Leslie Sauer closed her swimming pool and spa retail store in August 2011 after several years of struggling to compete with Internet giant Amazon.com.
In an unexpected twist of fate, her children instantly became popular guests at neighborhood gatherings.
“My kids go to birthday parties with their hands full of pool toys to give away,” says Sauer, who is chief financial officer of Aqua Artists Pools & Spas based in suburban Los Angeles. “I’d rather give away leftover inventory than sell it on the Internet,” she notes.
Sauer and her husband purchased the 48-year-old firm in 2003 but quickly realized it was impossible to offer customers the same low prices they were finding on Amazon. Because she adhered to a strict “shop local” philosophy that heavily influenced her buying practices and values, Sauer refused to become part of the very system that seemed to be destroying small businesses like hers. Aqua Artists now operates as a swimming pool service and maintenance company out of a small warehouse facility.
“Online businesses were just killing us,” she says. “We went from store to storage.”
Several retailers have suffered a similar fate with others expressing serious concerns that they too will soon be following in Sauer’s footsteps.
Analysts can’t argue with these predictions. “Amazon is a black hole sucking everything into it,” says Bob Phibbs, a retail speaker, author and consultant. “Don’t kid yourself; it’s a threat to every industry.”
As Amazon approaches its 18th anniversary, the reach of this global e-tailer cannot be overstated, and brick and mortars are clamoring to find a solution to an ever-growing powerhouse that’s wreaking havoc on the future of small businesses everywhere.
Welcome to the jungle
Much like the complex, layered ecosystems that make up the world’s rainforests, Seattle-based Amazon.com is an elaborate, multi-tiered company consisting of intertwined business platforms. The site features millions of products sold and distributed by an ever-increasing number of third-party vendors, but it’s also a vendor itself and the producer of the Kindle e-reader; a publisher; fulfillment center; software developer; provider of cloud computing services; and investor in several companies, including the daily-deal site LivingSocial.com.
But it didn’t start out that way. Founded by Jeff Bezos in 1995, the firm took root as an online bookstore, sending a loud message to already suffering independent book sellers who were competing with mega-chain stores: the retail environment was again going to change.
And it did. Fast. Most independent bookstores seemed to melt away almost overnight, yet the truly dramatic shift occurred when the once-untouchable Borders filed for bankruptcy last year while its rival Barnes & Noble clamors to stay alive.
In 1997, Amazon issued its initial public offering of stock for a price of $18 a share. (As of press time, it traded at a hefty $238.24 a share.) Soon after establishing itself as the “World’s Biggest Bookstore,” it diversified into music, electronics, apparel, toys and other goods. Since 1998, Amazon has made at least 33 acquisitions — CreateSpace.com, a distributor of on-demand DVDs; the shoes and apparel company Zappos; and the Internet Movie Database (IMDb), to name but a few.
Through a strategic and aggressive growth plan, Amazon has become the largest online retailer selling to more than 180 million customers worldwide. This achievement has come with the help of more than two million companies and individuals who function as third-party vendors operating via Amazon. In fact, 40 percent of the units sold are through these independent merchants, who were responsible for a whopping 65 percent unit growth in the fourth quarter of 2011 over 2010, according to a company statement made earlier this year.
In short, an individual can purchase just about any product imaginable through Amazon.com with the click of a mouse. Amazon also owns the trademark to 1-Click, a system allowing consumers to store their information in a database and place all subsequent orders in one step. Amazon has licensed 1-Click to Apple which uses it for its own online store as well for iTunes and iPhoto.
Quaking in their boots
While the rise of mass merchants posed a danger to independently owned pool and spa retail stores, the threat from Amazon is much worse, warns Bil Kennedy, president of the Atlanta-based market research firm PK Data.
“E-commerce is becoming the currency of the realm, and younger homeowners and the next generation of swimming pool owners will naturally go online for their pool products,” explains Kennedy. “It’s a cultural shift that can’t be suppressed through traditional merchandising tools.”
And Amazon is an entirely new type of opponent due to its size, product diversity, customer base and ease of use. Its prices are so low that mom-and-pops are losing sales daily. Some suggest simply matching the online price, but often the difference is so great that the average brick and mortar might not be able to pay the rent if they did so. In essence, the margins just aren’t survivable.
“I can go online and buy a heater as cheap, or cheaper, than from a distributor,” says Richard Giamusso, general manager of Olympic Pools in greater Scranton, Pa. “You have to match the price to retain the customer and you don’t make enough to put the key in the door.”
Making matters even worse is “showrooming,” a trend which has been springing up in stores over the last few years. This occurs when a customer visits a brick-and-mortar location to touch and feel a product, and then goes online to buy the item at a lower price. Often, the consumer will gain technical information and recommendations from the retailer as well.
“They’ll say they can get it for $50 or $100 cheaper online,” says Doug Mayhall, president of All Seasons Pools and Spas in the greater Chicago area. “They’ll take photos with their phone, leave and I never see them again.”
Now, Amazon has made it even easier for consumers thanks to Price Check, a free app for handheld Android and i-devices that enables a shopper to scan bar codes in the store and instantly find the product online. Last holiday season, Amazon even reportedly offered a small discount to those who made purchases using the app.
