What Is the Amazon Effect?

The Amazon effect refers to the impact created by the online, eCommerce, or digital marketplace on the traditional brick and mortar business model that is the result of the change in shopping patterns, customer expectations, and the industry's competitive landscape. As online shopping and eCommerce grow in popularity, it has hurt many traditional businesses that are forced to compete with the online marketplace with only a physical location.

Key Takeaways

  • The Amazon Effect is the disruption to conventional physical retail locations caused by the increase in online shopping.
  • Amazon is the biggest eCommerce website, so this disruption is often called the Amazon Effect.
  • Online shopping provides convenience and wide selection at often a good price, yet the customer loses out on seeing and touching a product before buying.

Understanding the Amazon Effect

As online shopping increases, the gains for e-commerce businesses are coming at the expense of brick-and-mortar retail stores. An increasing number of shoppers are heading for their screens instead of for stores; online sales accounted for 13.6% of retail sales in the U.S. in 2020, compared to 10.7% the previous year, according to the US Census Bureau.

Amazon.com Inc. (AMZN), which debuted in 1994, has maintained its lead in global online selling and has become the poster child for this change, giving the Amazon effect its name. Among other factors, the Amazon effect is cited as the primary reason for the decline in brick-and-mortar store sales, which have often foreshadowed the stores' eventual closure. More than 5,300 stores closed in 2017, up 218% over 2016.

Beyond hitting the revenue of traditional retail stores, the Amazon effect has also led to significant changes in consumer shopping patterns. For instance, based on the convenience they experience from online shopping portals, today’s shopper expects a lot more variety even while visiting a retail store. While it may not be possible to clearly read the contents or specifications mentioned on a small-sized pack containing an electronic gadget or cashew nuts in a retail store, the same product details can be easily accessed in large text on online shopping sites. The seamless online shopping experience has also impacted the behavioral expectations of shoppers, as they now expect the same smoothness, timely response, and convenience even for services (like at a salon) that generally cannot be offered online. Shoppers can also read comments online, instantly seeing how others feel about the product.

Advantages and Disadvantages of Online Shopping

The need to drive to a store, pick out different items, and stand in line to purchase them is eliminated with online shopping. Purchasing an item online can even be cheaper than purchasing in a store (although this is not always the case).

Technology-powered shopping portals also allow a comparatively better utility to customers, like an easy repeat of standard monthly grocery orders. The use of big data and artificial intelligence (AI)-powered systems that better monitor a customer’s shopping pattern and behavior via online portals are a win-win—the consumers receive customized offers and promotions, and shopping portals benefit by pitching products with a high likelihood of being purchased. These features are not available to traditional retailers or are costly. High real estate costs also put the retail stores at a disadvantage.

Amid rising protests from brick-and-mortar retailers across the globe, large online players are launching initiatives to loop the former into their supply chains. For instance, many online shopping portals allow online ordering with a pick-up option at a nearby retail store. Store operators benefit by receiving a cut for their service, by supplying a few of the ordered products from their own stores, and by an increase in foot traffic in their stores.

Customers buying online don't get to feel, see, hear, smell, or taste a product before they buy it online (unless they have already used the product or they scope it out at a physical retail location before buying it online). In this way, physical and online shopping create a good pair. Customers can interact with a product at a physical location but then order it online at their convenience, possibly at a cheaper cost.

While this is a good pair for the customer, the brick-and-mortar stores suffer. They pay the costs—employees, rent/leases, inventory, utilities—for customers to shop, but then the customer purchases the product online. This is problematic for many consumers as well because as stores close, consumers can't interact with products before they buy.

Special Considerations

The Future of Brick-and-Mortar Stores

The 2020 global crisis—where many citizens faced quarantines, stay-at-home orders, and travel bans—brought to light the importance of online shopping. For many, it became a necessity, as opposed to a luxury. As long as the Internet exists, online shopping isn't likely going anywhere.

The number of people shopping online is increasing, which puts brick-and-mortar in a precarious position. In order to draw customers to a physical location, something needs to be offered that can't be delivered online. This could be an experience or a feeling people get when they visit the location. Some malls offer theme parks, movie theaters, or a wide array of restaurants to entice people to spend the afternoon or evening at the mall.

Some retail outlets have thrived despite the increase in online shopping. This is because they offer a unique or high-quality product that simply isn't sold by online retailers or can't be easily replicated into a cheap knock-off product (that can be sold online by others). Other retail chains have created a culture around their product and stores, where people like to go and be seen going there. More brick-and-mortar operations will likely need to adopt these types of tactics in order to thrive as online shopping continues to possess more market share.