Posts

Alibaba’s entry into Southeast Asia served as social proof for many entrepreneurs and businesses that they were onto something big, which led to a year of exuberance for ecommerce in the region.

“We’re just at the beginning, [the Alibaba-Lazada deal] will kickstart the whole cycle. It will attract more global investments into the region, and attract more entrepreneurs who now see this region as a great place to start a business.” — Stefan Jung, founding partner at Indonesia-based Venturra Capital in an interview with Tech in Asia

Even as we get closer to 2018, there are already numerous casualties in one of the most promising ecommerce growth markets in the world.

Alibaba doubled down on its Lazada investment by upping its share from 51 percent to 83 percent and in a push to monopolize the market, put grips on Tokopedia, arguably one of Lazada’s biggest competitors in Indonesia.

Tencent, through JD or directly, also began executing its China playbook by investing in companies like Sea, Go-Jek, Traveloka, Pomelo Fashion and Tiki.vn.

Global attention from the US came from KKR, who through Emerald Media, put $65M into ecommerce ‘arms dealer’ aCommerce in a bid to replicate Baozun’s dominance in the Chinese “TP” (Tmall Partner) landscape.

And the plays won’t stop here.

Leveraging newly consolidated positions of strength, marketplaces will cross traditional boundaries and move into areas like private label brands and offline distribution. Brands will also feel increasingly cornered, facing a “damned if you do, damned if you don’t” situation.

Those that survive 2018 will have to find a niche for themselves, such as in fashion or home, because there isn’t much room left for another horizontal ecommerce player. Others will be tempted to take risky shortcuts like say, raising money through ICOs.

2018 will also see Tencent, not Alibaba or a local company, emerge as the winner in mobile payments in Southeast Asia.

It might be a good time to start learning Chinese.

1. Plata o Plomo: Southeast Asia ecommerce will be increasingly factionalized into Alibaba and Tencent camps, and locals will pick sides

Given its similarities to China roughly 10 years ago, Southeast Asia has become a gold rush for Chinese Internet giants looking to expand beyond the mainland. It was Alibaba’s acquisition of Lazada last year that triggered an arms race between China’s #1 and #2 in Southeast Asia, and in turn, will cause local companies to choose sides.

Image source: Sohu

Alibaba also led a $1.1B investment in Tokopedia in 2017, continuing to place its biggest bets on ecommerce. Moving forward, the company is expected to position Lazada and Tokopedia as the Tmall and Taobao of Southeast Asia, respectively.

Meanwhile, Tencent has aggressively tried to replicate a three-prong formula that was successful in its fight against Alibaba in China: gaming, mobile and payments.

The first step was becoming the largest shareholder of Sea (previously Garena), predominantly a gaming powerhouse that runs Shopee, a mobile-first ecommerce marketplace and the second was placing bets on Go-Jek to become a “super app” like WeChat and WeChat Pay.

Understandable as WeChat Pay now commands an impressive 40% market share in China vs. AliPay’s 54%, up from 11% in 2015.

“Is there a land grab right now for these kind of assets? I think in the land grab they [Tencent] are following us. They are seeing that we have positioned ourselves very well, and they’re sort of playing a catch up game. So what we want to do is, since we already have our positions, is to work with local entrepreneurs.” — Joe Tsai, Alibaba Vice Chairman, in speaking with Bloomberg.

Tencent and Alibaba share price increase over last 7 years compared to Amazon and NASDAQ composite
Source: Yahoo Finance (December 4, 2017)

With both Tencent and Alibaba market caps at all-time highs, we expect this trend to continue throughout 2018 with both sides gobbling up more local companies across the ecommerce ecosystem and upping shares in existing ones.

2. Facing slow organic growth, Amazon will acquire a company to fast-track its ecommerce expansion in the emerging region

Image source: Getty Images

Amazon’s entry into “Southeast Asia” was the biggest surprise and non-surprise at the same time.

A non-surprise because Amazon’s long-awaited and rumored soft-launch into Singapore was widely covered by the media even before the company’s Prime Now services officially became available on July 26, 2017.

A surprise because Amazon’s expected tour-de-force across the region ended before it even started.

Amazon fanboys celebrated the initial launch of a scaled down, poor man’s version of Amazon — Amazon Prime Now — offering a measly one million household items and daily essentials.

