Amazon is a frugal firm, illustrated by its founder’s remuneration. Last year Jeff Bezos received $81,840 in salary with no raise and no stock awards, making him one of the lowest-paid CEOs at a large technology company.
So where do all of Amazon’s hard-won cost-savings go? A big dollop of them are being invested China – although maybe not enough. That’s according Diego Piacentini, Amazon’s senior vice-president for international retail. He told the magazine Global Entrepreneur that Bezos is worried that the company isn’t investing aggressively enough in the China market.
“People are bound to make mistakes [about China]. But for me, when I make mistakes, I hope it is because we have invested too much in the country and not too little so we don’t fully develop the opportunity,” Piacentini cited Bezos as telling him.
Amazon is hugely overshadowed by the Alibaba Group in China, but it is showing no sign of giving up on the country. Piacentini flies there at least once every two months (coach, the company points out). He also stays in touch with his China team with WeChat, Tencent’s mobile messaging app, because he says that his staff responds faster to mobile messages than emails.
“I think this is the right decision. We are using less and less email so this is a good opportunity to learn and adapt. It is also going to have a big impact on Amazon globally,” he told Global Entrepreneur, mentioning that he has urged his boss Bezos to take up WeChat too.
Using WeChat to communicate is only one of the things Amazon is doing differently in China. “The biggest decision I have ever made is allowing Amazon’s Chinese site to do things that are different from the rest of the company,” Piacentini says in the interview.
For instance, for the past two years Amazon has offered same-day delivery to over 100 cities in China, a service unavailable in the vast majority of the United States until earlier this year. When Piacentini first proposed the idea, there was opposition at headquarters in Seattle because of the additional investment needed in logistics and infrastructure. But he insisted, explaining that speedier delivery was crucial to fend off competition from Amazon’s domestic rivals.
Niu Yinghua, Amazon China’s vice president, told Global Entrepreneur: “In the Chinese market every retailer has its own strategy. Amazon believes that only time will tell.” But he adds that thanks to its speedy service: “The customers on our site are very loyal.”
In comparison, another American retailer Best Buy has shown less staying power in the China market. The electronics retailer announced this month that it is selling the remainder of its Five Star electronics chain to Zhejiang-based property developer Jiayuan Group.
Best Buy did not provide financial terms for the deal but after it is completed (most likely early next year), the US firm will close down its Shanghai office, ending its painful, slow-motion exit from the Chinese market.
Best Buy had major aspirations for China. In 2006, it bought a majority stake in Five Star, a retailer that got its start selling air conditioners.
That same year, it also announced the first Best Buy store openings. It rolled out nine namesake stores, where it tried to sell high-quality sound systems and pricey plasma TVs. Then it backtracked, realising that Chinese consumers were more price sensitive than it had expected. It eventually shut down its Best Buy stores in 2011, leaving only the Five Star outlets in operations.
“The lesson we learned… is we got too far ahead of the Chinese consumer in how business is done there,” the chain’s chief executive Brian Dunn told the Financial Times at the time.
Still, analysts say Best Buy’s final China exit was a long time coming. “Some might see retailing giant Best Buy’s newly announced sale of its Five Star electronics chain as a retreat from China, but [it is] a shrewd move that was long overdue,” says Doug Young, author of Young’s China Biz Blog.
“That’s because traditional retailing is rapidly dying in China, as shoppers opt for the convenience, better selection and lower prices of e-commerce,” he pointed out.
If so, at least Amazon’s online strategy positions it in the less vulnerable part of the retail world. That said, Bezos will know his challenge is a daunting one as the US giant seeks to erode the dominance of domestic rivals like Alibaba and JD.com.
Forbes put the US firm’s share of the Chinese e-commerce market at about 3% in 2013. Amazon doesn’t break down its results for its China operation but in the first quarter of this year it did attribute the red ink in its international division to spending in the Chinese market. Its CFO Tom Szkutak told the Financial Times that it was trying to compete with the local players by “doing a lot on the retail basics. Making sure we have good in-stock availability, making sure we have some of the unique product selection, making sure we have the right pricing, making sure our service levels are where we need them to be.”
He added: “Is it a large investment? Yes it is. And that investment has certainly increased over the last several years.”
Another major US name that remains focused on investing in China is Walmart. Unlike some of the traditional Chinese retailers that have been investing heavily in e-commerce, Walmart doesn’t seem to think that bricks-and-mortar sales are doomed. It says it is committed to reaching 480 outlets in China by the end of 2016, up from 400 this year. In the third quarter, Walmart reported a 0.8% drop in China sales, which it attributed to deflation and the central government’s austerity measures.
“Our priority is retail stores before we consider e-commerce,” Andrew Mile, Walmart China’s senior vice president told Century Weekly. “We’re not (becoming) an e-commerce business simply to sell more goods.”
After the exits of America’s Best Buy and Home Depot (which decided to shut all its remaining Chinese stores in 2012) it will be interesting to see which of Amazon or Walmart has the greater staying power in the Chinese market, particularly given their diverging strategies.
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