How retailers can uphold gross margin in the face of Amazon

Three key factors.

A Citigroup analysis on the impact of Amazon Prime on gross margins for the specialty electronics retailers, showed little change over the five years following its introduction.

In assessing the factors underlying the relatively stable gross margin profile for both retailers, Citigroup has isolated three main factors that could help the eventual stabilisation and improvement in gross margin levels.

  1. Buying terms

“Amazon is unlikely to receive better buying terms than incumbent electronics retailers when it first enters a market. In this sense, it would be difficult for Amazon to buy inventory better or fund promotional price points with support from suppliers and rather does so through higher levels of operating efficiency as well as sacrificing its own near-term profitability.”

  1. Supplier support

Retailers are likely to turn to suppliers for support. “In our view, most of the gross margin recovery is driven by suppliers helping to fund incremental trade marketing spend and offering variations to buying terms on new and premium products.”

  1. Premiumisation and trading-up activity

Trade-up behaviour in-store is likely lead to more favourable sales and gross margin mix than online channels. “Amazon is effective at competing on older products where it can offer considerably cheaper prices in order to clear stock. This provides specialty retailers with the opportunity to leverage their service model to sell premium and newer generation products where Amazon lacks a pricing advantage.”

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