6 Amazon Proof Retail Sectors Where Retailers are Thriving

Woman Grocery Shopping
 

By Tricia McKinnon and Ben Rudolph

Despite Amazon’s dizzying growth over the past 25 years it is not taking over the world or even the entire retail sector.  Yes, Amazon has disrupted categories from books to electronics to even fashion.  In apparel, for example, in 2019 Amazon overtook Walmart to become the number one seller of apparel in the US.  Granted a lot of those sales are from commoditized basics such as t-shirts, underwear and jeans but it still speaks to Amazon’s ability to disrupt entire segments of an industry.  

Despite the hype over online shopping the outfit you are wearing today was probably purchased in a store and you are not alone, 90% of retail sales still take place in stores in the United States.  Stores appear to be the thorn in Amazon’s side. People still like shopping in them and they are an important part of eCommerce with customers often opting to pick up or return orders to stores.  Amazon is even trying its hand at bricks and mortar retail most prominently with its acquisition of Whole Foods.  But so far its offline results have been lacklustre.  Grocery is another category Amazon has struggled to dominate.  Add to that home improvement, luxury and beauty and what emerges is a set of segments that may be relatively less impacted by Amazon’s onslaught for now.  Want to know which sectors are considered Amazon proof? Read on.

1. Grocery. With only 3% of food and beverage sales taking place online in the US it is one of the least penetrated eCommerce categories.  A survey conducted by Nielson asked grocery shoppers what is the number one attribute that influences store selection.  High quality fresh produce was the winner. Being able to touch and feel produce and select the best items is one of the reasons that online grocery shopping and delivery has yet to take off.  Even Amazon realized that it had to take the battle for grocery offline when it decided to purchase Whole Foods.  

It has been just over two years since the eCommerce giant announced its plan to acquire Whole Foods for $13.7 billion. What has Amazon accomplished in the past two years? It has expanded Whole Foods’ grocery delivery options, Prime membership discounts, and cut prices on select frequent purchases which have helped to alter Whole Foods’ “whole paycheck” reputation. Apart from these moves, however, the Whole Foods’ customer experience doesn’t feel significantly different. For example, YouGov data shows that consumers’ willingness to shop at Whole Foods remains the same as willingness at the time of the acquisition.  Financially, a turnaround is not evident with Amazon posting that its bricks and mortar sales which are primarily comprised of Whole Foods sales were flat in the second quarter of 2019 vs. the same quarter last year.

Perhaps as a sign of the times in February of this year, customer favourite, Trader Joe’s announced that it is stopping its grocery delivery service to reduce costs. Speaking about the decision Trader Joe’s spokesperson Kenya Friend-Daniel said: "instead of passing along unsustainable cost increases to our customers, removing delivery will allow us to continue offering outstanding values — quality products for great everyday prices, and to make better use of valuable space in our stores." 

2. Home Improvement. Can you imagine starting a bathroom renovation project without having anyone to ask questions about the issues that typically come up in any renovation? “Alexa what should I do about this flood?”.  Something tells me that an Alexa skill will not be developed for that anytime soon.  Home improvement projects typically require specialized expertise that is best delivered in person.  In addition to needing a real-life person to talk to it is hard to get a sense of the true colour of something like paint simply by looking at swatches online.  You need to test it out.  The weight of home improvement products like lumber can also create issues with trying to sell them online with shipping costs outweighing the value of the item. 

Despite the favourable characteristics for selling offline home improvement retailers haven’t been sitting still.  Home Depot, in particular, has focused on strengthening its omni-channel capabilities, an advantage it has over Amazon.  In the second quarter of 2019 approximately 50% of Home Depot’s online orders were picked up in its stores.  This underscores one of the keys to success in competiting against Amazon, stores.  People still like to shop in them and like having the option to pick up their online orders in store and to return orders there.  

3. Dollar Stores. Dollar stores represent the only category within retail where the total number of stores grew in 2018 in the US.  One of the reasons for this is that although consumer confidence in the US is high many people who became thriftier during the great recession still have those habits today. Additionally, despite the economic recovery wages have not increased by the same amount.  Todd Vasos, the CEO of Dollar General has said: “while the economy is doing very well, our core customer continues to struggle because, normally, her expenses outstripped her wage growth.” 

