Scott Galloway on how Amazon is going after the retail Industry. Go checkout and follow their YouTube channel at: https://www.youtube.com/user/l2thinktank/featured
So, let’s bus right into it. So we know this is kind of the reckoning that’s been predicted in retail everyone’s been talking about, how retail was in for a fall because of stagnation and middle-class wages, America being over stored, just on Amazon. A ton of different things. Young people spending less money on stuff, and more on experiences. But retail sort of soldered on. It feels like the reckoning is finally here and we’re seeing just an incredibly challenging environment for retail. Between 1970 and 2015, over 45 years, malls grew faster. Twice as fast as the population, sort of setting themselves up for a fall. It’s no news we just have too many malls. There’s already been nine bankruptcies in retail, year-to-date. So only one quarter into 2017 and we already have more bankruptcies than we did in all of 2016. At the same time, in terms of retail, people are spending as much, maybe a little bit more, when they go to the store but the footfall traffic in malls has been cut in half just in the last several years to give you a sense of how dramatic the decline is. In terms of store closures, we wanted to put up store openings as well because these talks always seem to be about how great Amazon is and how screwed everyone else is. There are winners, there are people breaking through in the face of competition and opening stores. But as you can see there’s a lot more that are closing stores. We purposely put up Amazon’s fulfillment centers here as we believe in Amazon’s fulfillment centers are effectively and start serving as stores with Click and Collect and at some point, when you can go, when you can drive up to an Amazon Fulfillment Center, pick up your stuff, or even perhaps go into the Fulfillment center. Is it a warehouse or is it a store?
In terms of scale, Amazon has added sixty-four billion dollars in growth since 2010. That’s the size of Nordstrom, Macy’s and Sears. They’ve essentially added these entire businesses to their top-line over the last six years. To give you a sense of just how powerful Amazon is in terms of a recurring revenue stream, more of an attempt to get an annual fee out of people in the form of prime to subsidize what it effectively has been a break-even business, even at its scale with the retail platform. 44% of US households own a gun. 49% have a landline phone. Isn’t that crazy? Only half of households now have a landline phone. 51% attend church. I think these all the same people. And that joke goes over really well in New York. I’m in Tennessee tomorrow, and I will not say that. Anyway, “these are real Americans”. that’s what I’ll say tomorrow. 52% have Amazon Prime. So, more people now have Amazon Prime than have a landline phone.
To give you a sense of how technology shifted in America. There’s a company that offers a service so you can get great retail delivered within two days. That’s a technology that America has opted over versus a landline phone. About 55% of US households make over 50k a year. So they’re almost in… these are the same people. The people in Amazon Prime are the same households the make over 55,000. What’s unusual about Amazon, and one of the things that’s unusual about it, is there usually is a retailer that has discount as a core tenant of its value proposition, attracts the lower income consumer whereas Amazon is very much an urban, and very much a high-income consumer. And then 55% voted in the election. And 78% decorate a Christmas tree.
So, Amazon has changed more than just the face of retail. Amazon has essentially changed the relationship between companies and shareholders. And that is it is replaced profits with vision and growth. And that has changed the entire ecosystem because companies or investors are no longer satisfied with a company that is not growing but profitable or growing slowly and profitable. They want something that has tremendous vision and is growing fast and they’re willing to ignore a lack of profitability. This is Walmart versus Amazon’s profits. Amazon being the gold. Effectively Amazon runs their business at break-even. I’m speculating, and Oliver Chen who’s speaking about Amazon as an analyst, but my strong belief is that every time Amazon reports a quarter that’s quite profitable and there’s all this coverage saying Amazon’s not unprofitable, I think Jeff Bezos called all his top management into a room and said “you screwed up”. And we need to green-light more massively expensive things that might give us an advantage over the long term. That they’ve figured out that they don’t need to run the company for profits and once it becomes profitable, it’s like getting an addict hooked on heroin and there’s no taking it away. So they never let the company get very profitable. Why? They don’t need to. Investors don’t demand it of them. As long as they can take all of that money and plow it back into the company, then what’s the point of being profitable? And as a result, Amazon just plays by a different game. Amazon has this reputation for being so innovative, and I would argue that all of you, if your bosses said you no longer need to make twenty percent profit on every dollar you bring in, you could break even, then you’d be incredibly impressed with how innovative you can be.
