The Amazon Effect


Howard Schultz, Starbucks’ longtime CEO and current Chairman, says the retail industry is facing critical challenges.  “For every consumer brand that exists today, especially a brick-and-mortar retailer like Starbucks, there are very unique challenges because there is such a seismic change in consumer behavior – the Amazon effect,” he said.  That’s not really news, anyone who has been paying attention knows that Amazon is reshaping the retail landscape.  But beyond vague awareness, what are the numbers?  What is really happening?

 

Amazon started with books, then went to selling virtually… Everything.  Sales of electronics and general merchandise have have increased in the range of 2-3% year-over-year since 2007, while e-commerce sales of these items have increased in the range of 14-17% during this time.  That means more and more sales in this category are happening online than in a brick and mortar store.  Sales at Amazon however in this category have increased 28-74% year-over-year during this timeframe, which means an increasing number of these online sales are happening through Amazon.  According to a 2017 Forbes article, “Amazon’s entry into a market segment reshapes shopping dynamics, upsets the supply chain and exerts tremendous pricing and margin pressure.  Store closings are followed by bankruptcies and once proud and dominant retailers are teetering on the brink.”  Amazon now accounts for approximately 43% of all e-commerce sales.  Can this go on forever?  Maybe, and while the Amazon Effect may be good for consumers today, there may be a reckoning in the long-term.  According to Forbes, Amazon isn’t required by its investors to make any real money.  Amazon shareholders provide huge subsidies to its delivery operation, and according to one analysis, Amazon lost $7.2 billion on shipping costs last year alone.  That’s billion, with a B.

 

Source: Marketingsherpa

Source: Marketingsherpa

 

What does that mean for the HVAC industry?  Certainly, the industry is not immune from this phenomena.  A recent ACHR article cited research by an HVAC manufacturer that showed 43 websites selling HVAC equipment direct to consumers, and these websites collected more than 40 million hits.  The article points out that as ominous as these figures might seem, the closing rate for these Internet resellers was only around 3%.  That suggests that consumers were using these websites more for education than for purchasing.  Part of their education however includes obtaining better information about the price of equipment.  That has implications for every contractor, because today’s consumers want to know what things are going to cost before they buy.  They (read millennial’s) are much less likely to be okay with time and material estimates or convoluted explanations of what things cost.

 

When big-box retailers first came on the scene, there were predictions of the demise of traditional contractors that didn’t come true.  Do not confuse the Internet phenomena however with the advent of big-box retailers.  Internet information and sales are here to stay.  The above-mentioned news article asks contractors what they will do if they are approached by consumers asking them to install equipment purchased online.  Predictably, many contractors will stiffen their back and say they will never bow to such transactions.  The question is however, is that the smart move?  When your labor is fully productive and you have more sales than you can handle, perhaps that is the smart move.  But that is not always the case, is it?  Does it make sense to ignore ways of productively engaging your labor when you are otherwise keeping people employed by having them clean the shop or the trucks?  So what should you do?

 

The first thing you should consider is to go to flat rate pricing if you are not on it already.  This allows you to be upfront with consumers about what things will cost without going into mumbo-jumbo.  It also allows you the opportunity to properly price your payable hours as billable hours.  Secondly, you have an advantage over a retailer who is selling widgets over the Internet.  You have an applied product, not something that is plug-and-play.  The Internet can’t (at least yet) replace your technical skills and your ability to diagnose all of the thermal characteristics that have impact on a consumers energy consumption and comfort.  With that in mind, you can create a complete menu of flat rate priced services for the consumer who wants you to install equipment purchased on the Internet.  For example, you can have a fee for examining the structure to make sure it is properly matched to the purchased equipment.  The examination of the home required for that transaction allows you to examine the condition of the thermal envelope, ductwork and commensurate leakage.  It also allows you to investigate the presence of other items of potential interest to the consumer, such as areas of insufficient comfort, smart thermostats and IAQ options.

 

The point is, you can either treat Internet buyers and inquiries as hostile to your business or as leads for your business.  As the ACHR news article says, “What is your strategy?”