It's no secret that Amazon is flat-out murdering brick-and-mortar retailers with low prices and killer convenience. Amazon's market capitalization has now eclipsed the combined valuations of Wal-Mart Stores, Target, Costco, Macy's and Kohl's. And then there are the former greats clinging to their last scraps of market cap, like J.C. Penney and Sears, more victims of Jeff Bezos' online retail juggernaut.
But the downward pricing pressure from Amazon has massive ripple effects to upstream manufacturing vendors like my company, GMM Nonstick Coatings. GMM is one of the world's largest suppliers of nonstick coatings to the $9 billion American housewares industry. GMM's clients are iconic brands like Calphalon, Farberware, KitchenAid, Oster, Wilton and George Foreman, all of whom previously sold most of their goods to brick-and-mortar retailers like Wal-Mart. However, these days sales are exponentially moving online and to Amazon.
The big impact to GMM is obviously on pricing. GMM's raw materials are driven by the prices of commodities like oil, silicon and other polymers. In the past, when raw-material prices spiked, we raised prices. But with the rise of Amazon, any price increase risks elimination as a vendor because of crushing algorithmic competition. So what does it take to succeed in the Amazon era of unbelievably low prices that are only headed down?
Below are the tactics that GMM has used to continue to thrive:
1. No matter where you are in the supply chain, you better innovate like Bezos.
GMM employs 50 highly educated R&D scientists who are phenomenal at creating innovative ways to push costs down while bringing quality up. To pull off this magic trick, GMM invests in the best and brightest people, a decision that gives us a clear edge versus some other competitors, who are "me too" suppliers that only try to copy existing technology.
Our largest clients (all multibillion-dollar conglomerates who have sophisticated purchasing departments) don't just require low prices today; they want to see three-year plans promising further reductions so they know they won't be eliminated by Amazon's relentless pricing algorithms.
2. Know that last year's low-cost manufacturing information is worthless.
Most American housewares companies source their cookware, bakeware and appliances from overseas factories in China and Mexico because of price arbitrage. As a result, GMM has a number of overseas factories so we can make fast, local deliveries. However, in the Amazon era, our clients consistently come to us asking what countries are emerging as high-quality, low-cost locations — and you better have smart answers.
For instance, GMM proactively built a multimillion-dollar factory in India in 2012, because we knew how much intellectual capital was available locally. At the time, competitors thought we were crazy because India had infrastructure problems and was not seen as a credible alternative to China. But we knew these issues would be solved, and they were.