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Three Ways Tiny Startups Can Beat Amazon

Three Ways Tiny Startups Can Beat Amazon
By Andy Gordon
Date September 4, 2019

In between all the eating and drinking (I make no apology!) I did with family and friends this weekend, I squeezed in a couple of sets of tennis. And I noticed my tennis partner had a new pair of sneakers.

“Nice sneakers,” I commented.

“I got ‘em at a great price,” my partner said. “I tried them on at a discount store at the mall, then bought them on Amazon for 20% cheaper.”

And that is why traditional retail is scuffling, in a nutshell.

Brick-and-mortar stores and e-commerce companies alike are trying to compete with Amazon.

But Amazon’s overwhelming market power begs the question: Is it even possible to compete?

Successful startups have to have outstanding leadership, an excellent product and a growth strategy that makes sense. For those startups that figure out a way to do all that and compete with Amazon, the prize is stunningly large. This year, the global e-commerce market is expected to reach $3.535 trillion. By 2021, it should approach $5 trillion.

Many retailers – both traditional and online – have tried to tackle Amazon head-on. But few have succeeded.

E-commerce pioneer eBay is managing to hang on, but for how much longer? Its market cap is $33 billion compared with Amazon’s $883 billion. Investors are willing to pay 75 times earnings for shares of Amazon – for shares of eBay, only 15 times earnings.

Investors are more optimistic about relative newcomer Shopify. Its shares have grown in value by 163% over the past 12 months compared with Amazon’s 12% drop during the same period. Shopify has been able to grow by offering merchants the same technology and capabilities as Amazon, but with more control.

That’s one competitive strategy. Other strategies target particular kinds of retail where Amazon lags behind. And some small startups are seeing initial success against the behemoth using this approach. Here are three kinds of retail that have gotten my attention through the amazing startups we’ve recommended to our First Stage Investor members. (If you’d like to learn more about these companies, subscribe to First Stage Investor.)

Lifestyle retail: In the lifestyle retail space, brands try to embody the values, aspirations and opinions of a group or subculture. Amazon’s boilerplate listings don’t lend themselves to lifestyle branding. And one company in the First Stage Investor portfolio is taking full advantage. Its first product was high-end jeans. And it’s now rapidly expanding into other lifestyle brands. Is it worried about poking the sleeping monster? Not really. “Amazon is used to dominating everything it touches, but it’s off to a slow start in the retail lifestyle space,” its founder told me. It views Amazon less as competition and more as a possible buyer of the company down the road.

Highly regulated retail: A great example of highly regulated retail is pharmaceuticals. Amazon entered this space when it bought PillPack, an online pharmacy that organizes your pills. But its upside is constrained by the highly regulated pharmaceutical delivery market. The licenses Amazon grabbed from its PillPack acquisition apply only to mail delivery. Meanwhile, our First Stage Investor company offers a free same-day delivery service and a one-hour service for a small fee.

In order to compete with this startup, Amazon would have to build a more expansive delivery infrastructure from scratch, including getting the right licenses. Amazon also can’t turn to two of its favorite tactics: undercutting prices (because they’re determined by third-party payers) and offering the widest selection (whatever drug is requested, our competing company can easily procure it from its supplier).

Highly specialized retail: Schick bought shaving startup Harry’s for $1.37 billion. Eyeglass company Warby Parker is worth $1.2 billion. And shoe retailer Zappos made $635 million a year before Amazon scooped it up for about $900 million. Amazon, with its massive and often generic shopping selection, has had trouble competing against these types of highly specialized, online, direct-to-consumer retailers.

When I’m considering investing in e-commerce startups, I ask founders two questions: How do you compete against Amazon? And how do you avoid competing against Amazon? And when the startups are in the three retail categories above, I expect, and often get, convincing answers.

Amazon may be big and powerful, but it does have some chinks in its armor. At a time when e-commerce is growing rapidly, tiny startups are making waves and jumping in where Amazon’s power to squash the competition is diminished.

Good investing,

Andy Gordon

Co-Founder, Early Investing

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