How To Compete With Amazon – From Bonobos’ Founder-CEO, Andy Dunn

Every once in a while you run into an article or a post online that is deeply insightful and is just perfect in different ways. One such thing that I just read is called “E-Commerce is a Bear“. Andy Dunn, Bonobos’ Founder-CEO wrote it.

The problem with such articles though is that you just don’t know what to excerpt…Naturally, having said that, a couple of excerpts for those in a rush:

1. Amazon’s Competitors – The Track Record:

Only two start-ups have properly challenged Amazon over the past decade: Zappos and Diapers. Amazon, shrewdly, acquired them both. Both companies faced long roads to generating profits in the ferocious low-cost game of competing with Amazon, and both decided if you can’t beat ‘em, join ‘em.

Having spent time with Tony Hsieh and Alfred Lin, the leadership duo who built Zappos, and Marc Lore and Vinit Bharara, the founders of Diapers, I can tell you: these are intense competitors who recognized the best outcome was to join forces with the industry leader.

So if Amazon is the low cost winner of selling brands online, if they are acquiring their best competitors, and if their everyday low prices are available to the entire country via a mechanical turk algorithm which is guaranteed to beat you, how do you compete?

2. Four Strategies To Compete With Amazon

…four strategies in the marketplace to deal with Amazon’s incumbency: proprietary pricing, proprietary selection, proprietary experience, and proprietary merchandise.

(You really MUST read the full article to find out more…Andy helpfully provides examples of upstarts and players in eCommerce that are successfully executing on each of those.)

3. There is little to no EBITDA in eCommerce. Even for Zappos:

Zappos is often given as an example of why e-commerce is awesome. Zappos was awesome for consumers. From what I’ve heard, and I can’t confirm this, at the time of the sale Zappos was generating about $10 million of EBITDA on $1 billion of gross revenue. Assume net revenues were in the $650 million range (~35% return rate), and you have 2% EBITDA margins.

The sale of Zappos to Amazon happened because it had to: it wasn’t a company that was generating enough EBITDA margin to be a viable public company. It didn’t have to happen right then or to Amazon as the buyer, but barring a radical change to the financial reality of that business, it had to happen.

Go ahead. Block off 10m of your time and read the whole thing. Totally worth it. 

Why Firing Andrew Mason Is Meaningless for Groupon

Groupon’s co-founder, Andrew Mason, was fired by its board today after another spectacularly unsettling earnings miss. 

Some of the snarkier comments on Twitter allude to the 19% voting stock he still controls and the $230m his stock is now worth.

But for entrepreneurs, I am going to guess that regardless of the riches, being ousted from their own creation has to be somewhat painful. But to Andrew’s credit, he seems to have handled it with finesse, with his farewell email (now famous) saying:

From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that’s hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable.

Moving beyond that though, this entire episode is meaningless.

The people that are temporarily taking over for the CEO are on Groupon’s board. So how are they off the hook for Groupon’s dismal stock performance and constant post-IPO slide? Andrew’s removal from the board seems merely a signal to the outside world that they mean business. 

At a very fundamental level, the business model – the “daily deal business” – has problems, especially for large players. But it is not flawed, as some has alleged (are you listening, Matt Yglesias?).

Restaurants and “service/experience” offerers around the country will always have excess “inventory” and daily deal sites will always do business. But the problem is that there are no “economies of scale” in this business, there are no barriers to entry and maximizing “lifetime customer value” – very important to small local businesses – is far from assured. 

More specifically,

(a) Anyone can easily get into this business and as long as they have enough foot-soldiers to violate “no solicitation” notices and people to work the phones, they can sign up any number of local businesses.

Local – because meals and services are always consumed by those that are local to each area. As your Inboxes can attest to, anyone and everyone has jumped into this business. 

(b) What can a company that is national or international do in this business that a business that knows a particular area very, very well, can’t?

(c ) Once a restaurant signs up with Groupon, anecdotal evidence suggests that the half-off coupons attract bargain hunters who don’t come back to the restaurant without another Groupon.

So “good” restaurants and other experience peddlers are not really cultivating a clientele via Groupon, thereby reducing Groupon’s attractiveness. This, in turn, means that Groupon is merely helping sell unsold inventory…but if any company can do that, why should that business use Groupon again and again? So if Groupon has to secure each deal afresh – that’s certainly not helping its operating expenses. 

So Andrew Mason’s ousting and his candid letter to Groupon employees will attract some media buzz for a couple of days. After the buzz dies down though, nothing would have really changed.

Last Chapter For Barnes and Noble? RIP – The Bookstore Business

I’ve always loved books.

Going into a bookstore, browsing the shelves, finding something good – perhaps serendipitously (“Saving Fish From Drowning” was one such quirky yet memorable find) – make for a consistently pleasurable experience. Further back, when I was younger, I enjoyed finding good reads in used book stores in India (makeshift ones that were set up on sidewalks, on weekends, in commercial areas).

But as we all know, printed books are slowly but surely marching into oblivion, thanks to eBooks and eReaders. It probably won’t happen in 10 years or even 20. After 25 years, who knows?

(Above: From a used bookstore; NOT Barnes&Noble…)

Poor Barnes and Noble though. As recently as last year, its eReader division, the Nook, was valued highly (at $1.8 B and I blogged about it in a long article here). How things have changed since then.

Both its bookstore business and the Nook business have been experiencing declines (NYT article). The former, because of online competition and the latter because…of marketing? positioning? an insufficiently enticing ecosystem? competition from Tablets and the Fire? all of the above?

The Nook drew in as investors Microsoft and the British publisher Pearson, which collectively bought a 23 percent stake last year. And the division’s various offerings have won praise from critics, some of whom recommended the devices over Amazon’s.