“I was expecting more things that I can’t get in Singapore, for example Sriracha or something small that’s not available in Singapore but most stuff on Prime Now are basic things you can get from Fairprice…” — Reddit User Ticklishcat

But there’s good reason for it.

It doesn’t make sense for Amazon to set up a full-blown local presence in the country-state. Singaporeans, under the Free AmazonGlobal Saver Shipping option, were already enjoying free international shipping from Amazon en masse for orders over US$125.

The country ranks #29 in terms of session/year to Amazon.com on a global scale but #4 when normalized for population size. With an average of 14.04 sessions per person per year visiting Amazon.com, Singapore takes the top spot among all the countries in Asia.

Singaporeans already buying from Amazon, without the latter’s full-fledged local presence: Singapore ranking only #29 in traffic to Amazon.com but #4 when normalized for population size (#1 in Asia)

Source: SimilarWeb, World Bank

The launch of Amazon Prime in Singapore earlier this month makes it even less likely for the firm to set up local operations beyond Amazon Prime Now. Amazon is no longer subsidizing the original free shipping for orders above US$125 to Singapore and Singaporean Prime members have free international delivery only on orders above S$60 on Amazon’s US website for S$8.99 per month in addition to other benefits.

Not much else has been heard about the company’s further expansion into the region, particularly Indonesia and Thailand, where markets are being rapidly carved up by Alibaba and Tencent.

With time running out for a full-fledged, organic entry into the high-growth markets of Southeast Asia, its stock trading at all-time highs, and not too distant memories of failure in China, we expect Amazon to attempt at least one major acquisition in 2018 to accelerate regional expansion.

3. Offline is the new online: pure-play ecommerce to launch physical stores to offset rising online customer acquisition costs and improve last-mile fulfillment

While traditional offline retailers like Central in Thailand and Matahari in Indonesia scrambled to move business online, online pure-play ecommerce is expected to make moves offline.

With online customer acquisition channels like Google and Facebook rapidly reaching saturation and diminishing returns, ecommerce players like Pomelo and Lazada will look to offline channels to reach new customers.

Pomelo dabbled in offline over the last few years but, fresh off a $19M Series B, recently launched its biggest pop-up to date in Siam Square, the fashion center of Bangkok. The store applies “click-and-collect”, enabling customers to order online and try items in store before deciding which ones to keep or return.

Image source: Pomelo

“In fashion, the number one barrier to purchase is still the need to try product on for fit coupled with the hassle of returns. An offline footprint addresses this barrier head on. Additionally customers can be acquired offline and data from online can be used to drive higher sales and greater operational efficiencies offline. In short, a mix of offline and online is the optimal strategy for fashion retail going forward.” — David Jou, Co-Founder and CEO, Pomelo Fashion

Love Bonito, another online-first fashion brand from Singapore, officially launched its permanent flagship store at Orchard Road after seven years of being an ecommerce pure-play.

Image source: Love Bonito

Lazada, on the other hand, may follow Alibaba’s moves in China where the ecommerce juggernaut launched Hema supermarkets in Beijing and Shanghai. In addition to reinforcing a positive brand experience and customer acquisition, these new offline stores serve as fulfillment centers, effectively making up for Southeast Asia’s lack of logistics infrastructure.

Alibaba’s Hema supermarkets in China. Image source: Quartz

Lazada Group CEO Max Bittner already hinted at the possibility physical stores in Indonesia at a conference earlier this year.

Over the last decade in China, Alibaba rode 50%+ year-on-year ecommerce growth to become what it is today, however, as maturation slows, Alibaba has doubled-down on initiatives like Single’s Day (11.11), “New Retail” (smart pop-up stores around China), and market expansion to accelerate sales (Southeast Asia).

Despite the region being projected as the next big ecommerce growth story, online accounts for only 1-2% of total retail today. If companies like Lazada and Shopee want to grow faster than the market allows, going offline will be the obvious choice.

4. New ecommerce startups will use ICOs to raise funding to battle giants

With Southeast Asia increasingly being carved up by giants such as Alibaba and Tencent in a presumed winner-takes-all-market, smaller ecommerce startups will look at alternative ways to finance themselves.

Enter newly hyped Initial Coin Offerings (ICOs).

Raising funds through these means in Southeast Asia was pioneered by Omise, a fintech startup based in Thailand, that successfully raised $25M in a few hours to develop a decentralized payment system.

