Spring 2013

Followed a link provided by @erikbryn to this piece by MIT Technology Review No Stores? No Salesmen? No Profit? No Problem for Amazon. The hook? To Amazon, retailing looks like a giant engineering problem.

And I admit at first glance the text was deliciously enticing. Overflowing with the insights into the competitive edge that makes Amazon, and by association eCommerce, a game changer.

But, being me, I couldn't help but see what a little bit of word substitution revealed about the nature of the narrative.

So I took this paragraph...

Amazon is a tech innovator by necessity, too. The company lacks three of conventional retailing’s most basic elements: a showroom where customers can touch the wares; on-the-spot salespeople who can woo shoppers; and the means for customers to take possession of their goods the instant a sale is complete. In one sense, everything that Amazon’s engineers create is meant to make these fundamental deficits vanish from sight.

And did this...

[Back in the 1890's] Sears was a publishing innovator by necessity, too. The company lacked three of conventional retailing’s most basic elements: a showroom where customers could touch the wares; on-the-spot salespeople who could woo shoppers; and the means for customers to take possession of their goods the instant a sale was completed. In one sense, everything that Sear’s catalogue designers created was meant to make these fundamental deficits vanish from sight.

And then for good measure I scrapped a little bit of big data from the web and compared the past 10 years of Amazon with iTunes and Wal-Mart. Only to make things interesting I scrapped the period in Wal-Mart's history forward from the pivotal point where its competitive edge (i.e. a global networked supply chain) allowed it to embark on its Supercenter growth strategy.

And indeed, when I looked at the numbers, I thought hum? interesting!

Because what reads as fresh, cutting edge and ground breaking, a new wave of engineering excellence, looks a little, in retrospect, well a bit of a remix. Repackaged. Bright, shiny and new. But sadly, by historical standards, a bit tame.

You see, although the statistical evidence of the impact of the Chicago Mail Order Catalogue Industry on the US Retail sector at the turn of the 20th Century is very hard to come by, the anecdotal evidence suggests the growth in eCommerce over the past 20 years in the USA, although up from the 1% share of the paper based mail order catalogue industry of 1990, has been marginal at best, at least compared to the revolutionary *paper, postal and rail* retailing platforms that Sears and Wards built in the 1890′s.

In its heyday the Sears' catalogue could be found in 75 Million homes (i.e. in excess of 85% of households in the USA at a time when the telephone had a reach of less than 40%).

Fast forward to 2011 and we discover that the comparative reach for Amazon was 96 Million in December or just 30% of the US Population.

The Amazon story also suffers in comparison to the early days of Macy's (circa 1859)

In its first year of operation Macy's sold $85,000 worth of goods. That translates into about $2.2 Million in today's numbers. $1.45 Million back in 1995.

How much did Amazon do in its first year of trading? $511K.

So the old Bricks and Mortar proved to be 3x more effective in attracting new business in its first year of operations.

But was it simply a matter of location, location, location? Or do other factors come into play?

History tells us Macy's invested $2,800 in advertising to achieve sales worth $85,000.

What about Amazon? They spent $200K to achieve $511K. So Macy's ROMS was almost 12x more efficient.

As you can see Amazon was going nowhere until it tripled its marketing spend in 1999. 2000 proved to be the break through year. After that the magic of the network effect kicked in and Amazon looked like a world beater. So it cut back on its marketing spend. Until the GFC changed the game. Since then the ROMS has been in free fall. Amazon has never spent so much to achieve so little.

Meanwhile there is every indicator that Wal-Mart executed the global networked supply chain model more effectively in the late 1980's/1990's than Amazon did over the period 1995-2013. Wal-Mart managed to almost treble the number of shop fronts - from around 1182 to 3406 (including 601 outside the USA) - while increasing its dividend to investors from $0.01 to $0.16. Indeed by 1996 it was opening stores in China. And this general observation is supported by the key ratios that measure management effectiveness. The Wal-Mart management team of 1998 achieving a Return on Assets almost 6x and a Return on Equity more than 12x that of the Amazon team today.

Needless to say, even before factor in the share splits and the dividends, Wal-Mart's share price over that period outperformed Amazon over the past 10 years by a factor of 2:1

Even today the illusion is Amazon is growing a lot faster than Wal-Mart but in reality Wal-Mart's revenues have grown twice that of Amazon over the same period (i.e.$61 Billion vs. $28 Billion). If we do a comparative analysis of just the US revenues we find an even bigger margin.

Nor is Amazon's business model more efficient than Wal-Mart's. Wal-Mart's gross profit margin is 24.7%. Amazon's 24.6%.

In the end though this isn't a question of execution of strategy. Be it original or yet another variant of an endless remix. This is simply a question of deconstructing the narrative to see what sparks the imagination of the marketplace today. After all we measure success against the narratives we choose to frame our lives. Or in this case our heroes. So what does it say about us?

Because it does raise the question, in the data rich world we have today, if we failed to measure the past how can we quantify and qualify our successes in the future?

Or could it simply be the market offers more hope for a brighter future when it has no memory?

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