Be Careful What You Wish For

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Amazon on a Level Playing Field

So, you big guys (and by that I mean you, Walmart (WMT), Target (TGT), Best Buy (BBY), Sears (SHLD), Gap (GPS), Macy’s (M), Barnes & Noble (BKS), and a whole bunch of others) are all wishing, and trying to force your state legislators, to put Amazon on a “level playing field,” by rescinding a 1992 Supreme Court ruling stating that retailers have to collect sales taxes in a state only if they have a substantial physical presence in the state in the way of stores, offices, warehouses, etc. Thus, Amazon (AMZN), by simply using small business “affiliates” to drive traffic to their site for a commission, has had an enormous pricing advantage in not having to collect and remit state sales taxes. However, the major brick and mortar competitors now argue that these affiliates, many of whom are third party retailers, do, in fact, qualify as providing Amazon a physical presence.

\"RRSo, the pressure from the giant, taxpaying brick and mortar retailers, combined with dismal deficits in most states, has caused many states, hunting for tax dollars wherever they can find them, to view the Internet as the bulls-eye of the moment. Illinois, for one, has signed a law which would require Amazon to collect and remit tax on all sales made in the state. And, many others are looking at the same target and are about to follow suit, thereby wiping out a key element of Amazon’s pricing advantage.

Well, it sure looks like the brick and mortar guys are going to get what they wish for: a level playing field. Or, are they? As the old saying goes, be careful what you wish for, you might get it. Do you think Amazon is going to lie down and cry “uncle” – and quietly settle into a level playing field? I don’t think so.

While the retailers may think they’re getting the level field they wished for, what they are more likely to get is a playing field reconfigured by Amazon.

As Amazon drops its 9,000 affiliates in Illinois to avoid having to collect and remit the sales tax, which it will likely do in other states when similar rules are enacted, it is difficult to imagine Mr. Bezos brushing it all off as he heads for a round of golf.

Rather, I suspect that he and his “brainiac” inner circle are hatching a new paradigm that will intensify Amazon’s competitive advantage (a necessary move if it’s in danger of losing these sales tax battles in the future) and fundamentally change the playing field. In essence, they will simply up the distribution ante against their competitors. Having always held the winning hand in fast and free shipping, why not make it even faster by opening local distribution points across the country, essentially trying to beat Walmart at its own game? Without the sales tax issue preventing them from opening up physical locations, there’s no reason not to. Ironically, according to John Fleming, a former EVP at Walmart, “…it was Walmart who, beginning in the seventies, pioneered and established the quintessential retail distribution machine.”

Better yet, since Amazon’s consumer data base probably rivals Walmart’s by now, (which is bigger than the Pentagon’s, according to Mr. Fleming), and therefore would know what a working mom in the northeast corner of Keokuk, Iowa eats for breakfast and what brand of blue jeans she wears, why not open little Amazon shops with localized assortments of consumers’ preferences in those areas?

When Mr. Fleming was asked what Walmart would think if Amazon started opening brick and mortar stores, he said: “I would think it would be one of Walmart’s biggest fears.” Furthermore, as he points out: “the future for all retailers is that their distribution must be on all platforms, and therefore be seamless for consumers.” So, just as the brick and mortar guys are making progress with their e-commerce initiatives, so too, must e-players consider connecting with consumers “on the ground,” so to speak. Fleming adds the perspective that e-tailers such as Amazon, with its huge data base, will be able to precisely identify consumers geographically, and therefore, will know where best to locate their stores. This comes at a time when the big-boxers, like Walmart, are now scrambling for small store strategies and some flexibility to move closer to the consumer.

Think about a little Amazon in every neighborhood with everything you want, or at least a screen to tap into if it’s not physically in stock, and a distribution point around the corner to deliver it tomorrow, if not later today.

No wonder Walmart is accelerating its small store strategy.

And, if it is one of Walmart’s biggest fears, I dare say, all you other brick and mortar guys are well advised to think long and hard about what you are wishing for.



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