Amazon shocked the retail world Friday morning by announcing that it had reached a deal to acquire Whole Foods Markets. While the move is largely seen as a way for the online giant to quickly way to gain a foothold in the grocery category, can the active lifestyle space be far behind?
For Amazon, with a market capitalization of nearly $500 billion, the $13.7 billion Amazon takeover is by far the company’s largest and is already leading to speculation about what Amazon may acquire next. Its biggest to date had been the $1.2 billion acquisition of online shoe retailer Zappos in 2009.
On Friday, Maxim Group managing director Tom Forte was already speculating that Lululemon would make sense as the next bricks & mortar retailer Amazon may pursue. He told CNBC that Lululemon is not “massively over-stored” like some of its peers and sits in an expanding lifestyle category, activewear, that Amazon may seek to buy its way into one day. He also mentioned Warby Parker and Everlane as potential niche targets.
But market watchers were more intrigued about how Amazon could transform physical retail. By most estimates, bricks & mortar retailing still accounts for about 90 percent of all U.S. retail sales, although it has been suffering foot traffic declines in part due to the growing appeal of online shopping, led by Amazon.
Amazon has already opened a convenience store that does not need cashiers, a grocery store concept that acts as a hub for home deliveries, and a small bookstore that brings its popular customer reviews to brick & mortar. But how Amazon’s technology prowess, including its logistics and inventory management expertise, and cost-cutting mindset will translate to brick & mortar is unknown. With Whole Foods’ more than 460 stores, Amazon will be able to experiment and learn quickly.
With just its online focus, Amazon is already a major player in the active lifestyle space. According to the SGB 2016 Retail Top 100 list, Amazon was estimated to generate $2.31 billion in sales in 2015 across outdoor and athletic categories, landing as the 9th largest sporting goods seller. That excludes Zappos, which was estimated to have generated $490 million in sales in the active lifestyle space in that year.
Heightened online competition was cited by The Sports Authority and several other retailers that have been caught in the rash of bankruptcies to hit the industry over the last two years. And much of that pressure is coming from Amazon. An analysis by Slice Intelligence released earlier this year found that 43 percent of all online retail sales in the U.S. went through Amazon in 2016 with the data showing Amazon growing at a much faster clip than e-commerce overall.
For retailers in the sports industry, many have been forced to make outsized investments in their online operations to catch up to Amazon and others.
Asked by an analyst on his company’s first-quarter conference call about pressures from Amazon, Ed Stack, Dicks CEO, said the company’s moves to establish an e-commerce platform in house as well as investments in personalization, direct marketing and other areas has helped the retailer’s online sales expand at a “very rapid rate” in recent years. Online sales were 9.3 percent in Dick’s first quarter.
He did note Dick’s had “some work to do around” around rising shipping costs related to online sales but he still felt the company was positioned well for online growth in the years ahead. Stack said, “You’ve seen us start to market from an e-commerce standpoint more aggressively than we have in the past and we think we’re doing all the right things that prove out from a sales standpoint.”
Still, smaller retailers in the active space have been vexed about price-competition from Amazon and other online sellers, particularly with shoppers able to quickly compare prices on mobile phones. At the same time, most vendors have been taking advantage of the volume that comes from online selling, including Amazon.
“Protecting the mom & pops is, sadly, down the list of priorities for industry brands as a general rule,” said Kenji Haroutunian, the former long-time director of the Outdoor Retailer show who now runs Kenji Consults. “The sheer volume of working through Amazon, as well Zappos and other sites owned by Amazon, is impossible to ignore.”
Another frustration for both vendors and retailers, according Haroutunian, is that it’s “extremely difficult” for both brands and retailers to track price fluctuations daily and police MAP infractions when online selling is involved. He remarked, “It’s caused an entirely new line item on brand P&L’s in fact!”
Terry Schalow, executive director of the Running Industry Association (RIA), however, sees a “maturation of e-commerce sales strategies, and a shift in Amazon strategies in particular” – at least by many running brands. He believes they’re recognizing that selling online is having a “major diluting effect on the premium image of brands.”
He noted that one major brand, who he declined to identify, is in the process of closing Amazon as a direct account and allowing only select third-party partners to sell on the Amazon platform due to the inventory management challenges and other pressures placed on direct sellers. ON Running is among those that have chosen not to have a presence on Amazon at all. Others are tightening their brand protection platforms by taking their MAP policies all the way to the shopping cart and aggressively pursuing and shutting down unauthorized dot.com sellers.
Added Schalow. “They’re realizing that the volume that Amazon represents comes at a cost of reduced margins and lack of brand control. This bodes well for the health of the brand community, and specialty run retail will be benefit as the playing field begins to level as a result.”
One sporting goods executive, who declined to be quoted, felt most vendors would be hard pressed to walk away from selling to Amazon given the much bigger challenges facing traditional retail, including the spate of bankruptcies and store closings. The executive said, “We need people who can sell and move product. And move it in scale. There are fewer out there than they’re used to be.”
Both Haroutunian and Schalow agreed that smaller specialty stores are more immune to pressures from Amazon that some of the bigger players.
Schalow said that while the channel has faced challenges with online selling, the fact that run specialty has been able to keep revenues flat over the last two years amid the seismic shifts at retail shows the channel is at least holding its own against online pressures. He believes the gains Amazon is clearly making in the running market are largely coming at the expense of big-box stores as evidenced by the exit of Sports Authority.
“It is really a remarkable achievement that Run Specialty is simply flat,” added Schalow. “This reflects the channel’s resiliency, and is a testament to the fact that a large group of consumers prefer the service, product differentiation, and overall shopping experience that simply can’t be duplicated by dot.com and big box.”
Haroutunian believes REI, the fastest grower in the outdoor space in recent years with its broad consumer reach in key cities, will likely be most impacted by Amazon’s continued expansion, as well as pure-plays such as Moosejaw and Backcountry, that have to face off against Amazon’s expanding online appeal. Moosejaw was recently acquired by Wal-Mart, which on Friday quietly acquired online men’s clothing retailer Bonobos.
Yet Haroutunian said that despite Whole Food’s specialty approach, the thought of Amazon making a big play in specialty outdoor retail “doesn’t really translate to me.” Haroutunian believes smaller stores will “need to get far more savvy in e-commerce and quickly” with the arrival of some less-expensive technology tools expected to help. But he still believes the service-oriented, community approach that have long helped mom & pops differentiate against the big boxes will position them to complement Amazon as well.
“Boots on the ground beats drones in the air, still, in my humble opinion,” said Haroutunian. “In the end, fit plus expertise plus reputation plus community is the equation that retailers can invest in to stay on point.”
Photo courtesy Amazon
