, unburdened by such real estate, was easily able to mobilize
Internet capabilities in order to capture a dominant share of a notoriously
inefficient book retailing industry. It didn’t stop there. And now it is
systematically moving into new product categories, including those served by
Walmart.
Amazon’s success raises questions about the future of retailing.
Is an “Amazon 2.0” even now in the early stages of design and introduction? Is
the wheel of retailing any longer a valid or helpful concept?
References:
James L. Heskett, W. Earl Sasser, Jr., and Leonard A.
Schlesinger, “Leading for the Future of Services,” Chapter 8 in What Great
Service Leaders Know & Do (Oakland: Berrett-Kohler Publishers, Inc., 2015),
pp. 191-224.
M. P. McNair, “Significant Trends and Developments in the
Postwar Period,” in A. B. Smith (ed.), Competitive Distribution in a Free High
Level Economy and Its Implications for the University (Pittsburgh: University
of Pittsburgh Press, 1958), pp. 1-25 at pp. 17-18.
Reader's Respond:
Is Amazon Riding the Wheel of Retailing?
Controversy concerning the “wheel of retailing” concept
continues. Whether or not it applies to Amazon is a subject of some debate.
Whether or not Amazon has stopped the wheel, will be a future victim of it, or
is riding it, are questions posed by respondents to this month’s column.
The wheel of retailing is a concept that has been used to
describe phenomena in which retailers use low-price strategies to build market
share, to the point where the goal shifts from attracting new customers to
building margins and profits through higher prices. This creates room for
retailers with new low-price business models to create a further turn of the
wheel.
Most of this month’s respondents at least implicitly appeared to
accept the validity of the concept. However, there was healthy skepticism. For
example, Scott Hessell commented, “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 …” Nick C
said: “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.” Edwin Lambregts added, “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 general consensus among those commenting on the question was
that Amazon, even with its newly-acquired might, will not be able to stop the
wheel. “Waves of technological change bring new disruptors along,” as Gadi
BenMark put it. In the future, look for “Blockchain enabled ecommerce, AR-
(augmented reality) and VR (virtual reality)-based commerce, and 3D
printing—each holding the potential of new entrants coming in and “Amazonizing”
Amazon. The wheel of retailing will not stop.” Lester D’Cruz concluded that
“the wheel will remain stopped only if Amazon establishes itself as a global
monopoly. Regulatory agencies may have something to say about that.”
Jan Kessels raised the possibility that Amazon has temporarily
stopped the turning of the wheel. As he put it, “The acquisition of Whole Foods
by Amazon (which took place after this month’s column was posted) 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.”
Several comments suggested, however, that Amazon may be able to
continue to grow and succeed by “riding” the wheel. “Given Amazon’s existing
store efforts and Amazon’s need to create retail profit at some point, perhaps
we are already seeing the wheel in motion,” AtomicAdMan observed--the search
for margins that can turn their retail operation profitable. Glenn Younger put
it this way: “Using unique products or services to chase market share, as
Amazon has done till now, will keep the retail wheel turning,” adding that “it
will take real discipline to make this happen.”
by James Heskett
https://hbswk.hbs.edu/item/can-amazon-do-what-walmart-couldn-t-stop-the-wheel-of-retailing
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