Given early speculation of Amazon moving into the cryptocurrency space, we’ll have fertile ground for our first Southeast Asian ecommerce ICO. Already a start up called HAMSTER is selling HMT tokens to develop a decentralized marketplace that promises “no fees, no brokers”.

Revolutionary ecommerce platform funded by ICOs or ponzi scheme?

Expect ecommerce startups to use ICOs to fund customer acquisition, new product development, and inventory financing. That is, until the bubble bursts

5. A final wave of ecommerce consolidation sweeps through as local players adjust to a New World Order

We’ve shared numerous stories of casualties and consolidation during the Southeast Asian ecommerce bloodbath in our previous annual predictions.

Japan’s Rakuten sold off most of its assets in the region when it retreated in 2015/2016. Rocket Internet dumped Zalora Thailand and Vietnam in a fire sale in 2016 and sold its Phillipines entity to local conglomerate Ayala Group the year after.

In Thailand, Ascend Group put its assets WeLoveShopping and WeMall on life support to focus on fintech.

In Indonesia, reports surfaced of SK Planet selling its Elevenia shares to Indonesian conglomerate Salim Group, which was quickly followed by news of its Malaysian entity up for bid between Alibaba and JD.

Earlier in the year, Indonesia’s second largest telco Indosat Ooredoo shut down its ecommerce website Cipika. Alfamart, Indonesia’s second largest convenience store chain also had to downsize operations to pivot its ecommerce initiative Alfacart away from a general marketplace play towards an online grocery channel.

Come 2018, all eyes will be on the health of remaining bastions of home-grown, horizontal ecommerce plays. As Alibaba and Tencent up the ante, there will definitely be more casualties in the new year.

6. Go-Pay will venture outside of Indonesia through Sea, Traveloka and JD to become the WeChat Pay of Southeast Asia

Indonesia’s ecommerce today is like what China was in 2008 — the pace of change is unimaginable. When I visited our office in Jakarta 12 months ago, hardly anyone was using Go-Jek’s mobile payment platform and wallet, Go-Pay.

Returning six months later, almost all of my colleagues used Go-Pay to transfer money peer-to-peer and pay for products and services.

In most of emerging Southeast Asia (excl. Singapore and Malaysia), credit card penetration rates are in low single digits and most people don’t even have a bank account.

Source: Global Findex, World Bank

Unfortunately, few fintech and payment startups in the region have created products to address the lack of credit cards and large unbanked population. Instead, the majority happily build payment gateways and e-wallets that rely on existing and legacy credit card infrastructure like in the US (Apple Pay anyone?).

It’s no wonder cash-on-delivery (COD) still makes up over 70% of all processed transactions according to data by ecommerceIQ.

Those that do focus on mobile wallets topped up with cash like Thailand’s True Money struggle to achieve sustainable “core product value” and reach mass.

“Community, Commerce, and Payments are inter-connected in the Digital World. Thus far, all successful mobile payment plays, globally, are centered on the commerce and community axis. PayPal started with eBay, Alipay with Alibaba/TMall/Taobao, WeChat Pay leveraged WeChat/QQ, and Amazon Pay has Amazon. Due to this very reason, standalone payments/wallet business will struggle.” — Gaurav Sharma, Founder at Atlantis Capital

Go-Pay addresses these fundamental issues by allowing users to send payments peer-to-peer (P2P) and top up by giving cash to Go-Jek drivers who act like mobile ATM machines.

Top up your Go Pay mobile wallet by handing cash to a Go-Jek driver

More importantly, with Go-Jek being part of the Tencent faction, we expect the company to push Go-Pay into other Southeast Asian countries through its community and commerce platforms such as Sea (Garena, Shopee, etc.), Traveloka and JD.

Following rumors in November, Go-Jek finally announced its acquisition of Kartuku, Mapan and Midtrans. The latter, being one of Indonesia’s top online payment gateways, will give Go-Pay additional distribution channels and use cases such as Matahari Mall, Tokopedia and Garuda Indonesia, pushing it beyond the realm of P2P into B2C payments.

A strong contender for the “WeChat of Southeast Asia” is Grab, whose 2.5 million daily rides makes it the largest ride-hailing platform in Southeast Asia. GrabPay, launched this year, is Grab’s effort to move Singapore towards a cashless society, with plans to expand across the region in 2018.

Should Go-Jek be worried? Not really.