So, loss is the new black. And now we have some very profitable companies in the Four Horsemen. Google and Facebook. Google the original and worth around 550 billion. Then Facebook, a little less profitable, worth about 420 billion. But the company that is probably the most impressive in terms of its own metrics of evaluation relative to its peer groups, and that is it justifies evaluation that no one can justify, is Amazon, that is just not profitable that runs literally at a break-even business. This has had a big impact on the ecosystem. So people always mimic the winner. and as a result, we have a series of private companies, the unicorns, the companies that we now admire, have adopted this Gestalt of growth and vision at the cost of profits. So, you have wework, valued at 16 billion dollars, a 530-million-dollar business that’s break even. Snap, which did about four or five hundred million, but lost more. Its losses were actually greater than 500 million. And then you have Uber at five and a half billion in revenue and three billion in losses. Now you can argue this might not end well, this might be the wrong strategy long term. It might have some underpinnings of something scary brewing in the economy, but the reality is retail investors love this model. Vision, growth, and they ignore profits, or a lack thereof.
Amazon now has more people than Facebook, Google, and Apple combined working for them. But what’s different, is if you look at retail, Walmart the largest employer in the US, maybe in the world, generates about $90,000 in shareholder value for every employee. Macy’s 140,000, 60,000 dollars in market cap per employee. Sears effectively out of business. And then Amazon 360,000 but 1.2 million dollars in shareholder value. Now given that that shareholder value of those options of that equity is a part of compensation, if the team of the best player wins, imagine what Amazon’s advantages relative to other retailers when they have 1.2 million dollars in shareholder value per individual and they can offer some of that as compensation whereas everybody else is really playing with a squirt gun compared to Amazon’s bazooka, as a function of their compensation and their ability to recruit employees.
They’re getting into other businesses as a function of making this $99 a month, 51% of US households proposition even more attractive. Things that we never thought Amazon would get into.
So, Amazon video and Amazon media, or the part of the Prime Amazon television. Two and a half billion dollars is how much HBO has allocated towards content, and all of us, HBO has become such a part of the modern vocabulary in terms of the great content and series. They’re going to spend two and a half million dollars on original content this year. ABC and NBC are at about four billion. Amazon, the retailer, it’s going to spend four and a half billion dollars on original content this year. The only one that’s bigger than this is Netflix at six billion and this is Netflix’s core business. Just to give you a sense of how much fun it is to play in traffic when you have almost infinitely cheap capital. You can take an encore business and almost overnight compete, you know, with the biggest players in the business. Amazon is now spending more on content. The major broadcast networks are HBO in an attempt to get you to pay $99 bucks, and they can monetize it differently. They’re not going to ask you for $19.95 a month, which HBO asks you for. They’re going to ask you for $99 a year, which you get a ton of other benefits for.
So, like the overlooked middle child we don’t talk a lot about on Amazon is an Amazon’s Media Group, which has become a very big business, sort of under the radar. Advertisers report that Amazon is in fact their favorite DSP in terms of where to allocate the revenue in terms of who they enjoy working with most. If we can assume if we translate the margins on their business as the same as the margins on Facebook’s business, they’re producing about 400 million dollars a year and profits from their media business, which means that despite being a pimple on the elephant, in terms of the top-line revenue, the Media Group now does about a fifth of the profit of the entire company. And this is an adjunct business. They are now bigger than Twitter and, excuse me, they’re about half the size of Twitter and they’re obviously bigger than Snapchat. Think about all the heat; 23-million-dollar evaluation for Snapchat. And Amazon Media Group is a business that is three times the size of Snapchat.
So, what’s next? I think that effectively you have a company that has conspired with about a billion consumers and technology to destroy brands. I think their attitude is that brands have for a long time earned this unearned price premium that screws consumers. The attitude of an association and shorthand to get to a good product at a very expensive price because you don’t want to do the diligence across all these other products. The brand charges a premium for that shorthand or that diligence. And Amazon has said, “I know using technology and a billion people who will write reviews and then putting algorithms, we can destroy that price premium that brands have commanded through consistency and all this advertising and all these things like packaging and shelf space and endcap and in-store promotions, that we can go after that, it really doesn’t add any value. and we can destroy it, you and me, the consumer, with our software and our scale and start sucking the margin away from brands and give it back to you, the consumer”. I think this is effectively a war on brands. If you look at all the money that is spent by brands and CPG on shelf space, on marketing, on creating demand, the partnership, the skill they need, the massive amount of money they spend on relationships with retailers. Amazon doesn’t need to do any of that. Amazon has said, “None of that is important to the end consumer. That we can take all of that margin and give it back to the consumer”. And then you go online and there’s less of that. So brands are at a bit of a disadvantage online because they don’t have as much opportunities to portray all these amazing things they’ve invested in at the point of purchase. They’re not as obvious or as valuable online and the typical brand building investments have less purchase or less justification, less value when we go online.
