Amazon is following Sears’ roadmap from the late 1920s

Amazon is following Sears' roadmap from the late 1920s
Robert E. Wood, courtesy Library of Congress

Robert E. Wood was a decorated Army officer who retired in 1919 as brigadier general. He was about 40 years old. He quickly joined Montgomery Ward, and was one of the first retail executives to appreciate the commercial impact of the rise of automobiles.

Here’s how Alfred D. Chandler describes Wood’s insight, in his book Strategy and Structure:

At Montgomery Ward, Wood began to advocate a new business strategy. More than any other mail-order executive of the time, he was aware of the impact of increasing urbanization and of the coming of the automobile on the national and, particularly, the mail-order market. […] Moreover, the mass-produced automobile was making it possible for the farmer to get to town more easily and to buy from a much broader assortment of goods than was available at the crossroads general store. Wood pointed out in October 1921 to Theodore Merseles, Ward’s President, that chain stores like J. C. Penney were already beginning to exploit this small-town market. With its existing branch houses as distributing points, its highly developed purchasing organization, and its long-established reputation, Montgomery Ward could easily compete with, Wood insisted, the chain stores in any market.

Unfortunately for Montgomery Ward, their president failed to appreciate Wood’s insight. Fortunately for Sears, one of its earliest and most important leaders, Julius Rosenwald, recognized that Wood was on to something. In 1924, less than 3 years after Wood pitched his retail store idea to Montgomery Ward executives, Wood left his old employer and became a senior leader at Sears.

In January 1928, less than 4 years after joining Sears, Wood became its president. He aggressively pursued his retail store idea. Here’s how Chandler describes Wood’s approach:

The General’s basic strategy was to concentrate on the urban market by using three types of stores. Placing his outlets in cities with a population of at least 100,000 should keep the new retail stores from competing closely with his mail-order houses. By having large, medium, and small stores, he hoped to meet the competition of the two primary types of volume marketers in the city -the older department stores and the newer urban chains like Woolworth’s, Grant’s, or Kresge’s.

Against this competition, Wood planned a strategy based on store location and types of lines offered. “Three essential and at that time revolutionary concepts characterized Sears’ inauguration of its retail stores,” Wood wrote in 1948. “First — location. Second — the character of the stores. Third — mass purchasing and integration of the durable goods lines.”

Sears leverages a disruptive technology: the automobile

The importance of the automobile is embedded in the first “essential and…revolutionary” concept: location. Stores no longer had to be located at the city center, at the points where transportation systems converged. Stores could be located away from the city center, where land was cheaper and parking was plentiful.

In other words, Robert E. Wood utilized an enabling technology, the automobile, to connect people with products in new ways. Sound familiar? That’s exactly what Amazon has done.

In the very early days of Sears, consumers would typically get products in one of two ways. Either order them through the mail. Or go to the general store in town.

The tradeoffs are clear:

  • If you order through the mail, you can get practically whatever you want. The prices are better, because you’re taking advantage of a large business operating at scale. But you’ll have to be patient, because it will take time to deliver these products to you.
  • If you buy from the general store, you can get something much sooner. But you can’t get everything you want. And you’re probably paying a worse price, since the store has overhead costs that the mail order company doesn’t. 

Sears’ big strategic change was to blend the advantages of these two channels. Operating a chain of retail stores at scale, so costs would stay low, but you could deliver products to consumers more conveniently. It was an on demand model, where customers could have basically whatever they wanted, whenever they wanted. As long as they were willing to get in their car.

The automobile made proximity to your customers less advantageous

Think about this from the perspective of the general store incumbent. Before the automobile, proximity was a serious competitive advantage. Being the first mover was critical. Once you set up shop in a town, it would be difficult to displace you. Unfortunately, the automobile mitigated the competitive advantage that proximity used to offer.

The Internet was an innovation akin to the automobile, in terms of its effect on commerce. Now proximity mattered even less. Online storefronts with tangible products could sell to any customer within reach of a delivery service. This disruption to existing commercial models was more evolutionary, than revolutionary.

