11 May 2015
Does Amazon's UK Slowdown Betoken Wider Problems for E-tailing?
2014 was not a vintage year for Amazon in the UK, according to John Baulch, publisher of Toy World. Do the issues affecting its British sales have far-reaching implications for the online sales behemoth or is it merely a local blip?
Amazon is a company that divides opinion like few others. The retailer's seemingly inexorable march towards dominance of the online market in the US and Europe continues apace while, at the same time, a number of its business practices have been called into question. Its influence on the global toy market, though, grows with each passing year, leaving some toy companies with a growing sense of unease at the potential long-term impact it is having on traditional bricks and mortar accounts.
On the positive side, there are numerous third-party sellers that have come to depend on Amazon for their very existence. There are also a number of independent bricks and mortar retailers who accept that life would be a lot harder for them without the incremental business they generate via Amazon and other online channels.
Online shopping is also becoming increasingly popular with consumers. Whether this is down to convenience, preferential pricing or simply a fascination with technology, more and more shoppers have been turning away from the High Street in favour of ordering goods from their own home or their mobile device. It has even been suggested by some observers that as much as one-third of all UK toy sales will be transacted online by 2018.
Across the globe, the pattern is similar – non-food store sales are flat and footfall is declining, forcing traditional retailers to realign their assets and resources, placing greater emphasis on their ecommerce offerings in the process. There's no doubt that Amazon's sales performance is one of the major factors behind this global retail transformation.
There are, however, a few clouds beginning to form on the horizon. Amazon has just released its annual results, which point to a significant slowdown in the UK. Amazon's 2014 UK sales were US$7.29 billion (£4.46 billion) – a rise of around $800 million on the previous year. By comparison, UK revenues rose by $1 billion to $6.48 billion in 2012 and by $1.4 billion to $5.35 billion in 2011.
If you take into consideration the fluctuating dollar-sterling exchange rate, UK growth was estimated at 14% in 2014 on a like-for-like basis – down from 22% in 2012 and 31% in 2013. Of course, while most retailers would only be too delighted with double-digit growth, the fact that Amazon's growth rate has halved over the past two years has taken a few observers by surprise.
So what is behind the slowdown? It could be that Amazon's continuing bad press in the UK has persuaded some consumers to turn away from the retailer. The retailer's stance on paying tax has been particularly controversial in times of austerity – in 2013 Amazon paid just £4.2 million in tax, equivalent to 0.1% of the company's UK sales revenue. Ironically, this sum was virtually identical to the amount that Amazon received in subsidiaries from the UK government during the same period.
It must, however, be stressed that Amazon has done nothing illegal, complying with all the relevant UK laws and regulations. Nevertheless, there have been questions of morality over Amazon's corporate structure, particularly in terms of ownership of Amazon.co.uk having been transferred to a Luxembourg company in 2006. Its UK operation is classed as a fulfilment business, basically equating it to a delivery company, such as UPS or DHL. The UK's Public Accounts Select Committee has left Amazon in no doubt as to how it views this arrangement.
If Amazon's approach to taxation has been a contentious subject, its unwillingness to tackle companies selling infringing product on its site has attracted no less ire from the business community. Matters came to a head last summer when it transpired that the top-selling toy on Amazon was a counterfeit Frozen doll, complete with fake packaging. It would be unthinkable for a specialist toy retailer's top-selling line to be an illegal copy, but Amazon seemed unwilling to deal with the issue, with its silence on the matter proving overwhelming. Perhaps this should be no surprise, given the organisation's well-documented reluctance to engage with the media.
Amazon has also been accused of bullying behaviour towards both staff and its suppliers. A 2013 BBC investigation uncovered working conditions that one expert said could cause mental and physical illness, including punishments for talking and timed toilet breaks. It has also been one of the companies most frequently cited in the controversial 'zero hours' contract debate. Toy companies, meanwhile, have looked on nervously from afar as Amazon has become embroiled in a series of high-profile spats with major global publishing companies over its terms of business. They know only too well that, if Amazon continues to grow more powerful in the toy arena, a similar fate could well await them.
Consumers are also finding that Amazon's business model is changing. Just before the latest results were announced, Amazon doubled the amount of money customers need to spend to qualify for free delivery.
Up unto 2013, items were sent free to customers. In 2013, Amazon introduced a £10 minimum spend. That price has now doubled to £20. The move is thought to be an attempt to encourage more customers to take up its £79 Amazon Prime service, but it represents a major increase in a short period of time.
The knock-on effect for toy retailers could be significant. With many toy purchases throughout the year falling into the sub £20 bracket, Amazon may now find itself a more expensive option than its bricks and mortar competitors when the delivery charge is accounted for. For many years, retailers have complained about the lack of a level playing field when it comes to competing with Amazon – they have had no choice but to pay rent and rates (and tax), all of which have to be factored into the pricing equation.
For all Amazon's remarkable revenue growth, though, the company has still not demonstrated that it can generate profits consistently. Ever since the company first began trading, shareholders have backed Jeff Bezos and his annual statements that Amazon was not about short-term profits. He has long expressed his disdain for short-term profitability, emphasising the need to invest into growing and evolving the business. In his vision, profits will come later.
When you are valued at 112 times expected earnings – as Amazon is – investors inevitably have high expectations. It's also worth noting that the retailer has never paid a dividend to its shareholders. One wonders how long their patience will last. What if, for instance, Amazon gets to US$200 billion in revenue and still doesn't make a profit?
Is Amazon simply an over-valued logistics company or will its unrivalled distribution network and state-of-the-art online technology enable it to overcome its challenges? How does Amazon see its own future – as the dominant player in the online space or a retailer that embraces every possible distribution channel? Recently, there have been trials of click and collect services at bricks and mortar stores and even rumours of Amazon opening its own physical stores. Should these be borne out, the wheel really will have turned full circle.
John Baulch is the Publisher of Toy World,
the UK's leading toys and games trade publication