Amazon's impact in Israel has been overestimated

Amazon

Amazon's Hebrew-language website for Israeli sales is leading businesses onto the platform out of concern for "not being there," not for real business considerations.

It is time to say it aloud - Amazon's entry into Israel will not cause an upheaval in the Israeli market, at least not in the way it has entered. Actually, it cannot be ruled out that this is a bubble inflated mainly by the media. It is worthwhile, however, to stop a minute and consider the real significance in depth: are Israeli consumers on the verge of a real revolution?

The answer is probably no. We already have unlimited online arenas at our disposal. In general, it appears that the hysteria about Amazon, which is currently focusing on the opening of a Hebrew-language website for local sales, is leading businesses to purchase the platform out of concern for "not being there," not for real business considerations.

Nevertheless, there is something new here, and it will not come from the price or the variety, but from another direction. Amazon will force both online and offline businesses to fall in line with respect to the kind of service that people in the US are already familiar with, and which it is also time for Israeli consumers to get to know.

1. Only partial entry

Amazon is an absolutely gigantic retail monster. In the US, it controls 50% of online purchases, amounting to at least 10% of all consumption in the US. Amazon's share of all retail in the US is therefore at least 5%, and that is a huge number.

Amazon's goal is to increase its market share everywhere in the world, and to expand membership in its club to beyond the 300 million members that it already has. These enormous numbers are disturbing both regulators and politicians in the US, including President Donald Trump, who are increasingly saying that it is necessary to limit the company.

Amazon has shaken up markets that it entered in Europe and other countries, but this is also because of how it decided to operate. In Israel, Amazon will operate a website in Hebrew and allow Israeli sellers to sell through it (under stringent conditions), but it is far from doing this with its full marketing and operational force.

An important factor in understanding Amazon's model in Israel is realizing that Amazon does not sell directly to consumers, which is called fulfillment by Amazon (FBA), in which it is responsible for the entire supply chain. It is fulfillment by merchant (FBM), in which the seller is responsible for the supply chain, including storage, returns, and the most important part - delivery (Amazon is recommending that delivery be free).

In other words, Amazon will set up a local ecommerce platform here, like a virtual shopping mall, similar to other local platforms like Azrieli.com, which lost NIS 15 million in the first quarter of 2019.

How does this differ from the Amazon website currently available to Israelis? The trigger for online buying is composed of two main elements: price and selection. Amazon, eBay, and AliExpress (an Israeli favorite), together with websites like Asos.com and Next Israel, are already giving us this. Will selling directly in Israel cause anything new to happen?

2. People have been buying online for a long time

Do retailers really have to be worried? Yes, but retailers should have been worried years ago, when the huge volumes of ecommerce, mainly on overseas websites, were first reported. Billions of shekels a year are going to overseas merchants, a number that is constantly growing, and reached 70 million packages a year arriving at the Israel Postal Company.

Amazon is not a game changer in online shopping; it is riding the wave of which Israeli consumers are already aware, a wave that should have awakened Israeli retailers a long time ago. Online is already here, with a strong presence, just as in the rest of the world. It is a sales channel existing side by side with the physical channel in shopping malls, and it has clear advantages that are grabbing a 20% market share in certain categories.

One example of a company that realized this in time is Shufersal, which founded a website, solved the online formula for a supermarket chain in Israel, and now makes 16% of its sales online. At the same time, Shufersal tried to enter the "conventional" online sectors with an American Outlets website offering US fashion products, and failed to achieve the results that it expected.

3. VAT exemption? Not here

One of the weak points of Amazon's Israeli website is its lack of an exemption from purchase taxes. Israeli buyers currently enjoy a sweetener in the form of an exemption on purchase tax on purchases of up to $75, an exemption that is only valid for purchases on overseas websites. Sales on Amazon's Israeli website are by Israel merchants located in Israel, and the exemption therefore does not exist. In this situation, every overseas website on which purchases are tax exempt will also give Amazon a fight.

There are those who regard this exemption as a distortion and unfair competition between Israeli merchants and overseas merchants who do not pay VAT. For the consumers, however, it is a considerable bonus which certainly contributes quite a bit to the flood of packages landing here every month.

4. An aggressive concern that takes a hefty cut

Israeli retailers are facing a dilemma. On the one hand, they do not want to be perceived as indifferent to Amazon's entry into Israel. On the other hand, being on the website for the sake of prestige is not a good enough reason. Some merchants who have already entered the Israeli Amazon website did so for this reason. They will not admit it, of course, but that is the atmosphere behind the scenes.

Another dilemma is that faced by businesses successfully selling online on their own websites - is it worthwhile for them to open another online sales channel and compete with themselves by offering products on Amazon's website? Take a website like Mahsanei Hashmal's Payngo, for example (Electra Consumer Products), a very successful website for the chain. Electra proudly declared that it had already sold dozens of small electrical appliances on Amazon (mixers, microwave ovens, etc.), "in compliance with the standards dictated by Amazon." It is unclear however, how it can simultaneously avoid damage to its own website and sell on Amazon. Will these be different products? Will it compete with itself in the price?

What tempts Israeli merchants is the promise that Amazon will be their entry gate for selling in the infinite global arena, not just the small Israeli market. This is certainly interesting bait, but here the competition becomes more aggressive and expensive for merchants (in order to win priority in search engine results and prominence on the page), a challenge that not every business, whether big or small, can meet.

Amazon is an aggressive concern that takes a hefty 15% cut of every sale, more than shopping malls charge stores (according to the reports by BIG shopping malls, for example, rent and management fees average 8%, and 11% in the reports by Azrieli. How much do the profit margins of merchants allow them to keep their head above water on the Amazon website? To illustrate this, if a product sells for NIS 100, the merchant must set aside NIS 15 for Amazon and NIS 17 more for VAT. The initial net price of NIS 68 has to cover logistics costs for delivery and storage, in addition to other fixed costs, and the merchant has to make a profit.

Above all, in order to play by the online rules, the price presented on the website must be competitive. Is this possible? For electrical products, for example, on which profits are smaller, the challenge is even greater. Someone has to pay this price in the end - the retailer foregoing his profit or the consumer.

5. The redeeming factor - Service must improve

Amazon demands a level of service unfamiliar to Israeli businesses. This is an extremely important point in the US giant's entry into Israel. The poor level of service experienced by Israeli consumers, particularly in post-buying service, returns, repairs, malfunctions, and everything that companies are happiest to disavow, has got to improve.

Even before Amazon entered the picture, Israel consumers were already exposed to different levels of service. This happened as soon as we started buying on international websites and physical overseas stores (8.5 million Israelis travel abroad every year). Although the relationship between consumers in Israel and businesses is based on grating distrust that did not come from nowhere (each side tries to take advantage of the other), businesses have not yet realized that the competitive arena in many sectors long ago switched from the price to the service. The consumers realized this long ago.

The moral is clear - if you don't know how to provide a service experience, you won't survive in the long run.

Published by Globes, Israel business news - en.globes.co.il - on September 11, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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