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Braving The Amazon

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2016 marked the second year in a row that more retail stores closed than opened. For retailers, this is both a body-blow to their bottom line and a shocking prognostication about what’s coming down the pipeline for retailers. The source of this disaster for brick-and-mortar retailers is the rapid “Amazonization” of the retail marketplace.

2016 marked the second year in a row that more retail stores closed than opened. For retailers, this is both a body-blow to their bottom line and a shocking prognostication about what’s coming down the pipeline for retailers.

The source of this disaster for brick-and-mortar retailers is the rapid “Amazonization” of the retail marketplace.

In 2016 alone, Amazon reported that, between four quarters, it had made $135.99 billion in total revenue. It must also be noted that in 2016, total online sales in the United States reached $394.86 billion. This means that Amazon alone dominated 34 percent of all U.S. online sales for 2016. It’s almost unfathomable to imagine a single business controlling more than a third of the online sales for a year, but this is the world in which we live now.

Moreover, Amazon’s domination of the e-market is not happening in a vacuum. In 2007, e-commerce was worth $137 billion dollars, which represented 5.1 percent of the retail market in the United States. As of 2016, the total online U.S. sales of $395 billion represented 11.7 percent of the market. However, while digital retail has made rapid and impressive strides in recent years, brick-and-mortar retail businesses haven’t fared so well:

In a disturbed market, retailers frequently plan to try different things, but more often than not, the fear of a sunk cost in an area that is non-productive is a prominent driver of conservative behavior. As Charles Roxburgh noted in “Hidden Flaws in Strategy”, a 2003 article in the McKinsey Quarterly, business managers often fall into the sunk cost trap because of short term logic that makes sense in the moment: After having invested a large amount of money in a project (the traditional policies and advertising strategies of jewelry retailers in our case), management is more inclined to invest, for example, 10,000 dollars into an intractable $1 million project, rather than scrap the $1 million project itself.

However, this sunk cost trap has long term costs that can outweigh the lost initial investment. Retailers who fear investing in online business, perceiving it as a loss of the money they have invested in traditional brick-and-mortar policies, run the risk of losing their whole business in the long term:

Between 2012 and 2016, the total of jewelry retail sales only rose by an average of $0.3 billion, which is a yearly growth of 0.19 percent; during the same period, the total of jewelry online sales (which is a subset of the larger jewelry retail sales) rose by an average of $0.32 billion, which represented a yearly growth of 2.3 percent.

Online Vs Total Retail Sales

  • Online jewelry sales are only approx. 5% of the market today.
  • Online jewelry sales will likely reach 10% by 2020, but that may be the absolute ceiling for online-only jewelry sales.
  • Physical interaction with jewelry is still a primary driver in selection of pieces; touch and sensory stimulation considered a “crucial” factor.
  • Brick and morter retailers may find more success with mono-brand “boutiques”, which allows greater control over brands, more interactivity with customers, and higher margin potential

While the jewelry retail industry as a whole is fluctuating between stagnation and shrinking, the percentage of the industry that is online is making steady growth every year.

Still, that shouldn’t be an incitement to sell one’s brick-and-mortar location and head for the hills. On the contrary, keeping your brick-and-mortar stores might actually be a good investment in the long term—as long as you take some facts into account and learn to adjust your business to them.

While Amazon represents the biggest player in the U.S. retail industry, the company has been—believe it or not—expanding into the physical world. Since opening a bookstore in 2015 in Seattle, Amazon has since opened another location in Southern California, in a mall near the University of California, San Diego. Also, Blue Nile, the giant online retailer of jewelry, is also opening “webrooms”—its first was built in 2015 in Long Island, New York; and it has since opened four more locations in Tysons Corner, Virginia; Bellevue, Washington; Portland, Oregon; and White Plains, New York. It might seem asinine or confusing to consider digital power-players like Amazon and Blue Nile buying into a sales medium that appears, by all metrics, to be doing poorly, but a cursory examination of Amazon’s sales figures by category can allow retailers to deduce why these online businesses are breaking into the physical world.

According to Cowen and Company’s “Equity Research: Internet: Ecommerce Amazon.com” from March 2016, respondents listed the categories, in descending order of frequency, from which they purchased when shopping on Amazon’s Prime Now: Media, electronics (less than $50 in value), personal care products, clothing/shoes/accessories, electronics (greater than $50 in value), household products, toys, baby products, groceries, pet products, home/garden products, office supplies, and sporting goods. All remaining categories only attract two percent of Amazon’s shopper base.

Jewelry retailer, you should take note that none of those Amazon categories are “jewelry”. Online retail titans like Amazon and even online-only jewelry retailer Blue Nile are opening physical locations because brick-and-mortar storefronts have benefits that the internet still can’t (and potentially never can) match.

A bit of a digression: For many decades, Key West, a Floridian island off the coast of Miami-Dade County, was considered a relatively impoverished part of South Florida, dominated by fishing and sponge harvesting. However, in the 1970’s, the city made a concerted effort to attract tourism and high-income visitors, which, in turn, sparked an economic boom on the island. Low-income residents, usually part of the aforementioned fishing industry, suddenly found that their beachfront property, which had frequently held nothing more elaborate than shacks and mobile homes, was worth millions of dollars.