Merchandise and deals change frequently within dollar stores.  Not knowing what you are going to discover from one trip to the next is often what keeps customers coming back for more.  Dollar stores also contain consumer staples such as toilet paper, cleaning supplies and razors that you need to refill quickly when you run out of them.  For items like these you may consider it more of a hassle to order them online than going into a dollar store on your way home from work.

There are more than 30,000 dollar stores in the US which is more stores than the number of stores that Walmart and McDonald’s have combined. Dollar General, for example, opened 900 stores in 2018 and plans to open 975 stores in 2019, that’s more than any other retailer.  Out of the 2,780 store openings that had already occurred by June of 2019, 1,800, or more than half of them, came from discount chains.  The retailers that plan to open the greatest number of stores in 2019 are: Dollar General, Dollar Tree, Family Dollar, Aldi and Five Below.  

4. Off Price. If you want to compete effectively against Amazon try an in-store experience that can’t be easily replicated online. Off-price retailers like TJX Cos. and Ross Stores Inc. have thrived by offering customers a “treasure hunt” shopping experience.  Finding the perfect brand name item at a bargain price before it’s gone entices customers to go back to these stores often.  Value is also an important part of the equation with even wealthier consumers choosing to shop at discount stores.  For example, 90% of US shoppers that make over $100,000 and 89% of all US consumers say they shop at discount stores.

For TJX, for example, the treasure hunt strategy has been a winner.  TJX’s revenues were up 5% in Q2 of 2019 and it has already opened 106 stores this year.   Speaking about the company’s performance, Ernie Herrman, President and CEO of TJX has said: “we have great confidence in the enduring appeal of our treasure-hunt shopping experience, with the vast majority of overall retail sales occurring in brick-and-mortar locations.”  In a statement following TJX’s most recent earnings report Herrman pointed out that: "this quarter marks the 20th straight quarter of customer traffic increases at TJX and Marmaxx."

5. Luxury. While its third-party marketplace has been a boon for Amazon it has been a serious thorn in the side of many brands.  After taking its products off of Amazon, Birkenstock CEO David Kahan said: “the Amazon marketplace, which operates as an ‘open market,’ creates an environment where we experience unacceptable business practices which we believe jeopardize our brand.” “Policing this activity internally and in partnership with Amazon.com has proven impossible.”  Just how many items on Amazon are fakes? No one knows for sure but it is a material concern.  According to Gartner L2 33% of items in categories such as headphones and clothing contain a customer review claiming that the merchandise is fake.

For luxury retailers in particular, the issue is particularly salient as it is estimated that luxury brands loose approximately $30 billion in income each year as the result of counterfeit goods sold on-line.  This is one of the reasons why luxury brands generally do not to sell on Amazon.  Amazon also does not provide the high-end shopping experience that luxury consumers are used to and that brands find necessary.

Speaking about selling on Amazon, Charlie Cole, Vice President at Tumi said: “nothing about the way they do business and nothing about the way their business is set up is appropriate for a luxury brand.  When you think about their completely egalitarian and no-barriers-to-entry model for their marketplaces — which is what’s served them so well as far, as expansion goes — it’s remarkably anathema to a luxury business.”

6. Beauty. It is hard to find that perfect shade of concealer that matches your skin while shopping online.  Although digital tools now exist that allow customers to digitally apply makeup to their face from the comfort of their homes customers still like to test products in-store. Texture, scent and the selecting the right shade matters.  Customers also like the immediacy of being able to pick out a product and have it right away to take home with them so that if they want they can put it on later that evening. When shopping for makeup and skin care products having expert advice matters. While there are millions of YouTube makeup and skincare tutorials nothing can match the one on one customized advice a customer receives when speaking to a sales associate in person.  

Ulta Beauty is a retailer that has been able to capitalize on these fundamentals to great success.  UBS has said that Ulta Beauty is one of the “best growth stories in retail” and it was right. With the exception of 2018 where Ulta Beauty grew by a “mere” 14%, Ulta Beauty’s sales have grown by at least 20% nearly every year for over a decade.  In 2018 Ulta Beauty entered the Fortune 500 cementing its position as one of the largest and most successful companies in the US. In the second quarter of 2019 Ulta Beauty’s comparable store sales were up 6.2% and revenue was up 12%.

Subscribe to our newsletter and get the latest retail insights & trends delivered to your inbox

Tricia McKinnonAmazonComment