Now, think about what you do when you’re the disrupter. You go for scale. If you operate at the same scale as the local provider, you’ll likely face the same costs. Sure, there’s a chance you’re a more clever business thinker and can optimize some elements of the business. But if you’re trying to make real money, and offer some real differentiation…you go for scale.

That’s what Sears did, starting in the late 1920s. That’s what Robert E. Wood was talking about when he discussed his “highly developed purchasing organization”. What do we mean by a “highly developed purchasing organization”? An organization that buys the right things at the right prices. An organization that knows what customers want, and can buy those things for less than a customer is willing to pay.

Amazon is synonymous with scale

If you had one word to describe Amazon’s business today, it would be “scale”. It’s the lifeblood of their organization. Jeff Bezos, the CEO of Amazon, says this himself in his 2015 letter to shareholders:

We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.

Have you heard of the scalpel metaphor in business? You use a metaphorical scalpel when you want to delicately and deliberately pursue a solution to a particular challenge. Amazon uses another well-known metaphor in this context: the machete. Grow as big as you possibly can. Unit costs come down as a result. No need to bother yourself with nuance. 

That’s not a criticism of Amazon’s business model. Amazon’s model is powerful. It’s how Sears became a dominant retailer almost 100 years ago. Amazon saw how the Internet wave was going to change commerce, and it rode that wave effectively. Amazon’s leadership realized if you’re going to overcome the advantage of proximity, you’re going to need massive scale. That’s how they’ve run their business.

Scale gets more attention than it deserves

Here’s a big challenge with scale: anyone can do it. Particularly in today’s world, where capital is super, super cheap. In some countries, we see negative interest rates. If a company could make a compelling argument about how it would succeed at scale, it could find an endless line of investors willing to pony up money.

Scale is visible. By definition. We know about Amazon because they’re everywhere. Everyone shops there. They’re one of the largest corporations on the planet, so they’re splashed all over the news. They’re an integral part of all of our lives.

But it’s not the scale itself that makes Amazon unique. It’s what Amazon does with its scale. Amazon has a great user interface on its website. Amazon makes it easy for third parties to connect with customers on its platform. Amazon uses its business analytics to learn what customers buy what products in what locations. With that knowledge, Amazon stands up its Prime Now offering, further helping it overcome a convenience gap with local competitors.

Scale followed success for Amazon, not the other way around

Scale is the part that gets all the attention, but success is a necessary prerequisite for scale. There’s a reason Amazon got this large in the first place. Tons of web companies got tons of cash in the late 1990s. Any of them could have tweaked their game and ridden the wave. 

Remember that Amazon started out as a bookstore. There’s no reason books were more likely to lead to total online retail domination any more than dog food or flowers. Amazon was the one who navigated those turbulent late 1990s waters, when access to capital wasn’t one of their competitive advantages. It was their other competitive advantages that allowed them to play the game long enough to earn the privilege of achieving scale.

Sears had the same success, 90 or so years ago. All the mail order giants had the scale to play the retail store game. Sears was the one opening the best stores, in the best locations, selling the best products (e.g. the “durable goods” that Robert E. Wood mentioned).

While scale was an important arrow in Sears’ quiver, other arrows were equally important. Sears knew their customer better than their competitors did. And that knowledge translated to better decisions, in terms of “location” and “the character of the stores”. “Mass purchasing”, the third of Wood’s “essential..and revolutionary” concepts wasn’t sufficient. Sears needed all three concepts to thrive.

We should slow our roll with the scale worship

We can too easily fall in love with the story of scale. Scale is necessary for the success of some business models, notably those of Walmart and Amazon. But those companies didn’t come with scale out of the box. They had to survive and thrive for a long time before they could count scale as a competitive advantage.

It seems like if you could just snap your fingers and stand up a large business, you could win in scale-sensitive markets. But that’s not true. The hard part isn’t getting the capital. The hard part is knowing what to do with it. Amazon and Walmart are big, yes. But they’re smart. And most importantly, they were smart well before they were big.

P.S. The quotes at the top of this post were from Alfred D. Chandler’s Strategy and Structure, which was published in 1962. I love that book. I’m reading it right now. I have written several posts recently that were inspired by Strategy and Structure. Here they are, in case you’re interested:

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