In many ways, brick-and-mortar jewelry retailers are in the same position—even though the market is changing in a destructive way for the established community, the already-established find themselves with a limited resource that incoming parties are scrambling to snatch up.

If you choose to adjust your business to meet the needs that Amazon has yet to fulfill for consumers, choosing to fill that niche without going head-to-head against the retail titan will allow your business to thrive in both the brick-and-mortar world and online.

What is it that a digital-only business can’t provide for its customers? A personalized experience. There is a valley between a world of pure information that the internet represents, and the world of human connection and emotion that people create with each other. Even though they’re tempted by the convenience and speed of Amazon, people are still more interested in shopping for jewelry in-person because brick-and-mortar businesses allow customers to touch jewelry, try it on, and discuss pieces with the store’s employees. Moreover, by turning your physical storefront from merely “a store” into a luxury and one-of-a-kind experience, you can allow your customers to feel something while shopping that an automated and generic experience like Amazon’s website can’t match. Huffington Post’s 2012 article, “Luxury Brands Must Develop Their Customer Experience to Survive”, gives some useful examples of what retailers can do to “luxurify” their business: creating masterful customer service, in-store micro-events for top-tier customers, working with local businesses to create “villages” of talent and quality, adding “at home” experiences to your storefront, and dedicating space to single luxury brands to emphasize their uniqueness, among other practices. All of these practices have a “customer first” mentality at their root, speaking to the necessity of engaging with customers in a way that a faceless retail giant can’t match.

Now, we may be talking about the merits of your brick-and-mortar storefront, but it’s simply not possible to ignore the digital aspect of your retail business. With the jewelry industry attenuating, it’s obligatory to invest in the one aspect of the industry that’s managing to seize more and more of a shrinking pie.

According to Forrester Research’s 2015 article, “US Commerce Platform Technology and Services Forecast, 2014 To 2019”, retailers are expected, through 2019, to more than double their spending on e-commerce technology, ultimately investing more than $2.1 billion to either boost their online profile or polish their e-commerce capabilities. This money will be spent primarily on: e-commerce platforms, email marketing, social media marketing, content management, search marketing, mobile shopping, and customer reviews.

Investing in upgrading these strategies can serve to make your retail business competitive across the entire retail spectrum, but there are three factors that determine the effectiveness of these upgrades. First, you must yoke all your advertising strategies together under one “concept”. That is, all your advertising strategies, ranging from the content on your website to things as disparate as radio ads, should contain the same message. This coherent, aligned message creates a single “voice” and philosophy for your business, and presents consumers with a clear concept to which they can anchor their image of your business.

Secondly, it’s necessary to “think globally by acting locally”. The paradox of online business is that despite the international reach of the internet, it’s a mistake to overlook the local community that supports your retail business. According to a 2015 article in Entrepreneur, “6 Benefits for You and Your Community from Supporting Local Entrepreneurs”, engaging with local consumers allows for personalized service and exceptional customer service that doesn’t rely on automation or outsourcing. As we mentioned previously, those are two qualities that digital-only giants like Amazon and Blue Nile can’t match. By creating a local reputation for service, you can play up the “one-of-a-kind” aspect of your business that we mentioned previously.

Third, you can also take cues from Amazon while not directly competing with them. Most people take advantage of Amazon because of the convenience and speed. It may be difficult to match the speed at which Amazon can send merchandise, but devoting time to finding methods of minimizing delivery time is in your company’s best interest. Also, by maintaining a strong mobile presence (for more information on maximizing your mobile presence, see our “Evolve!” article in Jewelers & Technology, Issue 1) and creating steps for customers to buy online and pick up their products in-store, you can allow customers to shop around their schedule rather than your business’s.

We can’t tell you not to be concerned about the future of the jewelry retail industry, and we can’t tell you not to be concerned about Amazon. However, if this article makes anything clear, it should be that Amazon isn’t your competitor if you choose not to make it your competitor. Amazon and its fellow online powerhouses in retail are capable of a reach, infrastructure, and supply chain that can’t be matched, but a tremendous size leaves niches in the industry that Amazon is too large to fit into. Aim for a personalized luxury experience that makes coming into your brick-and-mortar locations its own pleasure; aim for maximizing your customer service so that walk-in customers (and customers searching on mobile) have not only a convenient, helpful shopping experience, but also suggestions about future pieces and looks.

And while you can’t beat Amazon in the digital landscape, trends in jewelry demand that you maximize and unify your digital presence to meet the needs of an “always-on” culture: Have a website and polish its content, aesthetics, and convenience to a mirror-like sheen; and tie all your advertisement media to one central theme—one concept that encapsulates the philosophy of your business and gives your customers an “idea” to latch onto.

As you brave the Amazon, just remember to travel smart, travel carefully, and always keep your eyes open for what’s in the middle of the trail.

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