DEFINITION of 'Amazon Effect'

The "Amazon effect" refers to the impact created by the online, e-commerce or digital marketplace on the traditional brick and mortar business model due to the change in shopping patterns, customer expectations and a new competitive landscape.

BREAKING DOWN 'Amazon Effect'

As more and more people across the globe are turning to online shopping, the retail landscape continues to change rapidly. The gains for e-commerce businesses are coming at the expense of brick-and-mortar retail stores, as an increasing number of shoppers are heading for their screens instead of for stores. Inc. (AMZN), which debuted in 1994, has maintained its lead in global online selling, and has become the poster boy for this change, giving the "Amazon Effect" its name. 

Among other factors, the Amazon effect is cited as the primary reason street-based stores' declining sales, which have often foreshadowed the stores' eventual closure. A WWD report cited more than 9,400 store closings in 2017, up 53% from the number that shut in the wake of the Great Recession in 2008.

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 on 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 the 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. (See also, Amazon to Sell Real Christmas Trees.)

The need to drive to a store, pick and choose items, and the impatient wait to pay is eliminated by online shopping, even if it comes at a slight premium. Technology-powered shopping portals also allow comparatively better utility to customers, like easy repeat of standard monthly grocery orders. Use of big data and artificial intelligence (AI)-powered systems that better monitor a customer’s shopping pattern and behavior on online portals are a win-win – the consumers receive customized offers and promotions, and shopping portals benefit by pitching products with a high liklihood 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 in an attempt to make it a win-win. 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.

Irrespective of the developments, online shopping continues to evolve with new high tech offerings, and continues to disrupt retail markets across the globe.

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