Singapore is not the ideal test-bed to launch a mobile wallet because the country already has an ubiquitous cashless payment platform called “credit cards”. And GrabPay’s recent partnership in Indonesia with Lippo Group’s Ovo hasn’t garnered much attention or presented wide use cases.

“While it might seem like common wisdom to first test (an idea) in Singapore, and then take it regionally and to the world, with all due respect to the government, I think it doesn’t make sense in today’s world.” — Min-Liang Tan, Co-Founder and CEO of Razer

Go-Pay, on the other hand, is adding value to users in a country where only 36% have bank accounts and 2% have credit cards. Emerging markets like Thailand, Vietnam and the Philippines have a similar (lack of) financial infrastructure as Indonesia.

Go-Jek, by being part of the Tencent faction, has access to a much more diversified distribution channel and offers a variety of common day-to-day use cases such as gaming (Garena), shopping (Sea, JD), travel (Traveloka) and pretty much everything else (Go-Jek itself).

7. New mobile-first fashion and beauty marketplaces will fill void left by Zalora

Zalora, Rocket Internet’s once star fashion ecommerce venture, has struggled in Southeast Asia since launching in 2012. Zalora Thailand and Vietnam were picked up by Thai retail conglomerate Central Group for pennies on the dollar while the Philippines entity was partially sold off to the Ayala real estate group.

There were even rumors of Zalora Indonesia exiting to local retailer MAP, which were swiftly denied.

A few factors contributed to the company’s difficulties: 1. Price and product variety competition with merchants selling on Facebook, Instagram and LINE, 2. Control of brands by one or two retail conglomerates like Central in Thailand, MAP in Indonesia, and SSI Group in the Philippines.

These two factors made it difficult for Zalora to pivot to an ASOS-style premium brand marketplace.

A shell of its former self, Zalora’s challenges left a void that is increasingly being filled by more nimble, mobile-first fashion marketplaces that see an opportunity in a space dominated by mass-market, general ecommerce platforms like Lazada and Shopee.

As evident from Amazon’s struggle to court premium fashion brands in the US, luxury brands don’t like to sell on mass platforms, where merchandise shows up beside detergent and washing machines.

“After purchasing Whole Foods, Amazon now has access to the wealthiest refrigerators in the country but they still can’t get into our closets because the aspirational beauty and fashion brands don’t want to distribute on their platform. Why? Because they don’t have their heads up their ass and realize that Amazon partners with brands the way a virus partners with its host.” — Scott Galloway, L2 Founder and NYU Stern Professor

Over in China, both Tmall and JD had to exert a Herculean effort to attract fashion brands. In October, JD launched TopLife, a standalone online luxury platform to provide a high-end experience that high-end brands promise. Alibaba also launched Luxury Pavilion, a section within Tmall tailored to luxury brands like Burberry and Hugo Boss.

Spearheading a new wave of mobile-centric Southeast Asian fashion marketplaces are Zilingo, fresh off an $18M Series B, and Goxip, a Hong Kong based startup that recently completed a $5M Series A with plans to enter Thailand. In Indonesia, there’s LYKE, ironically founded by the ex-Zalora CMO.

With the benefits of hindsight and understanding of the importance of social commerce on driving fashion, these emerging players will offer elements like chat, content and an influencer network to offset some of the customer acquisition cost challenges inherent in scaling ecommerce.

8. Marketplaces will grow up and clean up ‘grey market’ for blue-chip and luxury brands

Over the last six years, most of the region’s initial ecommerce growth was focused on driving GMV by tapping into any merchant and brand willing to sell online.

In 2018, marketplaces like Lazada and Shopee will continue to attempt to onboard bigger global brands but their success will require them to control grey market sellers and counterfeit goods in order to cultivate an environment in which blue-chip brands will feel comfortable selling.

Alibaba went through the same process in China when discussions surrounding counterfeits and grey market goods on Tmall and Taobao peaked around the company’s IPO in 2014.

Based on data provided by marketplace analytics platform BrandIQ, 80% of SKUs from consumer product giants like Unilever, Samsung, and L’Oreal on average are sold by unauthorized, grey market resellers. These grey market SKUs are sold at a price 30% lower than official flagship stores and authorized resellers.

Why all the fuss? Because grey market sales impact the image of brands selling in official stores.

“Lately, the explosion of third-party sellers on the site has led to authentic goods from companies such as Nike, Chanel, The North Face, Patagonia and Urban Decay being sold on Amazon even though they don’t authorize the sales, undercutting their grip on pricing and distribution,” said the Wall Street Journal.

