Who doesn’t love Amazon’s business model? Order a product, get a great price — and if you’re a Prime customer — enjoy free, next day delivery. But that model isn’t working as well as it used to. And after 20 years, their razor-thin profits are just part of the problem.
Jet.com, a well-funded retail competitor launched with a totally different business model that puts Amazon squarely in its cross-hairs. Capitalizing on a promise of 10-15% lower prices, the brash newcomer actually posts Amazon’s prices alongside its own. Jet.com makes no money on sales; profits come from $40 yearly membership fees.
Walmart is giving Amazon headaches, too. Although Wal-Mart was late to the online retail game, its investments in online technology and warehouses are paying off. For the first time, Wal-Mart’s online sales growth outpaced Amazon in the last quarter of last year. Macy’s, Nordstrom and Dick’s Sporting Goods are also growing their ecommerce business faster than Amazon. Since savvy retailers like Wal-Mart and Macy’s know a thing or two about price competition and distribution models, Amazon could find itself embroiled in quite a fight.
Ironically, Amazon’s biggest problem stems from what once was its biggest advantage — internet-only retailing with minimal overhead. Since Amazon launched, the leaders in global online commerce have shifted to a “bricks and clicks” strategy that demands seamless integration of online and physical stores. Amazon, the great disruptor, is itself being disrupted.
Consumers want multi-channel convenience. They want to start shopping on a smartphone and finish on a tablet, or research a product online then buy it in a store. According to GE Capital Retail Bank’s Major Purchase Shopper Study, 81% of consumers go online before heading out to the store.
Think about that. Low commodity pricing and product selection — the basis of Amazon’s success — is taking a backseat to physical convenience and face-to-face service.
Underscoring that sentiment is the fact that the number of stores in the U.S. is actually growing. Occupancy rates at U.S. malls and shopping centers hit a 27-year high of 94.2% in 2014 and base rents rose 6.5% — the strongest level since 2008, according to the International Council of Shopping Centers.
Amazon, the once mighty online retail giant, is not blind to the problem. They have beta-tested stores on college campuses. They tried to purchase Radio Shack locations. And they are reputedly opening a drive-thru location in Sunnyvale, California. But a huge investment in physical locations by a firm that is marginally profitable may require more than just the persuasive powers of an enigmatic leader like Jeff Bezos.
“Bricks and clicks” illustrates the importance of having physical locations in the banking industry. Consumers prefer to use a mix of channels — smartphones, tablets, desktops and branches. In fact, research has found that many of the heaviest users of mobile services also tend to be among the most frequent branch visitors.
This shouldn’t come as a surprise to those financial institutions that are scaling back — not eliminating, just scaling back — their branch networks. But it may be news to internet-only banks and neobank gurus who long ago dismissed branches as “dead.”
Some customer transactions will always require face-to-face service. For instance, the 2015 State of the Online Shopper survey found that 61% of customers prefer to return items to stores versus 39% who want to ship items back to a retailer. Fewer than half made another purchase when returning online, while 70% make additional purchases when returning in store.
Branch and ATM networks are still relevant, still necessary — not just for survival — but to prosper. Few online bank customers will be content with digital-only interactions, while large ATM and branch networks have undoubtedly been an important factor contributing to banks’ disproportionate growth.
“Bricks and clicks” also means online-only neobanks will be marginalized if they don’t find an answer to the question surrounding physical locations. They can either build, partner or merge with chartered bank networks to give customers the convenience they demand. Because personal service is not passé. In many ways, it’s (still) the future.