January 9, 2015

Amazon's New Rival?

I finished reading Brad Stone's book on Jeff Bezos and Amazon over the Christmas break. The book is entitled "The Everything Store: Jeff Bezos and the Age of Amazon". Here is a link to the book if you wish to purchase it (of course I will link to Amazon!).

I enjoyed reading the book a lot and took a lot of mental notes on how Mr. Bezos was able to build Amazon from the ground up. To make the long story short, he was very smart, stubborn, competitive , had a grand vision and simply refused to fail and take no for an answer.

There are several examples in the book that describe the very aggressive pricing tactics Amazon used (with the blessing of Bezos) to either put pressure on a competitor or a supplier. For example, Amazon consciously did not inform publishers that they planned to sell e-books below acquisition cost. Another example is when Amazon forced an upstart competitor (Diapers.com) to sell the company to them by selling diapers on Amazon at a loss.

Today, I read an article by Brad Stone on Bloomberg Businessweek talking about the founder of Diapers.com and his new start-up venture called Jet.com. Jet.com plans to revolutionize online retailing by bringing the "price club" model online. They plan to sell at prices even lower than Amazon's by maximizing shipping size and sourcing products from locations closer to the buyer.

It will be interesting to see how Amazon will retaliate. From what I gathered from the book on how Amazon has reacted to competition in the past, I expect that Amazon will come out swinging. Amazon is not afraid of going on a protracted war of attrition and Jet.com and their backers will immediately be tested.

You can bet that Amazon, and their pricing bots, will look to sell every item on Jet.com at a lower price even if it means taking a loss. How long Amazon (and Jet.com for that matter) can last will depend on their tolerance (and their investors tolerance) to absorb the losses. You can bet that Jet.com will be in it for the long haul, they have already raised $80 million from venture capitalists and are already lining up a 2nd round of fund raising.

It can be argued that the big winners here are consumers in the short term and we will benefit from the impending price war. Suppliers are likely to be winners too in the short and long term as they will welcome a competitor to challenge Amazon's dominance in online retailing (Jet is already positioning their culture as anti-Amazon so hopefully they don't end up running suppliers into the ground as Amazon has done). 

Hopefully, both companies don't end up crippling themselves in the long-run to the detriment of consumers. Rather, I hope they end up becoming rivals who push each other to improve and innovate to the benefit of consumers in the long run. Online retailing is after all a big enough space that maybe both Amazon and Jet end up sharing what will likely be an even larger online retailing pie in the future (similar to how Walmart and Costco co-exist in offline retailing).

I am definitely watching this new development with a lot of interest and look forward to the day that online retailing becomes mainstream in the Philippines. 

Link here to the original Brad Stone article from Bloomberg Businessweek