Nike, for example, refused to sell directly to Amazon for a long time, fearing it would undermine its brand. But by not selling on marketplace creates space that will be quickly filled by grey market, unauthorized third-party resellers looking for arbitrage opportunities as seen from the previous BrandIQ data.

Customers buying from these grey market resellers perceive this as buying from the brand itself and, when having a poor customer experience, end up blaming the brand rather than the unauthorized reseller.

BrandIQ data shows that the average rating for grey market SKUs are 24% lower than reviews for similar products sold through the official shop-in-shop or flagship store.

We’ll see a push from the marketplace and brands to address grey market sales in Southeast Asia in 2018. Marketplaces will employ a tighter grip on third-party resellers in order to attract better brands, while brands will set up an official presence on marketplaces as a way to pro-actively manage the customer experience and brand image.

9. Marketplaces and e-tailers will introduce its own private label products and alienate brands

As the ecommerce market in Southeast Asia matures and consolidates, marketplaces, e-tailers and ecommerce startups will be increasingly scrutinized for margin growth. Gone are the days of aggressive top line growth and market share grabs at all cost.

With Lazada post-Alibaba acquisition and Shopee post-IPO (as part of Sea), what other value-added services will these companies tap into for sustainable revenue growth?

In this instance, companies in Southeast Asia have taken a cue from the China playbook. Lazada launched a Lazada Marketing Solutions unit to monetize its 23M active annual customers through advertising similar to how Tmall and Taobao charge for ads in China.

Today, Lazada offers display ads and programmatic promoted product ads to its customers but is expected to launch pay-per-click search ads in 2018 competing with Google, Facebook and similar networks out there. Across the region, Shopee has already launched pay-per-click search ads.

Beyond advertising, we can expect more marketplaces and e-tailers to follow Amazon’s foray into private label brands to boost margins. With the data collected from selling third-party brands, these ecommerce platforms know exactly what kind of products sell best, to whom, at what time and where.

Flipkart, one of India’s top marketplaces competing with Amazon, recently announced its aim for 20-22% sales contribution from private labels in the next five years.

“When we first decided to foray into private labels in mid-2016, a ‘Tiger Team,’ for private labels was created internally to research 50-odd retailers around the world, including Europe, the US, China and India, to envisage what the private label landscape would look like for Flipkart over the next few years. Research revealed that private labels can contribute 10-20 percent of the company’s business. For instance, US-based Costco Wholesale’s private label brand Kirkland contributes 20-25 percent of its business,” said Adarsh Menon, Flipkart’s Head of Private Labels in an interview with The Hindu.

Launching private label brands in Southeast Asia isn’t something new. Zalora launched its own fashion label called EZRA as early as 2013 followed by Lazada’s LZD Premium Collection in 2014. With the focus on top line growth in the period of 2013-2016, private label brands have taken a backseat as seen from the limited number of them listed today on Zalora and Lazada.

Althea, a Korean beauty e-retailer that recently raised a $7M Series B, specifically said to be using the new funds to launch more private label products.

Althea private label product sold on their website

“Based on the vast amount of user data that we have gathered… we are now able to understand the specific needs of our customers in each market, garner feedback almost instantly through our online platforms, and quickly turn that into a product within a month or two,” said Althea Co-Founder and CEO Frank Kang. “We have deep insights into our customer base that traditional brands simply cannot match.”

In light of all this, it’s not surprising Zalora has expressed renewed interest in pushing its own private labels, “Something Borrowed” and “Zalora”, for the new year.

10. B2B ecommerce to disrupt offline distributors, blurring lines between online and offline distribution

Despite the rosy outlook for ecommerce in Southeast Asia, the reality is that B2C ecommerce today is still in the low single digit percentages. Given aggressive growth targets, brands, marketplaces and e-tailers will increasingly look toward non-B2C channels such as B2B and B2E (Business-to-Employee) channels for revenue.

Zilingo, the Sequoia-backed fashion marketplace, launched its Zilingo Asia Mall B2B marketplace to allow fashion buyers in the US and Europe buy Zilingo merchandise at wholesale prices, effectively creating an “Alibaba” for fashion.

Shopee launched a wholesale feature earlier this year, allowing merchants to set lower unit prices for larger order quantities.