Now where do brands absolutely almost not matter at all? What is banishment? What is being put on an ice flow in the world of brand? I think its voice. And if you look at activity on voice and on Google, the number of people or the number of searches or voice requests that have a brand as a modifier or prefix before a request, is declining. When Google came out, when Google launched, I think the sun had past midday on the era of brand. We all have this Gestalt. I have had it for 25 years. I’ve made a nice living espousing that brand is everything. And there’s this reflex reaction in the business world that brand is still sacrosanct, and I think Google and now Amazon have decided all the money, all the price premium that’s required to support this intangible called brand building, is money we’re going to give back to the consumer. The consumer is starting to not care or not find value in all this clinical brand building.
What are people using Echo for? Right now, they’re just using it to get information. If you have kids, it’s a ton of fun, geography, jokes, Amazon or Alexa is by far the most popular device in my household right now but it’s not being used for shopping. Where is it going to go? It’s pretty clear where voice is going to go based on the company. So Apple will use voice for media. Google will use voice for search and information so it can monetize it with advertising. And the way Amazon monetizes things is through commerce. So it’s likely you’re going to see a huge effort on the part of Amazon to turn Alexa into a frictionless, brand-less, means of ordering all the stuff you need in your household. My prediction is within two to three years, Amazon launches something called Prime Squared, where it takes artificial intelligence, your purchase history, your credit card history, these dots you have around your house, and says, “Tell you what, we’ll be your only retailer. You don’t need to go ever shop anywhere else. We’re going to send you two boxes twice a week using this unmatched fulfillment infrastructure. One is going to have the stuff in it we think you want, and in the second box is going to be empty and just put the stuff you don’t want back in the second box. Send it back, we’ll recalibrate, calibrate using Dot or Alexa. Just say, “Alexa, more pork, more bacon, less beer, barbecue on Saturday for six people, send me three quotes for auto insurance for a 2014 Toyota Camry via email”. The easiest way to get stuff done in 95%, maybe 98% of our purchases, are low value, low consideration, tedious purchases, I think Amazon’s going to say to a series of households, “Tell you what, you don’t need any other retailer; we’re it”. The company is going to announce that those households are going to quintuple or sextuple and purchase volume and the stock is going to become the first trillion-dollar market cap company in the history of business.
So, what happens with voice? How is Amazon going to get to penetration and help get traction or adoption where I’m using Alexa for consumption and for shopping. And they’re already getting there and they’re getting there through price. So if you go on Amazon, you’ll see that the number one recommended detergent around the Gain brand is, Gain Flings Original laundry detergent packs, 81 count for $18.97. However, when you ask Alexa, “Buy Gain laundry detergent”, “Amazon’s choice for laundry detergent is liquid laundry detergent, 96% bio graze, fragrance free, 106 loads. It’s $19.59 total including tax”. It was $18.48 thirty minutes ago. I think Amazon got word I was going to trash them and it’s really screwing with us right now. “Alexa, buy L’Oréal mascara”. “Amazon’s choice for L’Oréal mascara is L’Oréal Paris. A luminous original mascara. Carbon black. 26 fluid ounces. $4.89 total including tax”. So the majority of the products that we did this test on, if you order through Alexa, you got a lower price and what you can find on Amazon. “Alexa, buy baby wipes”. “Waterwipes Baby Wet Wipes. Natural and chemical-free. $24.81 including tax”. So it’s clear that Amazon has decided to give people a discount when they order through voice, as opposed to going on Amazon, where obviously the prices are pretty low. And this is obviously going to cost them a lot of money and they’ve made a conscious decision to make a huge investment to encourage more adoption of purchase through Alexa. “Alexa, buy batteries”. “Amazon’s choice for batteries is Amazon Basics Double A batteries, a 48 pack $13.60 total including tax. Would you like to buy?” “No”. “I also found a 20 pack of Amazon Basics Triple Performance alkaline batteries. It’s $7.61 total including tax. would you like to buy?” “No”. “That’s all I could find for batteries”. So, Alexa, knowing that you don’t have the visual cues of other brands, has decided to tell you that Amazon private label batteries are the only batteries available, despite the fact there are numerous brands available on Amazon. I think this is where we’re headed. I think Alexa and Amazon have conspired and figured out that voice is a way to pull brand and some of the traditional mechanisms and accoutrement of brand building out of the ecosystem and then slowly but surely take control of your preferences, and your preferences are about to become the product that Amazon makes the most margin on or Amazon private label. And we’re going to see a further death in the world a traditional brand building.
