Memo: Amazon’s Moat

Amazon’s upperhand has long been its ability to build a moat, so that the external forces affecting other retailers don’t infringe on its business. The ongoing supply chain crisis is no different, and as customers begin to scramble for last-minute gifts, Amazon is sitting in the right position as it usually is.

This has long-term implications for Amazon’s standing as rivals look for weaknesses. Ben Thompson has aptly detailed how Amazon’s ownership of its supply chain and its content fortress (manages ads and conversion) has helped the retailer set itself apart from the Anti-Amazon Alliance (Facebook, Shopify, Google). Here’s what were reported in May 2021:

Amazon now encompasses 10.3% of the digital advertising market (up from 7.9%) in the United States with a projected 13% market share by 2023. Amazon’s walled-garden approach ranks them third in an advertising market that is currently dominated by Google and Facebook (one that Apple wants a piece of). Facebook’s walled garden approach is intended to help them climb to the No. 1 position. They are better positioned than Google in this respect.

Through years of investments, Amazon has created its own cargo shipping fleet and is leasing planes, along with the opening of an Air Hub in Cincinnati, to avoid out-of-stock problems that have begun plaguing other retailers at this stage in the holiday shopping season. Amazon has stretched its business in myriad ways, but its advantages are no longer just product and digital-driven. As Thompson points out, Amazon’s transport business is pretty substantial. On October 5, container ship ported in Houston, Texas with a ship filled entirely by Amazon. Here’s how, according to CNBC: Amazon is making its own 53-foot cargo containers in China. Ocean Freight Analyst Steve Ferreira on the matter:

Amazon has produced probably 5,000 to 10,000 of these containers over the last two years I’ve been tracking it. When they bring these containers onto U.S. soil, once they unload them, guess what? They get to be used in the domestic system and the rail system. They don’t have to return them to Asia like everyone else does.

More container ships means more tractor units in the United States:

Amazon is also investing in the air according to Thompson. The retailer is leasing more planes and it has completed an air hub in Cincinnati, Ohio, From a September 2PM special report on how Amazon will flesh out this strategy:

Amazon Air flight activity has increased 17% between February and August 2021 after the company added 14 planes, including two that enable intra-Canadian operations. In addition to these 14 planes, Amazon uses up to 20-30 partner flights per day to ship goods from hub to hub according to a recent document: Blue Skies for Amazon Air.

Customers consider a number of factors when deciding where to purchase. Depending on circumstances, different needs take priority at different times. In December, the No. 1 need is on-time deliveries. More people will turn to Amazon when it becomes one of few retailers to have what they need in stock and available to arrive before Christmas Eve. Importantly, this asset extends to Amazon’s third-party sellers. When Amazon began fulfilling merchant orders with Fulfilled by Amazon 15 years ago, as Thompson stresses, it reinforced its supply-side moat (represented by the “m” above). More sellers benefit from Amazon’s infrastructure.

Here, Shopify and the Anti-Amazon Alliance are still catching up, and the argument around why sellers should jump ship from Amazon – even after the reports confirming that Amazon is using seller data for its own benefits – is harder to make convincingly.

By 2PM

Data: Black Friday Down

Updated. The writing was on the wall when holiday decorations hit sales floors in October. Thanks to persisting supply chain concerns, the holiday season began earlier than ever, which is impacting the bellwether statistics that retail industrialists rely on for forecasted investments. For the first time in history, online retail saw a reversal in year-over-year growth trends. On November 26, online shoppers spent $100 million less than they did on Black Friday 2020. Total sales fell $8.9 billion compared to last year according to Adobe Analytics. Adobe’s Lead Analyst Vivek Pandya:

Shoppers are being strategic in their gift shopping, buying much earlier in the season and being flexible about when they shop to make sure they get the best deals.

By some, the downward trend has been characterized as a contraction in eCommerce spend, but it will be remembered as a confirmation of a much larger shift in pandemic-era retail. In July’s Digital Supply Chain, I wrote about one of the changes that we’d see this fall.

This Black Friday season will see a narrative around short supply of physical goods and an emphasis on brand retailers offering NFT-based products that appeal to their most enthused consumers. Nike will sell digital shoes, Balenciaga will sell avatars for your child’s favorite multi-player game, and legacy companies will emulate the brilliance of the Bored Ape Yacht Club whose NFT sales provide access to a real-life community.

There were other contributing factors to retail’s declining Black Friday performance, and they were not exclusive to online retail. According to CNBC’s Lauren Thomas, Black Friday shopping in stores fell 28.3% from 2019’s levels. And Thanksgiving Day visits were down 90.4% from 2019 levels according to Sensormatic. It should be no surprise that the culprit behind the “down year” is actually a number of factors. The Adobe data indicates an 124% increase in out-of-stock levels. Consumers starting earlier may have taken the sting out of the November shopping event. In October 2021, I explained in No Stock For Chrismukkah:

This means Black Friday will look different. In previous holiday seasons, pricing incentives were the sales hook. This year, retailers won’t need to offer flash sales or free shipping: availability is the hook. Plainly put, if a quality product is available to ship before the holiday season, it will likely be purchased. This is what Lowe’s is signaling with their premature focus on Christmas. If they waited until the normal beginning of holiday cheer, there may not be the stock to support the spike in demand.

It’s not for a lack of trying. According to a Gallup poll, Americans intend to spend record amounts for Christmas; product availability is the problem. This forecasted spend is actually higher than pre-pandemic levels and 2020.

