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OPINIONTechnology

The Amazon Doctrine and the Innovation Arms Race

Observations on how traditional retailers can best compete with the world’s leading e-tailer
Photo courtesy of Amazon

Amazon CEO Jeff Bezos has long understood the value of being out in front as technology innovation fundamentally alters the rules of competition. While other companies have long based competitive strategy on technology, what’s different is this point in time: We are at the inflection point on the exponential growth curve of computer processing power where noticeable change happens at an ever-increasing pace. Amazon is leveraging its innovation leadership position harnessed together with its vast resources to overwhelm the traditional grocery industry, relegating many retailers to the proverbial corner convenience store.

Sound familiar? It should. In the 1980s, President Ronald Reagan, in what was to become known as the Reagan Doctrine, leveraged the powerful U.S. economy with the country’s burgeoning military innovation to launch an arms race with the Soviet Union. The result, as we all know, led to the collapse of the USSR and the end of the cold war.

Last year’s acquisition of Whole Foods by Amazon triggered a grocery innovation arms race, throwing traditional retailers into a war few were prepared for. How bad is it? As Recode recently reported, Amazon spent nearly $23 billion on innovation research and development last year (2017), up 41% from the year before—more than any other U.S. company, That’s more than Microsoft, Intel, Facebook and even Apple spent on R&D.

To put that in perspective for the grocery industry, a report from the IHL Group states: “Amazon’s 2016 R&D spending was more than the top 20 retailers (excluding Walmart) technology spending combined … and about 75%-85% of the top retailers’ IT budgets is spent on simply maintaining and upgrading existing systems. As such, retailers are completely outgunned when it comes to spending on IT.”

And yet more evidence of the Amazon doctrine in action: The battle for voice-based commerce is already over—long before most retail executives knew the battle had even started. According to USA Today, “Purchases made through devices like Google Home and Amazon’s Echo are projected to leap from $2 billion today to $40 billion by 2022.” Here’s the kicker: “Amazon is forecast to have 70% of the voice-enabled speaker market this year (2018), per Tech Crunch. By 2020, it’s projected that there will be 128 million Alexa devices installed.” Amazon is aggressively expanding the Alexa platform, weaving it into everyday life, through partnerships with auto manufactures, home appliance makers, and even Microsoft to bring Alexa into the workplace.

Amazon's Formidable Lead

But innovation spending is not the entire challenge. No matter how much a retailer may spend on innovation today, it cannot overcome the lead Amazon has built. Patent filing activity provides a view into the overwhelming power of the Amazon doctrine. Amazon received 1,963 patents in 2017 and holds more patents than any other retailer in the industry (7,096). By comparison, Walmart, perhaps the most serious traditional retail competitor, holds only 349 patents.

It may already be too late for a good number of traditional supermarket operators. The innovation arms race has gone nuclear as Kroger partners with Ocado to build automated fulfillment centers and Nuvo to use automated self-driving vehicles to deliver orders. Beyond digital disciples such as Kroger and Walmart, few retail companies have the wherewithal to invest so heavily in new innovation in an effort to keep pace with Amazon, the deity of digital.

Innovation spending aside, many multibillion-dollar regional retailers are what I think of as digitally discombobulated. Many of these companies are trying to do the right thing, investing in e-commerce, putting the customer at the center of their business strategy and launching new digital services. But too often these retailers end up with overlapping capabilities, expensive or impossible system integrations, digital silos, and fractured user experiences. The very nature of competition has fundamentally changed and many industry executives do not yet get it.

How important is user experience? Very. My wife and I regularly order restaurant meals delivered to our home. Living in southern California, we have our choice of delivery services; DoorDash, Grubhub, Eat24, Delish, Uber Eats, and many more. Yet for all those choices, Amazon Restaurants has won nearly all our business because of a seemingly simple thing: I can track the delivery driver in real-time through the app, knowing—literally to the minute—when dinner will be at our door.

What should frighten retailers the most is that this battle is just getting started. As innovation accelerates, it is driving convergence between historically disparate capabilities and even industries. Companies such as Label Insight are using AI to deconstruct the typical package nutrition information into dozens or even hundreds of granular data points. Separately, health industry innovators are using cutting-edge data science to understand the individual person’s unique, granular nutritional requirements based on gender, weight, age and specific health conditions. At the same time, Apple is reported to be working on noninvasive real-time monitoring of an individual’s glucose levels. A well-known university is able to ascertain a person’s vitamin levels from a teardrop.

And then there’s ScriptSave, with its long history of innovation in the pharmacy space, knitting together disparate capabilities to transform and personalize the health and wellness space. Think of it as a virtual dietitian helping guide the shopper to beneficial products across the store, ultimately driving recommendations off real-time health monitoring. And then embedding this capability at the intersection of food and healthcare.

What's the Next Move for Retailers?

What are retailers to do? Is there any way to compete? Here are a few thoughts:

Think integrated platforms not point solutions. This is especially important when considering customer-facing digital capabilities. Avoid disparate solutions powering up a splintered experience; one AI “brain” should be driving personalized, relevant engagement across every channel and touchpoint.

Don’t build tech internally. Unless you are Kroger or Walmart, don’t think about building IT solutions internally; technology is moving too fast and has become too specialized. Instead, leverage advanced cloud-based solutions that provide a “technology putty”—leading edge capabilities molded to your brand and operations.

Move faster. If there is one thing that I think endangers traditional retailers more than anything else it is the slow pace at which they are moving. There is no place for five-year plans; the game will be long over by then. Remember, you are now in a world of exponential growth of innovation—speed counts.

So, is all lost for traditional retailers? Is the dominance of Amazon and the digital disciples a foregone conclusion? No, but retail executives must understand that shopper expectations now rule, that tech-based innovation is the new battleground, and that tomorrow will no longer resemble today.

Gary Hawkins is the founder and CEO of the Center for Advancing Retail & Technology (CART). He can be reached at gary.hawkins@advancingretail.org.

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