So, some summaries. Amazon really is, in my opinion, conspiring with technology and a billion consumers to say, “We have declared full wholesale war on brands”. There are going to be some brands that are successful. If you think about what typically works with the Amazon algorithm, it’s one of two things: it’s either a hot independent brand that’s getting great reviews and is a very specific indication and is getting tremendous buzz and that gets put to the top, or it’s a good brand, that for whatever reason, is an amazing deal that day that’s on sale. And the algorithm literally goes out every nanosecond and tries to find the best value for the consumer. Most big brands are neither of those things. Most big brands are good brands. Not hot brands. Not up-and-coming brands. Not the cool independent brand that’s getting a ton of buzz. A good brand that commands a premium. It’s not great value. It’s a good price but it’s not a great price. So traditional short-tail, CPG, large conglomerate brands are just not what Amazon is recommending nor will they recommend. So you have one company that’s soaking up all of the retail growth. It’s essentially decided the brands of yesterday, are just that, they’re yesterday.
Algorithms versus partnerships. If you think about your traditional retail partnerships, they are partnerships with big barriers of entry. It’s hard to get into Macy’s. It’s expensive. There’s a lot of human interaction. But once you’re in there, and they’re making money, and you’re making money, it’s a wonderful partnership that they continue to reinvest, they’re patient. It might sound like a difficult relationship where they’re asking for a lot. But you haven’t seen difficult until an algorithm is willing to trade you off for any other of a hundred different brands in a nanosecond because, for whatever reason, the algorithm has decided that that exact moment, you are not the best deal for the consumer or for Amazon. It’s an algorithmically driven retailer which is a nightmare for traditional brands that have the scale to develop these relationships, to advertise, to get shelf space. Amazon doesn’t care about any of those things.
Storytelling is the new competence of business. We saw this firsthand at L2. and that is when we started L2, I was born in an age, or came of age in business, where you were trying to get to profits. That was the goal. And my first company in profit brand strategy, I was really proud of, because within the first two years, we got to profitability. And the way I’ve always tried to run companies is to grow them between 20 and 40% a year and maintain somewhere between a 30 and 40 percent eb-2 margin. And that’s what we were doing at L2. We were growing about 30 or 40 percent a year and we were getting somewhere towards 30% operating margins. And then the Venture capitalists came in. Very smart guys. And said, “Scott, you’re going about this all wrong”. And put a bunch of money into the company and said, “Take it to 70% growth and lose a lot of money but become more special and have technology at the center of your company and establish a leadership position that no one can argue with based on the 70% versus 30% growth”. That was massively uncomfortable for me to see every month us hemorrhaging money. 36 months after we took that money, the valuation of our company went up about tenfold so they were right. So this is the new Gestalt in our economy. And that is to establish leadership, to grow at all costs, even if it means losing a lot of money. And I still don’t know if this story ends well. There’s something uncomfortable about that approach to business.
Death has a name, and it’s “voice”. I think when we look back on the death of brand, if you will, or how a lot of the margins get starched out. When Kraft Heinz comes after Unilever, they’re basically saying, “You need to cut costs, and if you don’t we’re going to come in and do it for you”. And overnight, a couple hundred thousand CPG executives lost their job, they just don’t know it, because now in every boardroom of every CPG company they’re saying, “We’ve either got to cut costs or someone’s going to come in and take us over and do the same thing for us”. And at the end of the day that cost cutter, that destroyer, that voice sharpening the knife is one, Google, two, Amazon’s algorithms, and now it’s going to be voice. Voice based technologies are taking over the world. “Alexa, who is Scott Galloway?” “Scott Robert Galloway is an Australian professional football player who plays as a fullback for Central Coast Mariners in the A-league”. Really, that is literally the funniest thing my children have ever seen. And three to four times a day, they invite me into the room as if they’re doing something else, and my six- and nine-year-old ask that question of Alexa and wait to see my disappointment and just ride on the ground with joy. They think it’s the funniest thing ever. And we did this on a Winners and Losers, because we thought it would be funny. And then I got a note in the comment section from somebody who said “Scott, loved your videos. this is a gift to you”. And he gave me a link to a wiki page and now I have a Wikipedia page which scares the shit out of me because I don’t know what’s going to end up on this thing. So, “Alexa, who is Scott Galloway?” “Scott Galloway a clinical professor of marketing at the New York University Stern School of Business. A public speaker and entrepreneur”.