Competing with Amazon

At the FEDA conference last fall, there was a panel titled “Competing with Amazon.” In my prior life as a technology investor, I spent hundreds of hours studying Amazon. Here are my thoughts on what I think it means for FE&S dealers. Spoiler alert: I believe the next wave of FE&S industry leaders will be created not because they beat Amazon but because they learned from them.

I’ll start with some good news. I believe most of the FE&S industry is protected from Amazon. For starters, Amazon has no interest in getting involved in commercial kitchen openings due to their significant construction and installation components. Equipment capital expenditures are also fairly insulated as they tend to be mission critical items and can also require installation and rough-in work. For supplies and smallwares, chain businesses should be fairly protected given the lower markups, relationships and desire for simplicity. Taken together, these segments represent the vast majority of industry spend.

What about supplies & smallware distribution for non-chain customers. If Amazon decided to take market share from FE&S dealers, they’d probably succeed regardless of how the industry responds. But would they really make this a priority? The addressable spend for this segment is nowhere near enough to move the needle.  In 2021, Amazon had $600 BILLION worth of goods sold through their platform. Going after FE&S supply/smallware distribution is an excel rounding error for them.

I’m not saying the industry can ignore eCommerce. Operators want a high-quality, omni-channel experience. If their current dealer doesn’t provide that, they will switch to another one.  Like always, technology is a risk for those that fear it and an opportunity for those that embrace it.  So what’s the best way to embrace building a high-quality eCommerce experience? Ruthlessly copy Amazon's strategy.

Below is one of my favorite Jeff Bezos (Amazon CEO) quotes on the enduring value propositions of eCommerce: Price, Selection and Convenience.

“I very frequently get the question: 'What's going to change in the next 10 years?' I almost never get the question: 'What's not going to change in the next 10 years?' This question is actually the more important of the two. We know that customers want low prices. They want fast delivery; they want vast selection. It's impossible to imagine a future 10 years from now where a customer comes up and says, 'Jeff I love Amazon; I just wish the prices were a little higher and you'd deliver a little more slowly.”

Your price is a major part of your brand and brands are sticky. It’s much easier to raise prices once you are considered “low price” than it is to lower them to improve your high-price brand. As an example, when was the last time you checked Amazon or Costco’s prices versus a competitor.  Selection and convenience are straightforward.  No one wants to go to multiple places to get what they need and they want what they buy as soon as possible.

Webstaurant & KaTom are the two dominant eCommerce brands today. If you want to compete with them, you have to at-least equal them on these value propositions. If not, not only will you fail to compete but you will actually help Webstaurant and KaTom grow. No new customer (to you) will go online and buy your product before checking them out. So if they have a better offering, they will win. If it's an existing brick and mortar customer, then you just spent money to change their purchasing behavior to a new medium where you add less value than brands they already know. You will have in effect subsidized Webstaurant’s & KaTom’s marketing spend.

Finally, knowing how to build a successful eCommerce business, doesn’t mean you can. It requires a substantial investment and a willingness to forego short-term profits. This leads to another Amazon learning. From the beginning, Jeff Bezos was an amazing storyteller. He knew what drove the economics of distribution (scale) and he relentlessly told this story to his investors, Board, and employees.  Because people believed the story, their stock price was correlated with sales growth, not short-term profit margins. Investments weren’t questioned if it benefitted the customer and top talent all wanted to work there (people care more about great products and happy customers than this month's P&L). This created a massive flywheel that helped create a $1+ trillion company in < 25 years.

Amazon didn't sneak up on legacy retailers, which had better brands and bigger bank accounts. They should have beaten Amazon but because they weren’t telling the right story, they were forced to prioritize short-term profits to keep their stakeholders happy. Ironically, that guaranteed long-term profits would be materially lower.  As he famously says today, their “margin was my opportunity.”

In conclusion, I believe the next wave of FE&S industry leaders will be created not because they beat Amazon but because they learned from them.

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