Why is Amazon buying retail companies and keeping them independent?

A Growth Question for Product Management Interviews

The Question

Amazon has a number of independent websites that in some ways duplicate the functionality of Amazon: Zappos (shoes and clothing); Diapers.com (baby needs); YoYo.com (kids’ toys); Look.com (kids’ clothing); Soap.com (toiletries); and Casa.com (house products). What do you think Amazon’s strategy is in maintaining so many different websites with such similar functionality? Do you agree or disagree with their strategy?

Answer Structure

When it comes to strategy questions, a very helpful approach is one given in the book Cracking the PM Interview by Gayle Laakmann McDowell and Jackie Bavaro:

  • Ask clarifying questions
  • Break down the problem into components using a mix and match of popular frameworks such as SWOT analysis and the 5Cs
  • Analyze each component
  • Wrap up with key insights and provide a recommendation

Answer Example

INTERVIEWEE: The question is pretty clear, could I take a few minutes to write down my thoughts?

INTERVIEWER: Please do.

INTERVIEWEE:

On a piece of paper, the interviewee breaks down the problem into components that will provide insights into the reasons for Amazon to follow such a strategy. This is what he writes down:

  • Company — Amazon, one-stop shop for everything
  • Customers — buy from best-in-class retailers because of variety and quality
  • Competitors — best-in-class retailers
  • Strength — Amazon, superb customer experience and world class fulfillment system
  • Weakness — Amazon, not top-of-mind for finding fashionable or customized products
  • Opportunities — Buying retail brands adds more categories
  • Threats — best-in-class stores are a threat to Amazon as the one-stop shop

INTERVIEWEE: I will start with Amazon’s mission, then analyze various components of their strategy to understand if this strategy fits with its mission, and end by providing my final assessment.

Amazon’s mission is to be the one-stop shop with the most customer-centric service in the world. The single category retailers you mentioned are best-in-class with strong brand names. They have been successful and are top-of-mind for a couple of reasons. First, they provide great customer experience, like Zappos for example. And second, customers have bought into the perception that single category retailers provide the greatest variety for that category.

For example, customers shop at Zappos because of their great customer service, the perception of having the largest inventory of shoes, and the likelihood that they will find what they want. When looking for shoes online, it is unlikely a customer will visit Amazon. Amazon is not top-of-mind because they are perceived as a marketplace that sells everything, but does not specialize. So, these best-in-class retailers represent a threat to the vision of being the one-stop shop.

By buying best-in-class retailers, Amazon eliminated the competition, but they kept the brand names separate, in my opinion, to retain these retailers’ customers and attract future customers of the brands. People shop at best-in-class retailers because of brand recognition and the perception that they offer the largest number of choices of the particular product category they are looking for. Customers would not think of Amazon as the place to find specialized versions of a product category. By keeping these retailer brands separate, Amazon creates the perception that nothing has changed with the brands.

So to wrap up, I think Amazon’s strategy of buying best-in-class retailers and keeping their brands separate, is a good strategy. It is in agreement with their vision of being the one-stop shop and by keeping the brand names independent, Amazon retains their existing and new customers. An additional benefit of this strategy is the increase in customer satisfaction these brands are likely to receive, as Amazon’s fulfillment service will be supporting their sales.