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Opinion Peter Verhoef: The immense power of Amazon

07 June 2018
Peter Verhoef

Amazon is not only powerful and successful as a cheap online store, but also because the company specializes in knowing when customers will be looking for their next purchase.

Amazon is one of the 5 most valuable enterprises in the world. I remember talking about Amazon during lectures, explaining that it was where you could order your books and the problems you might encounter. Nowadays, Amazon is a digital giant that also sells clothing, electronics and toys. Founder Jeff Bezos is currently the richest man in the world.

Sharp pricing policy

Should Dutch companies like Ahold, which owns Wehkamp and other subsidiaries, be worried? The term Amazonization is often used in a derogatory way. When Amazon muscles in on a market, the company’s sharp pricing policy puts all the other parties, profits and margins under considerable pressure. Examples of companies that have gone under because of Amazon include the toy chain Toys “R” US and electronics chain Radioshack. The question is whether Amazon is solely to blame. The demise of the Dutch V&D department store chain was not only due to online competition, but also to poor business operations and the high cost of real estate. Amazon mainly focuses on growth. It manages to finance this with continually rising share prices and without high profitability. But there’s more to this company than just competitive pricing.

No longer just an online store

To illustrate the power of Amazon: Walmart, by far the biggest supermarket chain in the USA, makes much lower profits despite employing many more people than Amazon. Amazon is no longer just an online store. Its strongest weapon is technology, software and large-scale data analyses. Amazon has boundless storage space in the cloud and excels in predicting its customers’ next purchases. This technology is also sold with their highly profitable cloud services, for example, allowing them to invest even more in their stores.

Due to Amazon's considerable technological prowess, the takeover of Wholefoods, a relatively small supermarket chain in the USA, caused share prices of companies such as Ahold Delhaize to fall. The body of technological knowledge at Amazon could bring about major changes in the food market. The company would be able to respond to customers’ wishes, while operating more efficiently by making better predictions regarding demand for, and use of, hyper-modern technology in shops and logistics centres. Take total self-scan technology, for example, which dispenses with the need for expensive cashiers.

Logistics and banking services?

But it is not only ordinary shops that see Amazon as a potential rival. Amazon has announced its intention to take over the logistics side of delivering its own and other parcels. This will put the company in direct competition with companies such as TNT and DHL. Amazon may possibly start to offer banking services via its platform too, constituting competition for banks such as ING.

Amazon is becoming an increasingly important customer gateway to products and services. In the USA, many consumers use Amazon as their primary search engine for finding products. Do we need to be worried about Amazonization here in the Netherlands?

Amazonized

Not many people know that in 2017, Amazon had a turnover of € 250 million in the Netherlands, with neither a branch nor a fully-fledged Dutch website. The company is sixth in the list of top online stores (higher than Zalando!) So the Dutch are already buying through Amazon, via the German branch which provides a Dutch website. Amazon seems able to generate significant profits even without powerful marketing campaigns or its own logistics centre. We are already being Amazonized, we just can’t see it.

At present, the Dutch market isn’t big enough to interest Amazon, but the company does operate in Spain, Germany and Italy. Strangely enough, the online turnover in Spain is the same as in the Netherlands. Unlike Amazon, our online store giants (Wehkamp, Bol, Coolblue) are shops rather than technology companies. Amazon manages to combine strong technological know-how with online shopping, in an increasingly digital world where brand loyalty is becoming a jaded term. Zalando, for example, has secured itself a strong position in the online clothing market, conquering rival players such as Wehkamp.

Current players should race themselves

But if Amazon decides to switch its attentions to the Dutch market, through a takeover or by establishing its own distribution centre with a full-blown Dutch website, the current players should brace themselves because Amazon will have the lowest prices. The excellent service provided by Coolblue may put this company in the best position to withstand Amazon’s advances, while Bol (with Ahold/Delhaize as mother company) may well have to play the waiting game.

Should the Dutch government be thinking about what to do if Amazon knocks on the door? This question goes further than Amazon alone. If nothing else, the government needs to ensure a level competitive playing field. The main problem is the tax constructs that Amazon is famous for setting up (which we also see at other tech companies like Apple and Alphabet (Google)), that keep their tax bills to an absolute minimum. But it won’t end here; we may well see a similar discussion in another couple of years with the Chinese online giant Alibaba at the centre. Alibabization!

Peter Verhoef is Professor of Marketing at the University of Groningen and director of the Groningen Digital Business Centre.

Last modified:28 January 2019 3.22 p.m.
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