Amazon has paused once ambitious plans to plunge into physical shopping with thousands of new stores. The ecommerce giant has closed some Amazon Fresh groceries and Go convenience stores and won’t open more until it finds a format that “is differentiated in some meaningful fashion and where we like the economics,” chief executive Andy Jassy told analysts.
What the economics like right now are established companies with strong franchises. As some would-be disrupters struggle, we are seeing the best environment in decades for incumbent companies to push back with innovative products and services of their own.
For years, start-ups and other digitally focused groups enjoyed a massive advantage in the form of cheap funding. Investors, who had few other options, looked to them for growth and were willing to tolerate early losses in hope of eventual profits. The disrupters competed for and won top talent with not just high salaries but also the promise of future equity riches.
Tech’s ascendancy grew even more pronounced during the early days of the pandemic when e-everything boomed while everyone else struggled with shutdowns and supply chain woes.
Now we are seeing a rebalancing. Rising interest rates mean capital is no longer free and investors are starting to demand, if not immediate earnings, at least a path to profitability. Despite a recent pop, the Nasdaq Composite index is down more than 25 per cent from its 2021 highs, and many private tech groups have put off plans to float, delaying their employees’ dreams of cashing in.
Moreover, tech companies have announced more than 255,000 job cuts since the start of 2022, mostly in the past four months, according to the Layoffs.fyi tracking site. Such instability makes working for a staid and stable existing company suddenly seem a lot more attractive, at a time when US unemployment is at historic lows and wages are rising.
“The incumbents are sitting on capital . . . [and] scaling costs a lot,” says Ari Libarikian, who heads McKinsey’s business building practice. Its recent survey of senior executives found big groups were building 50 per cent more new businesses than two to five years ago.
This is not the first time that incumbent companies have had an opportunity to regain ground: the downturns that followed the dotcom crash and the 2008 financial crisis also prompted investors and workers to rethink their choices. But this tech pullback comes at a time when at least some groups are much better positioned to seize the advantage.
That’s partly because the nature of the opportunities has changed. During the Covid lockdowns, ecommerce, streaming and cloud based software profited, but those sectors are now suffering as consumers turn elsewhere. Success in areas like decarbonisation, electric cars and healthcare means more than designing a good product. The ability to scale up requires building factories, supply chains and customer bases, skills that strong incumbents already have.
Some big companies have also spent years rethinking the way they approach innovation. Rather than expecting new offerings to flow naturally from existing departments, they realise that entrepreneurs need a less formal environment that shelters them, at least initially, from complex procurement and management processes, and buys them space to make mistakes.
“You’re not going to succeed by dumping $20mn on this one start-up, you’re going to dump $1mn on 20 of them and let them run some tests,” says Linda Yates, a consultant and author of The Unicorn Within.
When Pernod Ricard opened its California-based venture arm in 2017, it faced scepticism from founders who worried that the French drinks group would put its own interests first. Now, “having a recognised large and valuable corporate investor who can support a start-up for the long term is a plus,” says Stephane Longuet, who heads Convivialité Ventures.
But the Amazon store experience shows that it is what comes next that will be crucial. Coming up with innovative ideas — in this case fully wired convenience stores and shopping carts that let customers skip checkout lines — is just the first step. Making sure the offering can be rolled out in a profitable way is equally if not more important. For Amazon, sales in physical stores have stagnated since the company bought the Whole Foods grocery chain in 2017.
Amazon’s problem, Jassy says, has been finding a format that “resonates with customers”; successful incumbents in the sector already have one.
The revenge of the incumbents Republished from Source https://www.ft.com/content/ec06ee85-eda6-4351-8c6a-f49056511858 via https://www.ft.com/companies/technology?format=rss