 

Shopee Malaysia offering wholesale feature

aCommerce, Southeast Asia’s ecommerce enabler and e-distributor, fresh off a $65M Series B from KKR-backed Emerald Media, coined a new term for all this — “B2A” or Business-to-All.

The company is behind the B2B and B2E initiatives for brands like Samsung and L’Oreal. According to the company, B2B ecommerce now contributes to 30% of total revenues at aCommerce, up from 10% a year earlier (disclaimer, I work here).

Written by: Sheji Ho, aCommerce Group Chief Marketing Officer

Opinions expressed are solely my own and do not express the views or opinions of my employer.

Scott Galloway, Clinical Professor of Marketing at New York University, Stern School of Business & Founder of L2 speaks at L2’s Amazon Clinic about how Amazon is disrupting retail and how it’s planning to destroy traditional brands. For our eIQ readers, we’ve summarized the key takeaways as well as transcribed the entire video.

tl;dr:

  • Over the last 45 years, physical mall growth outpaced US population growth, setting the offline retail industry up for a big implosion; foot traffic to malls cut by more than half over the last few years.
  • 52% of US households now use Amazon Prime, effectively subsidizing Amazon’s break even retail business and driving Amazon’s onslaught of traditional retailers.
  • Amazon has set the new standard for a new era of unicorns given free reign by investors to focus on long-term growth and grand vision over short-term profits (e.g. Snap, Uber, Wework, etc.)
  • Return on Human Capital: with $1.2 million market cap per employee (vs. $90,000 for Wal-Mart), Amazon has an unfair advantage in recruiting and retaining talent.
  • With $4.5 billion in budget for original content production, Amazon’s entertainment business only trails Netflix ($6 billion).
  • Amazon’s ad business is lucrative, driving 1/5 of total Amazon profits and is 3x the size of Snap’s ad revenues.
  • Alexa, Amazon’s voice-based, intelligent assistant, is Amazon’s strategy to commoditize brands. With price subsidies for purchases through Alexa and a bias towards recommending Amazon’s high-margin, private label products, Amazon is serious about taking down traditional brands.

Note: Minor edits have been made to the transcription for clarity.

Everyone’s been talking about how retail is in for a fall because of the stagnation of middle class wages, America being overstored, Amazon, a ton of different things such as young people spending less money on stuff and more on experiences, but retail sort of soldiered on. It feels like the reckoning is finally here and we’re seeing just an incredibly challenging environment for retail.

The number of malls in the US grew twice as fast as the population between 1970 and 2015

In the 45 years between 1970 and 2015, malls grew 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 has already been nine bankruptcies in retail year to date. It’s 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 or maybe a little more when they go to the store. But, to give you a sense of how dramatic the decline is, the footfall traffic to malls has been cut in half in just the last several years.

In terms of store closures we wanted to put up store opening stats as well because these talks are assumed to be about how great Amazon is and how screwed everyone else is.

There are winners as well. 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 fulfilment centers below as we believe that Amazon’s fulfillment centers are effectively going to start serving the stores with click and collect. At some point 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 $64 billion in growth since 2010. That’s the size of Nordstrom, Macy’s and Sears. They have essentially added these entire businesses to their top line over the last six years.

In terms of scale Amazon has added $64 billion in growth since 2010. That’s the size of Nordstrom, Macy’s and Sears.

To give you a sense of just how powerful Amazon is in terms of a recurring revenue stream, see the stats below. More of an attempt to get an annual fee out of people in the form of Amazon Prime to subsidize what effectively has been a break even business even at this scale with their retail platform.

52% of Americans have Amazon Prime so more people now have Prime than have a landline phone. It gives you a sense of how technology has shifted in America. Amazon is the 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 $50,000 a year. The people with Amazon Prime are the same households that make over $50,000. One of the things that’s unusual about it is usually a retailer has discount as a core tenet of its value proposition. It attracts a lower income consumer whereas Amazon is very much urban, it’s very much a high income consumer.

One of the things that’s unusual about it is usually a retailer has discount as a core tenet of its value proposition. It attracts a lower income consumer whereas Amazon is very much urban, it’s very much a high income consumer.

Amazon Has Changed More Than Just The Face of Retail

Amazon has essentially changed the relationship between companies and shareholders. It has replaced profits with vision and growth. It has changed the entire ecosystem because companies and investors are no longer satisfied with a company that is not growing but profitable or are 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. Amazon runs their business at break even.