The other problem may be no problem at all. With spend spread over a greater period of time, even with supply chain concerns persisting, this holiday season may still set a new record in gross merchandising volume (GMV) between October and December 24. According to Adobe’s data, shoppers spent $3 billion or more 22 times so far this holiday season. Last year by this date, the GMV exceeded $3 billion just five times. There’s also conversion rates to consider:

The Black Friday conversion rates across the Adobe Sales Cloud spiked to extraordinary averages across desktop and mobile devices on Black Friday – a sign that there may still be an unmet need that Cyber Monday and beyond will account for. An elongated holiday season, fewer deals, and a supply chain under pressure are all contributing factors to America’s first Black Friday without a sales record. According to Adobe Analytics, shoppers spent $10.7 billion on Cyber Monday. This falls to 1.4% less than 2020’s record breaking Cyber Monday spend. When you consider the stay-at-home conditions of 2020, this figure is more of an accomplishment than it may seem to analysts. CNBC reports that November spend (through Cyber Monday) in the United States is up 11.9%, totaling $109.8 billion online.

Additionally, out-of-stock messages increased 8% over the week, signifying the culmination of a tumultuous season for supply chain workers and the retailers that rely on them. These out-of-stock messages are up 169% vs. 2020 figures and 258% higher than 2019.

The reality of these figures is nuanced; it could mean that demand could remain pretty strong and this year’s remaining sales volume will average out to finish higher than previous Q4 sales figures. There’s also the small chance that we’re just more grateful for what we already have.

By 2PM

Memo: CryptoKicks

The popularization of crypto wallets, NFTs, and marketplaces like OpenSea pried the door open to more interest in the metaverse. An NFT exists on the blockchain, uniquely representing a digital or real-life asset. It is common to see a social media user proudly showcasing their NFT as their preferred identity over their own likeness. Nike is betting that this will extend to how you want to represent online through your own apparel and accessories. Popularized over the pandemic, the convergence of the physical world and the digital world is being led by commerce as much as it is community. Nike has taken note:

Picture your digital twin rocking Nike sneakers and a tracksuit to a Microsoft Team meeting or Facebook’s — I mean, Meta’s — virtual rooms while you actually lounge on your sofa in pajamas and fuzzy socks. That’s the future Nike is imagining for itself. On Oct. 27, Nike filed over half a dozen trademarks with the US Patent and Trademark Office (USPTO), including those for its swoosh logo and slogan “Just Do It,” that reveal plans of making and selling virtual footwear and apparel. [1]

Two unrelated thoughts got me thinking about Nike’s potential future in Web3:

  • A potential DAO (Decentralized Autonomous Organization) built around its digital community with a tokenization that allows community to experience the upside in Nike’s Web3 pursuits in ways that traditional stock may be slow to reflect.
  • An active digital presence, in the same vein as the CryptoPunks or Bored Ape Yacht Club communities. It would be led by Nike executives and sponsored athletes where interactions resemble Jack Dorsey’s use of Twitter to build its legitimacy.

According to Cathy Hackl, CEO of Futures Intelligence Group, more brands and assets will follow Nike’s lead:

I think that something like what Nike is doing sends a big message to the market that this is not speculation, this is really where we’re going. And eventually, you’re gonna have to hire these leaders that can have the vision and that can lead the company in an informed way.

Nike, which is on track to pull in $50 billion in sales this year, has filed seven trademark applications that show intent to create and sell virtual goods including “footwear, clothing, headwear, eyewear, bags, sports bags, backpacks, sports equipment, art, toys and accessories for use online and in online virtual worlds.” With its swoosh logo and “Just Do It” tagline also part of the trademarks, Nike’s getting ahead of its own brand being used and co-opted by third parties in the metaverse. But it’s also planning on participating directly: the company is also planning to hire virtual material designers. The timing couldn’t be better:

Nike is at the forefront of a retail trend that will become the norm for other capable brands. As 2PM reported in July:

Every brand should have a digital supply chain or a set of components that, when properly constructed, equip a retail business with an important class of end products: content, first-party data, digital products, and community.

There’s few better positioned brands than Nike. To pioneer the marketing of goods inside the metaverse requires a patience, investment, and social capital that few other brands possess. It has a vast network of signed-on celebrity athletes to help drive appeal. Nike’s customers are loyal and engaged enough that sporting Nike sneakers in virtual spaces is a no-brainer. In the process, a new form of community and more accessible – albeit digital – products may begin to address Nike’s issues with its SNKRS app. Nike’s Global Vice President of SNKRS recently commented to Complex magazine on this issue:

We are at risk of losing our most sneaker-obsessed consumer. High heat, hype is ‘killing the culture’ and consumers are migrating towards New Balance and smaller, independent brands.

Many of these customers are currently left out of some of Nike’s most coveted drops, or only dream of actually securing a rare pair of Nike sneakers for themselves. The metaverse can be a solve for that by creating more demand, driving more purchases and making an unattainable purchase attainable in a new way for more people. Nike is not just ensuring control over its digital brand as Web3 spaces proliferate; it’s also creating entirely new revenue and marketing streams.

The adoption of Web3 principles will be gradual, but Nike has begun to lay the foundation by building up its direct-to-consumer business and investing in its own apps, trademarks, and intellectual properties, while reducing its dependence on traditional retail channels. Web3 and DTC are natural partners and Nike will be of the first major retailers to iterate around Web3 principles. It’s not just a new revenue stream: it’s community and status.

Who you are in digital spaces will become as important as who you are in real life, in a similar way Instagram followers have become a status symbol. Nike’s caught on because the company seems to understand that who you are is influenced by what you wear.

There’s no avoiding NFTs at this point. Every retailer with brand equity will strive to build its digital footprint for Web3’s version of the internet. The metaverse is no longer a far-off, futuristic concept, and where Nike goes – others follow.

By Web Smith | Editor: Hilary Milnes | Art: Christina Williams