Then there are the shipping options. Depending on the merchandise, customers can typically receive their orders in less than two business days. And Amazon Prime, a service that provides free two-day shipping for millions of products with no minimum order size, costs a mere $79 annually.
Moreover, two-day shipping could potentially turn into same-day shipping. A 1992 Supreme Court ruling in Quill Corp. v. North Dakota exempted retailers from charging sales tax in states where they didn’t have a physical presence. For years, e-merchants used this to their advantage and buyers enjoyed a tax break (even though they were technically required by law to report their online purchases on their tax returns). In the last year, however, a dozen states have begun requiring Amazon to collect a tax on purchases, and in response, the mega-retailer is building major distribution centers in all of those locations. This will allow the company to deliver goods even faster.
Lastly, brick and mortars are unable to develop the type of lead generation enjoyed by Amazon. This is due, in part, to the acquisition of Junglee in 1998. The company reportedly conducts a sort of data mining that targets individuals who purchased products in a given category and then emails those shoppers with special offers related to their previous purchases. This provides Amazon with marketing clout that’s unlike anything brick and mortars could ever achieve.
The blame game
In spite of the reams of data available about Amazon, there’s one big question for brick-and-mortar pool and spa retailers which has yet to be clearly addressed: How is it possible for Amazon and its third party vendors to charge so much less for the same merchandise?
The answer is buried under a great deal of rhetoric, excuses and finger pointing.
“Manufacturers give a lot of these Internet players backend deals,” says Mayhall. “The Internet players are getting better deals than everyone else.”
One solution that has been tried with varying degrees of success are Minimum Advertised Pricing programs whereby a manufacturer does not allow its products to be advertised for prices below a specified amount thus leveling the playing field.
While several manufacturers do a good job policing MAPs, some firms fail to enforce the policy, retailers say.
“It all stems back to the manufacturer,” says Giamusso. “They have the power to control this. After all, brick and mortars started the industry, not the Internet.”
Meanwhile, manufacturers argue that distributors are the ones supplying the product to e-tailers while the manufacturers themselves are simply enforcing MAP pricing. Others agree.
“Frankly, no one knows the answer but you can’t just blame the manufacturers,” says Grey Frandsen, co-owner of Riverside, Calif.-based Magnolia Pool & Spa Supply. “Manufacturers are certainly trying to rectify the problem. We know they are working hard to rope back in the dragon.”
Either way, dealers are seeking solutions in the hopes of keeping their businesses alive.
“Someone is not telling the truth,” explains Giamusso, who says he can purchase a product on Amazon for much less money than he can get the same item from a manufacturer or distributor. “If [the online retailer] is selling at a price lower than what a dealer can get it for, something is wrong in Denmark,” says Giamusso.
Bottom line, no one is willing to take admit fault, and the industry is left in limbo.
The re-inventors of normal
In a television commercial Amazon launched this summer, a narrator says, “We’re the re-inventors of normal.”
The statement reverberates with many industry members.
“Amazon has invented, reinvented and reinvented the category again,” says Kennedy.
This is especially true when it comes to how people are purchasing pool equipment, the segment that may be most drastically affected by online retailers. Seven years ago, industry distribution giant PoolCorp estimated that 4-to-5 percent of its products were sold through online purchases. Today, that number is approximately 11 percent. The most common items are those that require little-to-no installation knowledge, such as an automatic pool cleaner, which is currently the most popular pool product sold on the Internet according to PoolCorp CEO Manuel Perez de la Mesa.
Several leading online pool and spa retailers are contributing to this shift by capitalizing on Amazon’s customer base. For these third-party sellers, the website serves as a mechanism to reach a vastly larger audience.
“Amazon is like a walking billboard for the pool and spa industry, and a lot of people are being exposed,” says Dan Harrison, president of Las Vegas-based Poolandspa.com.
Harrison has been operating his online business for 18 years, and his site, which also serves as a premium fulfiller for Amazon, features more than 130,000 SKUs for practically every swimming pool product available. In May, he experienced the biggest retail sales day in the history of the company, an accomplishment he attributes, in part, to his working relationship with Amazon.
Harrison’s e-commerce business is one of several dedicated pool and spa sellers who set up shop on Amazon, and at least 20 others carry related merchandise on the site, he says.
“People are discovering stuff on Amazon that they didn’t know existed,” he says. “I believe I’m doing a positive thing for our market.”
Many agree, viewing a relationship with Amazon as a healthy way to approach the inevitable change in consumers’ buying habits.
“Successful companies have to adapt to stay viable,” Frandsen says. “I refuse to think any new platform entering into the economy is a bad thing. It evens out the playing field. In economics it’s called perfect markets.”
In fact, his own retail store is what he refers to as a hybrid company. In addition to operating nine showrooms or “customer service centers” in California, the firm also runs three online retail sites, one of which, Garfield Pool Equipment (or www.garfieldpoolsupply.com) is a third-party vendor on Amazon.
“This is an evolving time for the industry unlike any other in its history,” he says. Instead of fighting against the metamorphosis, Frandsen urges people to get involved.