My strong belief is that every time Amazon reports a quarter that’s quite profitable and there’s all this coverage saying Amazon’s now going profitable, I think Jeff Bezos calls all his top management into a room and says, “You screwed up and we need to greenlight more massively expensive things that might give us an advantage over the long term.”

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.

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? Because they don’t need to. Investors don’t demand that from them as long as they can take all of that money and plough 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 very innovative and I would argue that if your bosses said to all of you that you no longer need to make 20% profit on every dollar you bring in, you could be break even, then you will be incredibly impressed with how innovative you can be.

Setting The New Standard: Long-Term Growth and Vision over Profits

Now we have some very profitable companies in the Four Horsemen, Amazon/Apple/Facebook & Google.

  • Google, the original, worth around $550 billion.
  • Facebook a little less profitable worth about $420 billion.
  • Amazon, the company that is probably the most impressive in terms of its own metrics of valuation relative to its peer groups. It justifies a valuation that no one else can. It is not profitable and runs literally at a break even business.

This had a big impact on the ecosystem. People always mimic the winner and as a result we have a series of private companies and the unicorns, the companies that we now admire, have adopted this gestalt of growth and vision at the cost of profits.

  • Wework is valued at $16 billion, a $530 million business that’s break even.
  • Snap did about $400 – $500 million in revenue. But its losses were actually greater than $500 million.
  • Uber at $5.5 billion in revenue and $3 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 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, Wal-Mart, the largest employer in the US and maybe in the world, generates about $90,000 in shareholder value for every employee. Macy’s has 140,000 employees and $60,000 in market cap per employee. Sears is effectively out of business. Amazon has 360,000 employees but $1.2 million in shareholder value per headcount.

Now given that that shareholder value or those options or that equity is a part of compensation, if the team with the best player wins, imagine what Amazon’s advantages are relative to other retailers, when they have $1.2 million 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.

Entering Entertainment: Second-Largest Content Budget Trailing Netflix

They’re getting into other businesses as a function of making this $99-dollars-a-month, 51%-of-US-households-proposition even more attractive. Things that we never thought Amazon would get into such as Amazon Video and Amazon Media or part of the Prime Amazon television.

$2.5 billion is how much HBO has allocated towards content. HBO has become such a part of the modern vocabulary in terms of great content and series. They’re going to spend US$ 2.5 billion dollars on original content this year. ABC and NBC are at about $4 billion. Amazon, the retailer, is going to spend $4.5 billion on original content this year. The only one that’s bigger than this is Netflix which is at $6 billion. And this is Netflix’s core business. Just to give you a sense of how much fun it is to plan traffic when you have almost infinitely cheap capital. You can take a non-core business and almost overnight compete with the biggest players in the business.

You can take a non-core business and almost overnight compete with the biggest players in the business.

Amazon is now spending more on content than the major broadcast networks such as HBO and 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.

Amazon’s Ad Business: 1/5 of Amazon’s Total Profits and 3x The Size of Snap

Sort of the overlooked middle child, what we don’t talk a lot about is Amazon’s Media Group which has become a very big business under the radar. Advertisers report that Amazon is in fact their favorite DSP (Demand-Side Platform) in terms of where to allocate their revenue and in terms who they enjoy working with most.

If we translate the margins on their business, it’s the same as the margins on Facebook’s business. Amazon is producing about $400 million a year in profits from their media business. This means that despite being a pimple on the element in terms of the top line revenue, the media group now does about a fifth of the profits of the entire company. And this is an adjunct business.

They’re now about half the size of Twitter and there are obviously bigger than Snapchat. Think about all the hype with the $23 billion valuation for Snapchat, and Amazon Media Group is a business that is three times the size of Snapchat.

Alexa and Amazon’s Conspiracy To Destroy Brands

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 the association and short hand 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 short hand or that diligence.

And Amazon has said by using technology and a billion people who will write reviews and then putting in algorithms, we can destroy that price premium that brands have commanded through consistency, all this advertising, and all these things like packaging and shelf space and in-store promotions that we can go after, it really doesn’t add any value and we can destroy it. You and me, the consumers can destroy it with our software and our scale and start sucking the margin away from brands and give it back to you, the consumer.

Using technology and a billion people who will write reviews and then putting in algorithms, we can destroy that price premium that brands have commanded through consistency, all this advertising, and all these things like packaging and shelf space and in-store promotions that we can go after, it really doesn’t add any value and we can destroy it.

