Make no mistake, Amazon Prime has had a profound impact on the way people shop today. At IHL Group, we recently completed a consumer study that looked at a variety of retail segments and how consumers were responding in this new age of retail. And while we learned a lot about behavior change, some facts surprised us in the level of impact. One in particular is that between 21-24% of Amazon’s retail revenue (North American sales) could be attributed to local retailers being out-of-stock when shoppers went to their store.
In our report “Prime Challenge – How Amazon Prime has changed retailing and 4 steps retailers must make to thrive in the future” we’ve made four recommendations retailers must follow to beat this challenge:
- Accurate inventory for better in-stock position.
- Empower in-store associates with better tools to assist customers.
- Digital Signage to make the in-store experience quick and insightful.
- Optimized application-aware SD -WAN network.
But more on those recommendations later…
Now, I've never had anybody say “I'm an Amazon Prime member because I like the new Jack Ryan series or Prime video options.” No, it’s for the free two-day shipping. What Amazon Prime has done is change the question in our minds when we need something. That question is “Do I need it in two days or less?” If yes, then we go to our local store first most often. If not, we resort to buying it online. And now, Amazon is changing the question to “Do I need it now, or can I wait a day?”
In our study we found that 55% of all US households now have an Amazon Prime membership. For households with incomes over $100k, this number rises to 69%. As we looked at the data, we not only saw that the percentage of Prime customers increases with age, the sweet spot for members is 35-55 in age and in higher incomes than the average American home.
Where things got really interesting in the research, however, was when we were able to dig deeper and look at differences in behavior between Prime members and Non-Prime member households. The first area we reviewed was the amount of the monthly budget each household had for different categories of items, then we asked about the portion of these budgets that were being spent online vs in stores. The differences were striking.
Prime members spend 75% more of their budget for Health and Beauty items, 71% of their Electronics budget, 64% more of their Home Improvement spending, 55% more of their Clothing budget and 25% more of their Grocery budget online.
Now at first it was easy to attribute this as just wanting to buy online rather than in stores. But when we cross-referenced this with in-store experience, we saw a significant pattern emerge around how often Prime Members and Non-Prime Members shop at stores and experience out-of-stocks when they do so. While both groups were experiencing out-of-stocks of at least one item in 1/5 of their shopping trips, it is what those shoppers did at that point of experiencing the out-of-stock.
The study was very clear on why most consumers choose to shop at their local stores. The two most specific reasons is “They need the item now” or that they need to try it on or get more knowledge about the item before purchase. If those are the reasons they go to their local store in the first place, but they experience an out-of-stock, the Prime members are 71% more likely to simply pull out their phone, buy it on Amazon or elsewhere and pay for the expedited shipping if necessary. hey are far less likely to have that local retailer check for it elsewhere and are 25% less likely to bother going to a competitor. No, they simply default to Amazon.
I am a perfect example of this. My son was playing high school running back for the first time in his senior year. I thought it would be good to get him a pair of rib protectors from my local sporting goods store. So, when training camp started, I went to the store and while there were many pairs for children 5-6 years old starting in football, there were none on the shelf for a high school age player. Left with no in-store option, I had to buy them online. I had every intention of purchasing them at my local store, but they did not have them. Now as a consumer, if I am in a need for something for a seasonal sport for my son or daughter again, do you think I would consider that retailer for that item? No, I would go straight online because they wasted my time. It was reasonable I thought for them to have football pads going into football season, but they did not have any on the shelf.
This same type of out-of-stock experience is multiplied millions of times daily across retail. Through the study we were able to quantify that the average retailer loses the equivalent of 3.4% of store sales due to not having in stock what the customer wants to buy when they want to buy it.
But when we combine these figures with the spend level of Amazon Prime members, the consistency of consumers experiencing out-of-stocks at local retailers and then the behavior of those consumers once they experience the out-of-stock, we were able to see that a range between $24-$30 billion annually of Amazon’s retail sales in North America can be attributed to consumers who first tried to buy items in the store but the local retailer was out-of-stock. Which based on estimates of Amazon’s 2017 retail revenues would account for 21-24% of their sales.
So what should retailers do? What are leading retailers doing? This is the subject of the research report “Prime Challenge – How Amazon Prime has changed retailing and 4 steps retailers must make to thrive in the future”.
Get the report to learn our recommendations for each of the 4 critical steps I mentioned earlier that retailers must follow to beat the Prime Challenge! It’s not just #PrimeDay you need to worry about!