Understanding Amazon’s revolutionary store format

Amazon is trialling a new grocery store format, Amazon Go, in Seattle. The store’s technology has attracted huge interest, with sensors on the shelf that can detect when an item has been picked up and add it to a virtual shopping cart. However, the focus on technology misses the real reason this store format could be so disruptive.

Amazon Go is built around a digital connection, with every customer scanning their phone to enter. This gives Amazon an unprecedented real-time opportunity to understand and influence every step of the shopping trip.

Why is Amazon’s approach so radical? Consider loyalty programs, the main tool that store retailers currently use to understand their customers. These programs are expensive, on average costing 2 per cent of sales. The retailer is willing to bear this cost because, in return, they acquire the customer’s identity and can build a personal relationship. Store retailers without a loyalty program may not even know the names of their highest-spending customers.

The nirvana of loyalty programs

Amazon connects with store customers in a completely different way. Amazon Go involves radical changes to the traditional shopping trip, for example, by using smartphones to track purchases and eliminate the checkout. However, the most disruptive element is the real-time digital connection that smartphones enable.

Amazon Go has no need for a traditional loyalty program because that connection provides total visibility of customers’ actions as they take place. This is the nirvana of store loyalty programs and opens up almost unimaginable levels of customer understanding and personalisation.

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Whereas a traditional supermarket with a loyalty program can see that one of their customers is a dog owner and send them an email
highlighting this week’s dog food promotions, Amazon can see that one of their customers is a dog owner and just walked past the pet
food aisle without buying any dog food. It can then send them a personalised offer in real-time to encourage them to visit the pet
food aisle right now.

The strategic challenge for traditional retailers

To understand the challenge for traditional retailers, consider the “personalisation maturity matrix”, which looks at the two building
blocks of digital personalisation:

  •  The ability to capture data about customers
  •  The ability to use data about customers

The horizontal axis represents a retailer’s ability to capture data about their customers. All retailers can see “what” products
have been bought and track trends in overall sales by product or retail outlet. Retailers with a loyalty program can also capture
information about “who” bought “what” on each shopping trip (at least for customers in the program). Retailers with a real-time digital connection can not only identity “who” bought “what” but also “where” the customer is in their shopping journey.

The vertical axis represents a retailer’s ability to use the data they hold about customers. At the most basic level, any retailer
can create a campaign that targets all customers with the same message, for example a national or local TV campaign. Retailers
with a CRM tool can target individual customers with tailored messages. Sophisticated retailers can even deliver personalised
offers. For example, based on past behaviour, one customer may receive a double-points offer but another may receive 20 per cent
off. Retailers with a real-time digital connection can deliver “hyperpersonalised” communications that reflect the customer’s location
and stage in the shopping journey. For example, a customer may receive one offer when browsing at home and a completely different

offer (for the same product) when they are in the store. If you plot Australian retailers on this matrix, estimating positions
based on publicly available information:

  • Retailers without loyalty programs (e.g. Aldi and Bunnings) sit in the bottom-left quadrant. These retailers follow an Every
    Day Low Price strategy and lack the capacity to incentivise customers to identify themselves and create a connection.
  • Retailers with a loyalty scheme and CRM (e.g. Coles, Woolworths, Myer) can track spending to a unique identity and
    reward customers based on their individual preferences. These retailers typically face two challenges. First, many customers
    don’t want to join a loyalty scheme – even the top-performing schemes only achieve 70 per cent participation – and most schemes are built on inflexible legacy systems. They lack the ability to interact with customers in real time or deliver
    personalised offers.
  • In the top right sits the digitally connected retailer that can recognise each customer wherever they are in their shopping
    journey, and respond with hyper-personalised communications in the moment. Amazon Go is still a long way from this point,
    but it has a huge head start because every customer creates a digital connection by scanning their phone as they enter the
    store. Amazon has 100 per cent visibility of “who” is shopping in their store. The most advanced retail loyalty program
    operated by a traditional retailer is Loblaw’s PC Optimum in Canada. The program has an unmatched ability to use data,
    supporting over 100 million personalised offer combinations for its 13 million members.

The power of “now” in retail

So, what can retailers do to capitalise on the opportunity highlighted by Amazon Go, when for most, the store is still a “digital black hole”? There are some simple steps to enable rapid progress for a relatively modest investment. The priority is finding ways to digitally connect customers to your store by unlocking the technology that is already in their pockets.

Jonathan Reeve is Eagle Eye general manager for Australia and New Zealand. He is the author of Retail’s Last Mile: Why Online Shopping Will Exceed Our Wildest Expectations.

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