ROUND AND ROUND

Amazon’s strategy is to beat a cyclical trap known as the “wheel of retailing”

Jeff Bezos has been defying conventional retail wisdom since Amazon opened its virtual doors in 1995. By purchasing Whole Foods, he may be doing it again, by foiling a 60-year-old theory that explains why so many stores can’t sustain their success.

The wheel of retailing, first proposed in 1958 by Harvard business professor Malcolm McNair, describes a cycle in which retailers start out by offering low-cost products to attract customers, often through an innovation that allows them to undercut more established competitors. As they grow and attract more customers, these retailers raise prices, allowing them to widen their margins and expand. As they raise prices, they become vulnerable to lower-cost competitors, starting the cycle anew.

Amazon played a key role in another retailer’s struggle with this wheel: Barnes & Noble. The bookstore chain had fallen on hard times when it was acquired in 1971 by Leonard Riggio, who owned a handful of college bookstores. Using economies of scale, Riggio offered big discounts on bestsellers, undercutting established retailers and allowing B&N to expand into larger superstores. Those stores became the company’s weakness as it faced Amazon, a competitor with no physical presence that offered customers both low prices and the convenience of shopping from home.

Thus far, Amazon has avoided getting caught in the wheel by constantly expanding into new sectors. By moving beyond books and into general merchandise, then onto fields as diverse as web services and entertainment, Amazon remains a perennial upstart, never taking on the characteristics of incumbents. The company has also never enjoyed the fat margins described by the wheel, instead sacrificing profit for continual growth.

Buying a store nicknamed “whole paycheck” may not be an obvious choice for a low-cost strategy, but cementing its move into groceries gives Amazon yet another sector in which to harness its innovation and technology. The company’s long-game plan of offering streamlined grocery delivery undercuts incumbents by saving families something more valuable than money—time—which could be crucial in a grocery sector where margins are razor-thin.

Of course, the wheel of retailing doesn’t explain every store. The model has been challenged by the success of Walmart, which retained its discounter identity even as it grew to a massive size. But Amazon’s Whole Foods purchase may prove that even Walmart is vulnerable.

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