Friday, November 10, 2017

Presentation given to International Trade and Marketing Advisory Board of FIT, 9 November 2017-Sourcing in the World of Amazon and the Category Killers

To begin, let me set the scene of today’s world of retail- Here’s an image:

Godzilla rises above Tokyo Bay.  People scream and run helter skelter, in total panic. How did this happen? Surely we are dead now….

The name of this horror movie is “Amazon and the Category Killers.” By Category Killers, I refer to breakthrough companies like Inditex, Uniqlo, H&M, Lidl. They are commonly referred to as “disruptive.”

Actually, they didn’t disrupt anything; they just EVOLVED. And others didn’t.

The state of retail today follows Darwin’s theory of “Survival of the Fittest.” Per Darwin, those who figured out a new tool or technology better than others survived. Those that slept, ignored, or were ignorant, didn’t.

The rise of these companies who will doubtless dominate retail in the future has followed a clearly predictable pattern of evolution. And they themselves have evolved into their present state over as much as 40-50 years time. Let’s take a brief tour through the recent evolution of commerce that brought us to where we are today:

Today, with enabling technology, it is no longer necessary to run to the shopping mall to buy what you need; You can sit at home, just as people did more than 100 years ago with the Sears Catalogue. If you want to go out shopping for the entertainment or experience, you also have choices. Simply put, brick and mortar shopping with the department store as anchor has EVOLVED to, “ I can get what I NEED online. For my store shopping experience, I only have time for a laser-focused, clear, concise and pleasant presentation of what I should want now or this season.” No more boring trips to the department store sifting through too much inventory at too many prices. Solution: Amazon and the Category Killers.

People shopping remotely is not new.

Sears, enabled by Rural Free Delivery, mailed its first catalog in 1896, almost 30 years before it opened its first store. Sears even sold houses through their Modern Homes catalog starting in 1908. JC Penney produced its first catalog in 1925.

Quick-when did Ecommerce first appear? How many of you said 1983?

AT&T produced and distributed Viewtron, beginning with a test in Florida, from 1983-1986. Viewtron was a remote terminal on which you could order merchandise, book flights etc. based on NAPLPS graphics language and sent over phone lines.  The idea failed, as people were not accustomed to using technology and did not want to spend the $600 cost.

From there, we can clearly see the EVOLUTION of what we know today as ecommerce. Here are a few key dates and events:

1984- Tesco First B2C online shopping platform in UK and Compuserve Electronic Mall debuts in US.
1990- Berners-Lee introduces the first web browser, World Wide Web.
1994- Netscape Mozilla, first secure transaction.
2016- Amazon aided more than 10,000 sellers to generate more than $1million in sales on the Amazon Marketplace.

Wait- How did we get to 2016? When did Amazon start? Answer: In 1994. So Amazon has been EVOLVING along with the enabling technology for almost 24 years. 

So where was everyone else? Why does Amazon account for almost half of online sales today? Jeff Bezos even said, “There is nothing about our model that can’t be copied over time.” Yet today, 24 years later, there is only ONE Amazon.

Inditex, corporate home of Zara, Massimo Dutti, etc. started in 1963. More than 50 years ago. The first Zara store in US opened in 1989. Almost 30 years ago. By 2010 Zara had 5000 stores worldwide. Today Inditex operates in more than 90 markets. However, only very recently is there frantic talk about “fast fashion” as a force in the retail business. Inditex did not get to where they are in a magic burst. They EVOLVED over time. And those that are frantic now-didn’t.

Other category killers such as Uniqlo, H&M, Lidl also evolved; those department stores that are closing daily-didn’t.

It can be clearly seen that the phenomena that are Amazon and Inditex did not suddenly appear over Tokyo Bay-they EVOLVED over time with enabling technology.  Everyone else had the same opportunity to evolve-but they didn’t.

As we follow Darwin’s principles, those who adapt best to the changes and challenges over time, survive. Those who do not, don’t.

My conclusion is: Amazon and Inditex are NOT the problem. They are the SOLUTION-the EVOLUTION SOLUTION.

But what is Amazon today?

Amazon is much more than the monolithic force it appears to be. Let’s take a look:

Of the whole of $135.99 billion in global revenues in 2016, about $91 billion is from Amazon itself, selling its own or other brand products directly; 22.99 billion was generated by the Amazon Marketplace, third party sellers selling THROUGH (not TO) Amazon; most of the balance of revenue was generated by Amazon Web Services and Amazon fulfillment.

The Marketplace segment is comprised of more than 2 million sellers worldwide, selling their product THROUGH the website. While some reached as high as $10 million volume, the raw number is $22.9 billion volume/2million sellers-$11,450 average volume per seller.

So this “monolith” now looks like a community where even the smallest sellers can market their product. Compare that to the world of Walmart, where a half million square feet store presents “everything”, to the detriment of local and neighborhood business; Amazon has offered the opportunity to more than 2million entrepreneurs, family businesses, and small enterprises worldwide (in more than 100 countries) to be successful; one cannot imagine another affordable route to success for them if not for this Marketplace.

What is more, a whole new industry has evolved strictly devoted to facilitating these 2 million sellers manage their business- Repricers, SEOs, 3PL, and more.

Other companies recently have, in fact, copied the Amazon model, and their numbers are growing.

Oh, and Amazon Smile has given more than $62million to various charities based on subscriber purchases.

All of a sudden the Evil Empire looks like the Happy Kingdom. Not to those who slept or failed to evolve while it was growing, but to those who have or have had the sense and foresight to benefit from the Amazon business model, and all of those who benefit from the beneficiaries.

But how about sourcing? The $22.9 billion and growing of Amazon Marketplace 3rd party sellers is composed of products that need to be made and delivered. Gone are the days when sourcing was about a few big companies making lots of the same thing in the same color and telling the consumer what to buy. Now we face sourcing, for Amazon alone, $22.9 billion from millions of different sellers. How many SKUs do you figure that amounts to?

So the Amazon Effect, as well as the effect of fast fashion like Inditex, is MORE SKU and LESS QUANTITY/SKU. So how does a factory or those in the business of sourcing for others, like Li&Fung, deal with this? It is not easy to switch the sourcing of entire industries or portions thereof from a volume-based model to a style-based model.

The entire supply chain and sourcing process has been turned on its ear. What remains is a huge challenge and a huge opportunity. EVERYTHING needs to be renewed-people, procedures, systems, factories and factory business models, logistics, transportation. The paradigm now is to get a product that the consumer wants quickly, and likes to see (in fashion) renewed every couple of weeks, without any compromises to quality, for the right price. Hmmm..

Again, this is a huge challenge and a huge opportunity for anyone who boldly embraces the sourcing requirements of this business model. And for those who wish to catch up with evolution or face a dim future.

Amazon itself could doubtless open a new business segment to support this new world, completing and controlling their own business model. But I dare say even Amazon has no solid processes or organization in place to deal with this new world of sourcing.

BTW—Inditex has already figured this out. But they’re not telling us how.

It CAN be done. But it will take a major reorientation, reorganization, and a true overhaul of processes at the sourcerers and factory level. Creative destruction-kill what needs to be killed, leave the past and your ego at the door. Build something new. Evolve…


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