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Amazon: A Race to Your Doorstep, or to the Bottom of the Barrel?
From bookish beginnings in the 90s to world domination, Amazon grew because of its wide range and lightning fast delivery. But in 2022, Temu arrived.
A cheap, direct-from-China seller, Temu served Amazon a strategy conundrum.
In this month's Strategy Standoff, can you guess how Amazon will react to the new competitor?
Should the Bezos juggernaut double down on range and speed - or is it time for Amazon to take on Temu directly at a low price?
The rise of Amazon is one of modern business' success legends. And founder Jeff Bezos is clear about why it worked: "...the reason we're successful (is, we) put the customer first."
Amazon builds a seller marketplace
That customer-first mantra was the secret to Amazon's growth. But in the background they built the world's best logistics chain and later gave independent sellers access to its marketplace through the FBA (Fulfilment By Amazon) program.
FBA meant small businesses could do e-commerce with the speedy service modern customers had come to expect. Naturally, Amazon made money through fees applied to every transaction. They apply charges for everything - advertising, ranging, warehousing and delivery.
But Amazon has a new problem because Temu is growing fast, and most of Amazon's top selling FBA products are from China. Which means Temu is successfully selling to Amazon customers but often with very cheap prices for the same products.
Above: Temu (blue) vs Amazon (red) Google searches in Australia show the sudden impact
Temu offers cheap stuff but with slow delivery
Because all its products come directly from China, Temu offers many of the same products you find on Amazon, but at a fraction of the price. The downside to you as a customer? It will take a bit longer for you to get your foot spa delivered.
So it might take a few days longer than your Amazon order, but the savings are huge - often up to 80% off the Amazon price for the same item. Temu also has a cost edge because it pays Chinese post rates and doesn't have to pay the hefty fees and penalties Amazon charges its FBA suppliers.
Turns out people are prepared to wait a few days for something super cheap. With very high interest rates and a cost of living spike, Temu is ripping into Amazon market share. Loads of consumers are happy to wait a week to get their hands on an identical item at a fraction of the price.
What should Amazon do about the rise of Temu?
Since the beginning of the internet revolution in the late 1990s, and through the e-commerce boom in the 2010s, the market trend has been on faster delivery - with many vendors now offering same day delivery.
Customers have grown to love speed of delivery to their door - preferably nearly instant. But, quite frankly, people also love to get their hands on cheap sh!t. Amazon has to decide what to do.
This week’s Strategy Standoff:
To counter Temu, should Amazon race to the base with low-priced items or double down on delivery speed, potentially missing out on recession-driven demand for cheaper products?
The Strategy Standoff
Strategy A: Race to the Base
Under this option, Amazon would take Temu head-on and block them by creating a new range of low-priced items delivered to customers direct from China. This would have the advantage of starving TEMU of their easy customer wins.
However, people would have to get used to far slower delivery than their regular Amazon orders. Margins would be low and current FBA suppliers would be alarmed to have Amazon undercut their own products right as they pay big bucks to Amazon to manage logistics.
Amazon might end up cannibalising their own trade with a lower-value business.
Strategy B: Speed to the Rescue
Amazon would double down on customer service and delivery speed under the Prime service model, while expanding its home-locker service for added convenience. This would have the advantage of keeping Amazon focused on speed, leaving Temu to deal with the low margin end of the market. An increase in postal rates from China or a policy change in duty could bust the Temu model, anyway.
On the other hand, this option could mean Amazon might miss out on recession-driven demand for cheap products. And Temu might gain a foothold with new and differentiated positioning (lower prices with slower delivery).
So, Which Did They Choose?
Cast your vote to find out!
Good Job, Strategy A was chosen!
Better luck next time, Strategy A was chosen!
But how will this work out for Amazon...
Expert Facilitator Commentary By Matt
Matt Braithwaite-Young
Managing Partner
t +61 2 9002 3100
Amazon will create a low cost, slow delivery marketplace
Amazon just announced their choice. They are going to copy Temu and create a similar offer for the price-sensitive consumer. In a move that will upset many of their own FBA (Fulfilment by Amazon) marketplace suppliers, Amazon will launch a new shopfront so its customers can buy direct from China.
Amazon thinks the threat from Temu is too great to ignore, even with the downsides of margin and potential FBA cannibalisation.
It's usually a good idea for big market leaders to block major challenges as they emerge. But when the challenger is ripping margin out of your industry, it is hard decision, especially if your business is structured around a different customer value proposition.
Fulfilment by Amazon (FBA) suppliers see red
Amazon is now operating the FBA marketplace so creating internal competition for its FBA suppliers will be very unpopular. These suppliers depend on Amazon for traffic, conversion and logistics.
To these suppliers, Amazon says: "don't worry" because their Temu-killer will be a separate storefront. But FBA suppliers figure they will inevitably end up being undercut on the main platform, pointing to the very long history of marketplace owners biting the hand that once fed them.
Customer led decision
Bezos is following his guiding principle and focusing on the customer first. If customers want cheap stuff direct from China and are prepared to wait a little longer, he'll give it a try. If you're a supplier caught in the middle, that's not his concern.
By the way, Smart Company says Amazon Australia retail made OVER $3 billion in revenue in 2023 and they have expanded their one-day delivery service to key regional centres. Meanwhile, over 1 million Australian customers shop at Temu each month, with Roy Morgan research estimating Temu sales of $1.3 billion this year.
Does your business face a complex competitive challenge like this?
Strategy facilitation can help businesses navigate these complex decisions, helping you unlock the right strategy with industry-tested frameworks.
Your strategic visions deserve the commitment of your entire team. With Turning Leaf, you’ll create plans that not only get done, but drive transformative change within your business.
When you're ready to take your strategy to the next level, get in touch with the Turning Leaf team - www.turning-leaf.com.au
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