But in three years after the first device was sold, the Nook still trails the Kindle, the iPad and other tablets. Barnes & Noble warned earlier this month that the division’s losses will have grown from the previous year, not decreased.

An analyst at Credit Suisse, Gary Balter, described Nook Media in a research note on Monday as “money-losing and increasingly poorly positioned.”

So what we have now is Leonard Riggio, who built Barnes and Noble into the 689-store behemoth (and presumably crushed many smaller independent bookstores in its time…link to an old, long New York magazine article on Mr Riggio has some interesting details on him and how he built B&N) getting ready to buy the physical stores (only).

This will accomplish two things:

1. It will dissociate the physical stores from the digital book business. Important because it appears that the Nook business was eating up a lot of cash from the bookstore business. 

2. It will take the physical stores private…where Mr Riggio can re-structure them or do what he needs to (and wants to do), to prevent them from going the way of Borders book stores.

Isn’t that (#2), the question though? What will he do with the stores? No real clarity there…

The challenge for him is going to be – how do you create a model where you separate real book buyers from those that use the stores as a free library (who then go online to buy their books because they can save $1 or $2 per book?)?

Perhaps there will be a new radical re-think on how to monetize the space, by charging for access to space and WiFi…without alienating those that actually buy books. How about smaller stores that offer free coffee and WiFi, and charge annual membership fees – to be reconciled against actual book purchases? Maybe even “day passes” for occasional browsers?

Should be interesting to see what happens here. 

 

Consumers, Not Retailers, Will Win Retail Wars

Just in time for the holidays, the bricks and mortar retail empire is (trying to) strike back. 

The Wal-Mart tests, the first of which started last week in the Washington suburbs, let customers order toys and other popular gifts, and have them delivered to their homes the same day. Ms. Lester, the Wal-Mart spokeswoman, said the company chose which items to include based on what was popular in its order-online, pick-up-in-store service. 

“We are living in the age of the customer, and you can either fight these trends that are happening — showrooming is one — or you can embrace them,” said Joel Anderson, the chief executive of Walmart.com for the United States. “We have a lot of assets, but they’re only assets if you embrace the trends of the customers.”

India, Power and Growth

India’s power problems have been in the news a bit, of late. While millions of consumers and businesses have habitually suffered “power cuts”, what was different this time of course was that it was not a “scheduled” cut but a widespread outage caused by a series of issues all put together (demand, supply, quality of the distribution grid, etc.). 

The question though is, in light of India’s much vaunted role in the BRIC block, where does it go from here?

An interesting article in the Washington Post argues that from a electricity/power investment perspective, India is where China was two decades ago and where the US was in the 1950s:

Every modern, industrial society in history has gone through a 20-year period “where there was extremely large investment in the power sector, and electricity made the transition from a privilege of an urban elite to something every family would have,” Varro said. “India is right now just at that jump point.”

There are many reasons why India needs to get moving on this, but let us focus on the business aspects of that. 

In an increasingly competitive global economy where local employment, affluence and other metrics of growth and prosperity depend on the competitiveness of exports, clearly, the power situation is not helping:

(because of factories generating their own power)…The cost of fuel makes his shirts 5 percent more expensive, “which plays a major role when you are competing in the international market with Sri Lanka and China.”

But in a few years, I suspect that clothing and apparel will max out the total number of available jobs and if India is to provide jobs for the millions of youth that come of age every year, then manufacturing is the way to go. 

So at some point, India will have to figure out a way to create new labor laws (hopefully) – something that impedes manufacturing employment and growth in almost all of its states – and become a counterweight to China and other low-wage manufacturing hubs like the Philippines, Vietnam, etc. 

According to an article in The Economist, China is becoming less attractive to contract manufacturing because of rising wages and while it still retains other advantages, I can see how, in perhaps 5-10 years, as other countries catch up, non-domestic oriented manufacturing (perhaps even that too) will start to leave China for other countries. And India may have a once in a generation chance to capture some of that business and add a significant number of jobs. 

But unlike small garment manufacturers that can live with a diesel generator, manufacturing necessitates economies of scale, which in turn mean factories and foundries that consume hundreds of megawatts of power, which in turn make low-capacity generators impractical. 

The starting point of course is massive investment (private and/or public):

World Bank studies show that a lack of electric power is the biggest barrier to job growth and investment in India today and that outages are a significant drag on industrial output and retail sales. The IEA predicts that India will need a $1.6 trillion investment in power generation, transmission and distribution to keep up with the rapid pace of energy demand through 2035 and a $550 million investment in the coal, oil and gas sectors.

But India has a tendency to throw money at problems and create various laws (with low or no enforcement) that end up wasting money and increasing red tape. 

So just investment in this sector is not the answer though and unless there is a coherent policy (which produces results like the successful “golden quadrilateral“) that takes into account all the different parameters (policy, raw material necessary to sustainably grow power generation and distribution) necessary for success, things may not change much. 

Sometimes crises have a way of crystallizing action in a way that nothing else can. It remains to be seen what comes out of this one. 

Amazon’s New Strategy

 

It appears that Amazon is acquiescing to the “Why should Internet retailers be exempt from collecting sales taxes” argument (I fully support that argument – level playing fields are always good for everyone) and trying to use that to further its market share by opening tens of major distribution centers around the US. That should make next-day or even same-day delivery a very real possibility for millions of shoppers (even, non-Prime ones).

Kudos to Amazon’s strategy and their ruthless drive for efficiency, automation and leveraging of economies of scale. 

I wonder what Walmart’s response is going to be…Other retailers, especially those with showrooms, will have to figure out good reasons to have shoppers come into their stores to buy things. Maybe, eventually, anything that can be bought without without the need for a look/touch/feel will be bought on Amazon.