Survival guide for stores in the Amazon Jungle

A recent Washington Post article pointed out that Anthropologie posted four straight quarters of flat or declining comparable sales and J. Crew saw comparable sales drop 10% in the last year. Banana Republic has seen a decline in comparable sales for the past 13 months, including a staggering 14% plunge in July. Weak sales numbers have also plagued Gap and Ann Taylor.



Apparel is in the dumps, and while there are plenty of theories as to why it is down, none is more prevalent than the Amazon/online retail explanation. Here is how it goes: Online apparel sales are up and brick-and-mortar apparel retailers are down. There you have it, cause and effect. The real story, however, is much more complicated than that, because while some apparel retailers are hurting, others are booming.



The fastest-growing category of brick-and-mortar retail in both commodity and specialty retail is apparel. In commodity retail, the biggest winners are deep discounters like T.J. Maxx, Marshalls, Ross Dress for Less, and Nordstrom Rack, which are opening just under a combined 300 stores this year. On the specialty retail side, the proliferation of low-cost retailers like H&M, Zara, and Forever 21, has sapped market share from traditional mid-market brands and department stores, and contributed to a race to the bottom on prices. Add in expanding outlet center platforms, and you have a big part of the story.



And yes, online sales are a factor, accounting for almost 30 % of apparel sales. Both online encroachment and discount dynamics are contributing to the sluggish overall performance in apparel. But in point of fact, it is nearly impossible to sort this out without looking at winners and losers and how the deck chairs are moving around. The Bloomingdale’s division of Macy’s saw a 75% reduction of online sales in the in Minneapolis-St. Paul region after closing its only Minnesota store at the Mall of America. The evidence seems to suggest that online apparel sales are integrally connected to brick-and-mortar stores, but don’t tell Amazon that. They want a bigger slice of the pie, and they just might get it.



Life here in the Amazon Jungle

Much like the actual jungle surrounding its riverine namesake, Amazon is a force of nature, with the potential to expand and swallow up new territory, particularly given its low cost fueled by explosive stock price appreciation.



To understand what’s going on here, we first need to appreciate the fact that the Amazon website is much more complex than it appears at first glance. In fact, Amazon.com is not a single monolithic website, but in reality is three sites in one: Amazon Wholesale, Amazon Fulfillment and the Amazon third-party “Marketplace.”



Add to that the fact that Amazon actually loses a significant amount of money on its iconic Amazon Prime service. The monster of e-commerce reported a 40% increase in shipping costs in October and is well on its way to over $20 billion in annual shipping costs in 2017. Delivering items across the country in a short amount of time is expensive, yet Amazon offers much of its shipping at a free or greatly reduced rate.



Amazon suffers from the same pricing challenges that every online retailer does, but its hegemony over e-commerce wins it a pass on Wall Street. Despite a regular regimen of posting quarterly losses, its stock has risen from the low-$300 range in first quarter 2015 to its current high-$700 plateau. This gives Jeff Bezos the freedom to invest in ventures like buying out Diaper.com and starting his own air freight delivery force.



So what is Amazon really up to? A closer look at both retailers and wholesalers selling on or considering selling on Amazon.com may give a clue into what is really going on at Amazon, and it’s not pretty.



Amazon is most profitable when it actually buys merchandise wholesale and, like brick-and-mortar retailers, resells it at a price higher than its cost. It apparently makes less money when simply fulfilling orders for third parties or from its cut of third-party sales initiated on the “Marketplace.” As a result, and not unsurprisingly, Amazon is now dictating the wholesale to many of its suppliers. For wholesalers, the decision is to either invest heavily in their own website and distribution capacity and to subsidize high shipping costs, or to sign up with Amazon. Most of these suppliers also sell their products through independent retailers and resellers, who also sell on the Amazon “Marketplace.”



Not only are more suppliers turning to Amazon’s wholesale distribution model, but many are now finding that Amazon will only accept their products under the wholesale model. Since the majority of Amazon buyers use Amazon Prime, which is only available through its wholesale distribution model, it seems that everyone’s interests, including consumers, are well aligned.



Why is this such a big deal? Amazon’s three different business models give the company a dangerous degree of leverage that extends across different platforms and market segments. Partly to satisfy Amazon’s price-match guarantee, retailers who sign up for Amazon’s wholesale services must provide Amazon with a list of authorized resellers to protect against unauthorized discounting and fraudulent sales. But, it gets more complicated. Amazon maintains the right to kick any third-party seller off of Marketplace virtually at will. That means for many small retailers selling in the Marketplace, Amazon literally has the power to put them out of business!



So what exactly is Amazon up to? When you add it all up, Amazon is slowly amassing the power and information to not only control wholesale distribution of many products, but also to easily identify and de-list competitors operating on its “Marketplace,” creating the possibility of near-monopoly pricing power.



While Amazon has also done its share of traditional acquisitions (it’s owned online shoe seller Zappos since 2009), the current setup feels like Amazon is positioned to informally “acquire” by virtual control, almost any online retailer that doesn’t have the extensive resources necessary to compete directly with it. The real concern, however, is that Amazon will use predatory tactics to impose its will (and its own self-serving business model) on the Marketplace.



Another concern is the lack of control that retailers have when they cede so much of their distribution and sales structure to Amazon. When you ship your goods to Amazon, they don’t segregate that product. Everything is lumped together and distributed around the country using sophisticated algorithms to position goods for optimum delivery. Once you lose control of your distribution, you lose control over your inventory. No retailer wants to be responsible for inventory not in their control, as they have no recourse to address quality control for defective, damaged, or counterfeit goods.



Amazon is massively subsidizing tens of billions of dollars of shipping costs, and actually operating at a loss in many portions of its operation in order to tie up retailers, tie up the Marketplace, and quietly gain control of a larger portion of wholesale distribution. It is also applying steady pressure to retailers to conform to a model that leaves all of the leverage in Amazon’s hands. It’s a loss leader of sorts: a long-game strategy where Amazon seems willing to sacrifice profits now in order to lay the foundation for a monopolistic future where all of the information, power, and operational infrastructure is under its control.



This may explain the real reason Wall Street is so tolerant of skyrocketing and unsustainable shipping costs and decades of losses at Amazon, because the long-te