I think this is effectively a war on brands. If you look at all the money that is spent by brands and CPG (Consumer Packaged Goods) companies on shelf space, on marketing, on creating demand, the partnerships, the scale they need, the massive amount of money they spend on relationships with retailers. Amazon doesn’t need to do any of that. None of that is important to the end consumer. 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 they go online.

Now where do brands absolutely almost not matter at all? What is banishment? What is being put on an ice floe in the world of brand? I think it’s voice and if you look at the 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 request is declining.

If you look at the 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 request is declining.

When Google launched, I think the sun had passed midday on the era of brand. We all had this gestalt. I have had it for twenty five years. I’ve made a nice living espousing that brand is everything. There’s this reflex reaction in the business world that the brand is so sacrosanct. I think Google and now Amazon have decided that all the money and all the price premium that’s required to support this intangible called brand building is the money we’re going to give back to the consumer. The consumer is starting to not care or not find value in all this “brand building”.

What Are People Using Amazon Echo For?

Right now they’re just using it to get information. If you have kids it’s a ton of fun… geography and 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 depending on the company.  

  • Apple will use voice for media.
  • Google will use voice for search and information so it can monetize with advertising.
  • The way Amazon monetizes things is through commerce, so it’s likely we are going to see a huge effort on the part of Amazon to turn Alexa into a frictionless and brandless means of ordering all the stuff you need in your household.

The Future of Alexa

My prediction is within two to three years, Amazon will launch 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’s going to have the stuff in it we think you want, and the second box is going to be empty for you to just put the stuff you don’t want back and send it back. We will recalibrate using dot or Alexa. Just say, “Alexa, we need 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. And 95% — maybe 98% — of our purchases are low value, low consideration, tedious purchases. Amazon is going to say to a series of households that 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 in purchase volume and the stock is going to become the first trillion dollar market cap company in the history of business.

Amazon Subsidizing User Acquisition for Alexa

How is Amazon going to get penetration and help get traction or adoption around using Alexa for consumption and for shopping? They’re already getting there through price. If you go on Amazon you’ll see that the number one recommended detergent around the Gain brand is Gain Flings Original Laundry Detergent Pacs, 81 count for $18.97. However when you ask Alexa via voice to “buy Gain laundry detergent”, it gives you the product details and a lower price.

The majority of the products that we did this test on, if you ordered through Alexa you got a lower price than what you could find on Amazon.

It’s clear that Amazon has decided to give people a discount when they order through voice as opposed to going on Amazon. As the prices are pretty low already on Amazon, and this is obviously going to cost them a lot of money, it shows they’ve made a conscious decision to make a huge investment to encourage more adoption of purchase through Alexa.

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.

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 of traditional brand building.

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.

Summary

Amazon The Destroyer

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 it’s 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 nano second 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 vs 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 in. They are 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 one hundred different brands in a nano second because for whatever reason the algorithm has decided that at that exact moment you are not the best deal for the consumer or for Amazon.

You haven’t seen difficult until an algorithm is willing to trade you off for any other of one hundred different brands in a nano second because for whatever reason the algorithm has decided that at 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 As The New Competence

Storytelling is the new competence in business. We saw this firsthand at L2 when we started. I came of age in business where you were trying to get to profits. That was the goal. I was really proud of my first company Prophet Brand Strategy because within the first two years we got to profitability.

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% EBITDA margin. That’s what we were doing at L2. We were growing about 30% or 40% a year and we were getting somewhere towards 30% operating margins and then the venture capitalists came in.

They were very smart guys and they said, “Scott you’re going about this all wrong.” They 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. Establish a leadership position that no one can argue with based on this 70% versus 30% growth. That was massively uncomfortable for me to see us hemorrhaging money every month.

Thirty six months after we took that money, the valuation of our company went up about ten fold. So they were right. This is the new gestalt in our economy. It is to establish leadership, to grow at all costs even if it means losing a lot of money.

I still don’t know if this story ends well. There’s something uncomfortable about that approach to business.

Death Has a Voice

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 came 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. 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. At the end of the day that cost cutter, that destroyer that voice sharpening the knife is:

  1. Google
  2. Amazon’s algorithms
  3. 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.

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 comments section from somebody who said, “Scott, love 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 is a clinical professor of marketing at the New York University Stern School of Business, public speaker and entrepreneur.

BOOM.