The drums are beating in the sunburnt country

We are told we have one of the best retail industries in the world – competitive, aggressive and constantly delivering good value to the Australian consumer. Although the April 2017 Westpac Consumer Confidence Survey suggests a dip in confidence among Australian consumers.

Amazon is benefiting from the creation of FUD (fear, uncertainty, doubt) in the minds of our retail executives and expectations in the minds of the consumers. We now know when they will be in the market, the talk of drones and the like is a distraction. Amazon continue to dominate the media cycle and are benefiting from the coverage in that they don’t need to buy the airtime and mindshare, it is being delivered for free by the media.

Amazon is universally labelled “the great disruptor”, so let’s turn to Disruption Theory to see whether it’s helpful in deconstructing the strategy of Amazon as it eyes off the Australian retail prize.

As described in the critically acclaimed Innovators Manifesto by Michael E. Raynor, a theory is only useful if it can be used as a reasonable predictor of the future. Disruption theory can not only explain why some new businesses rapidly emerge and mature companies fall, it can actually help to predict the future success of new ventures more accurately. In this article we will step you through a deconstruction of the Amazon AU approach to see whether Disruption Theory can help us to better understand Amazon’s likely strategy in the future.

Understanding Disruption Theory

An incorrect concept of Disruption has now firmly entered the public awareness, everyone is concerned about disruption, every start-up is a disruptor and every senior corporate executive is supposed to be working to ensure the business disrupts itself. The conversation around disruption is not so helpful when everyone has a different idea of what it is.

In a nutshell Disruptive Innovation predicts that market incumbents will continually pursue sustaining innovations to meet growing high end customer needs. In this process they create the situation where low end customers are highly over served. This allows new entrants to compete for low end customers who do not require the highest performance on the basis of convenience and price. The incumbents, if they see this competition at all, see it in their lowest margin customers and view it as little threat so they leave it alone. Using new technologies and reach, the new entrants improve their product rapidly and grow market share at a pace that means they eventually over take the incumbent. So if that is what disruption is, let’s run the ruler over Amazon AU.

The disruptors approach is typically asymmetrical, or unfair. In this case if Amazon is fighting by different rules and in this fight the incumbents’ strengths are not useful, then it may indeed be a disruptor. However Australian retailers have well respected brands, efficient distribution and have traditionally provided convenient access.

The main test of asymmetry is to see whether Amazon’s entry is ignored or welcomed by the incumbents. At this stage you could hardly say that Amazon is being ignored, we have heard it called the “retail death star”, it is reasonable to expect that the incumbent Australian retailers will react aggressively to Amazon’s arrival in Australia.

Another reason, according to the theory, that incumbents may allow Amazon to build a beach head is that they see the Amazon consumer as undesirable, i.e. Amazon can make money in a way that would cause the incumbents to lose money.

In this case, we can view Amazon as a “low end disruptor” where it enters the market with a cheaper product that seems to perform poorly, has low margins and the incumbents accept this because they are chasing the higher margin customers. We would argue that Amazon can be seen to have potentially lower costs and accepts lower profit margins and makes money in new ways however its service and convenience promise is not low quality.

In an alternative view a “new market disruptor” doesn’t cause any pain to the incumbent because they draw new customers into the market so the incumbents don’t feel the difference and ignore it, there is an asymmetry in cost structure. In this approach, Amazon will gain a foothold and grow rapidly from there and capture increasingly larger parts of the market. Here the asymmetry is on the basis of competition and the measurement of performance. By growing and fulfilling unmet needs in the market they grow the overall pie. It looks like Amazon measures its performance in different ways and is prepared to play a much longer term game, Alibaba is similar.

Retail shake-up

Against any measure, Amazon is going to shake up the retail environment. It’s prepared to make longer term loss making market entries, its share price, balance sheet and proprietary IP allow it to offer a unique and trusted service to the Australian retail consumer. While the incumbents will not like it, aggressive price competition and low cost service is not in itself aligned with “disruption theory” it’s just good old aggressive business.

So is Amazon any different from Aldi? The incumbents need to respond to this new market entrant and the Australian consumer is likely to be beneficiary and won’t mind the “disruption”.