Amazon Go launched to much fanfare this month. Some have called it the store of the future. Some have said this was a big surprise and the biggest move since the Whole Foods acquisition.
While the move might be a surprise, the underlying strategies are tried and true--and, I think, significantly increase Amazon Go's odds of its success. Specifically, it taps into three proven growth strategies: it's 'different' (versus cheaper or better), it has a great demand tailwind, and it makes Amazon's brand stronger.
Let's talk about what those strategies mean--and how you can use them for your startup.
Most of the headlines about Amazon Go frame it in the context of a grocery store. That's 100 percent incorrect. It's either a really big vending machine or a really small convenience store. Amazon Go is 1800 square feet, or roughly two-thirds of a normal 7-11 Convenience Store.
Why is this nuance important? Grocery stores are primarily about cooking, and cooking is likely to go the way of sewing: a niche hobby that only some people do some of the time. Only 10 percent of U.S. households who truly love to cook and do it most of the time. This is down from 15 percent from nearly a decade ago comparing two large studies I conducted on how people cook and eat.
Quick serve restaurants and new fast food places like Chipotle and Panera continue to win in the marketplace. Over the last few years, consumers spent more money on food and beverage eating out than at grocery stores. So, yes--grocery stores are struggling.
A truly great second act or any kind of business innovation should have a healthy degree of confusion where people say, "What is it?" That's the tell-tale sign you've done a good job on innovation. It can't just be a slightly better or cheaper knock-off of what people know.
It has a great demand tailwind.
Of course, just because you're different doesn't mean you will be successful. However, they chose to be different in a sector of the market that has stronger profitability and growth prospects. Per the National Association of Convenience Stores (NACS), convenience stores have double the profit margin of grocery stores.
This is despite the fact that many convenience stores sell gasoline at levels that drag their profitability down. Amazon Go has cherry picked some of the most profitable parts of convenience stores like beverages, snacks and prepared foods (which have even higher profitability).
It also features Amazon-branded meal kits, which is important because private label products also increase profitability significantly. All in all, the deck is stacked in the favor of Amazon Go's profit prospects.
Beyond profitability, its growth prospects are great, too -- simply because smaller format stores are growing significantly versus large big box stores. Look at the struggles of K-Mart versus Trader Joe's and you can just see the difference. Since e-commerce has one-upped the convenience advantages of a one-stop-shop, smaller stores have a much better 'fun to chore' ratio which is a big draw of shoppers.
It makes Amazon's brand stronger.
The ultimate purpose of any second act or innovation should not be just to make money, but to make the core superconsumer and the core business stronger.
Amazon's superconsumers are its Prime members. Now you don't have to be a Prime member to use Amazon Go right now, though I wouldn't be surprised to see tighter integration of this in the future (e.g., better prices for Amazon Prime members).
But who is a Prime member? Prime members are consumers who will pay over $100 per year for the privilege of ultra-convenient shipping and shopping with what they assume are good prices.
E-commerce used to be about getting the lowest price possible when it first started. But now, it's mostly about convenience and consumers assume a good deal. As an Amazon Prime member myself, I don't bother to check prices on Amazon because it's so convenience and I assume it's a good enough deal.
That assumption of a good enough deal plus ultra convenience is what great branding is. If the Amazon brand's promise of a good-enough deal plus ultra-convenience is strong, shoppers won't check pricing. When shoppers stop checking prices carefully, Amazon will have a huge advantage, especially with its big data analytics. A slight price increase here or there won't be noticed by the consumer, and can generate huge profits.
That being said, nothing is a slam dunk. Creating great tasting meals is a uniquely human skill that algorithms and cameras can't help you with. Getting assortment right will be a challenge, as snacking is perhaps the most complex and hyper competitive arena in food. Managing food safety and food waste may be more than they bargained for.
But kudos to them for setting this experiment up to succeed via great strategy. And if Amazon can perfect their physical retail playbook through a consistent brand promise, it opens up a world of opportunity beyond Amazon Go. That's what great strategy is: a chess move that works now and sets up multiple future moves.