Can Amazon Do What Walmart Couldn’t, Stop the 'Wheel of Retailing'?

 
 
SUMMING UP Is Amazon's growing retail power capable of breaking the "wheel of retailing" theory? James Heskett's readers weigh in.
 
 
by James Heskett

Is Amazon “Riding” the Wheel of Retailing?

Controversy concerning the “wheel of retailing” concept continues. Whether or not it applies to Amazon is a subject of some debate. Whether or not Amazon has stopped the wheel, will be a future victim of it, or is riding it, are questions posed by respondents to this month’s column.

The wheel of retailing is a concept that has been used to describe phenomena in which retailers use low-price strategies to build market share, to the point where the goal shifts from attracting new customers to building margins and profits through higher prices. This creates room for retailers with new low-price business models to create a further turn of the wheel.

Most of this month’s respondents at least implicitly appeared to accept the validity of the concept. However, there was healthy skepticism. For example, Scott Hessell commented, “I think the notion of entering a market as a low price player to gain market share and then progressing through this wheel of retailing is in the past. Smaller retailers are gaining influence by playing in very special niches where they don’t have to win with low prices …” Nick C said: “Perhaps it is a function of expanding consumer power and flexibility in fulfillment that has changed the so called cycle, and new games and new rules have overtaken this model? Not sure we can describe this (as a) … new wheel of retailing; rather the new wheels of ecosystems.” Edwin Lambregts added, “In Europe the retail industry is more and more moving towards omnichannel and blurring concepts… To conclude the notion of one ‘wheel’ could be a thing of the past, because there are many wheels turning at the same time.”

The general consensus among those commenting on the question was that Amazon, even with its newly-acquired might, will not be able to stop the wheel. “Waves of technological change bring new disruptors along,” as Gadi BenMark put it. In the future, look for “Blockchain enabled ecommerce, AR- (augmented reality) and VR (virtual reality)-based commerce, and 3D printing—each holding the potential of new entrants coming in and “Amazonizing” Amazon. The wheel of retailing will not stop.” Lester D’Cruz concluded that “the wheel will remain stopped only if Amazon establishes itself as a global monopoly. Regulatory agencies may have something to say about that.”

Jan Kessels raised the possibility that Amazon has temporarily stopped the turning of the wheel. As he put it, “The acquisition of Whole Foods by Amazon (which took place after this month’s column was posted) shows that there still are vast opportunities for Amazon to avoid the mechanics of the wheel… The wheel begins to turn only when volume starts to stagnate and higher tickets and better margins have to keep profits coming in.”

Several comments suggested, however, that Amazon may be able to continue to grow and succeed by “riding” the wheel. “Given Amazon’s existing store efforts and Amazon’s need to create retail profit at some point, perhaps we are already seeing the wheel in motion,” AtomicAdMan observed--the search for margins that can turn their retail operation profitable. Glenn Younger put it this way: “Using unique products or services to chase market share, as Amazon has done till now, will keep the retail wheel turning,” adding that “it will take real discipline to make this happen.”

These comments prompt the question: Is Amazon “riding” the wheel of retailing? What do you think?

Original Column

In 1997, a young entrepreneur visited a class at Harvard Business School taught by my colleague, Len Schlesinger. The class discussed a case based on the visitor’s fledgling online retailing company that had rapidly expanded sales to $100 million. The main issue of the case had to do with avenues for growth for the company; what would consumers want to purchase online that would fit into a rapid response distribution model? Students rejected numerous options involving lower-value items such as dog food, which would require expensive storage and transport costs.

At the end of the discussion, the visitor commended class members for the depth of their analysis—then chided them for their limited vision. Of course, the company was Amazon and the visitor was Jeff Bezos. And his own view for the company was nothing less “sell everything to everyone everywhere.” Including dog food. (Twenty years later another colleague relies on Amazon for delivery of dog food to a remote location in Maine at a price comparable to the local supermarket.)

There is no question that Bezos has built a retailing juggernaut, one that is capturing the largest share of market in product category after category. His success raises a question: Can Amazon successfully defy a notion—the wheel of retailing—that has been debated in retailing for nearly sixty years?

The wheel of retailing was first described by Malcolm McNair, a distinguished faculty member at HBS beginning in 1920 who, after completing work in Shakespeare and English, became fascinated with the retailing field. In 1958, he described what was happening in the world of retail after the Second World War.

He observed that new retailing concepts typically begin with low-price strategies with the goal of attracting customers. As the number of customers and the volume of sales increase, the retailer gains a dominant position in the market. The goal gradually shifts from attracting more customers to increasing prices and margins in order to achieve higher profits. That subjects retailers to new competition from low-priced, low-service startups, thus spinning the wheel of retailing again.

The concept fell out of favor with the ascendancy of big box retailers, especially Walmart. Walmart gained such a dominant share, driving so many higher-priced, higher-margin competitors out of business, that it was believed that the only limit on the company’s growth and profit was the size of the global retail market itself. No competitors could successfully undercut such a retail phenomenon. The wheel of retailing had been stopped!

Until, of course, the internet came along. Walmart was slow to react to online retailing, favoring its brick and mortar big box stores instead. Amazon, unburdened by such real estate, was easily able to mobilize Internet capabilities in order to capture a dominant share of a notoriously inefficient book retailing industry. It didn’t stop there. And now it is systematically moving into new product categories, including those served by Walmart.

Amazon’s success raises questions about the future of retailing. Is an “Amazon 2.0” even now in the early stages of design and introduction? Is the wheel of retailing any longer a valid or helpful concept?

Can Amazon do what Walmart couldn’t: stop the wheel of retailing? What do you think?

References:

James L. Heskett, W. Earl Sasser, Jr., and Leonard A. Schlesinger, “Leading for the Future of Services,” Chapter 8 in What Great Service Leaders Know & Do (Oakland: Berrett-Kohler Publishers, Inc., 2015), pp. 191-224.

M. P. McNair, “Significant Trends and Developments in the Postwar Period,” in A. B. Smith (ed.), Competitive Distribution in a Free High Level Economy and Its Implications for the University (Pittsburgh: University of Pittsburgh Press, 1958), pp. 1-25 at pp. 17-18.

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