Since its much-anticipated launch in Singapore last month, online retail giant Amazon Prime Now has seen overwhelming demand.

So much so that it had to stop taking in orders, likely to avoid compromising on its core value proposition: Delivery in two hours.

Amazon is well-known for its aggressive pricing strategy in overseas markets, but this does not seem to be the approach in Singapore.

After making a few select price comparisons in food (eg, eggs and beer) and electronics (eg, men’s shavers and rice cookers) we found that Amazon is offering similar products at more or less the same prices, and identical products at the same price levels as its major online competitors.

This is a clear sign that Amazon is trying to capture market share with its unique two-hour delivery window and the overall shopping experience. Amazon has also waived membership fees to the service to make it even more attractive to shoppers.

In choosing Singapore as its first entry point into South-east Asia, Amazon has found itself in a highly competitive market that already features strong online retailers, such as Lazada and RedMart (both owned by Alibaba) and Qoo10.

With this strong competition, focusing on value looks like an effective strategy.

Instead of lowering prices unnecessarily to undercut competitors, Amazon is promising premium customer service with a focus on fast delivery.

By not competing on price only, Amazon’s market success will rely on creating the best possible shopping experience and its ability to deliver orders extremely quickly, efficiently and accurately.

After a few days of sky-high demand and customers finding no time-windows available for delivery, Amazon has taken steps to make sure that it has enough capacity to fulfil all orders.

If the fulfilment part continues to be the bottleneck in the go-to-market strategy, chances are that even with a strong brand promise and the planned expansion of offerings, these will not be enough to create a sustainable competitive advantage. That is even more so, as established players also offer fast delivery options.

However, the approach Qoo10 and Lazada take is slightly different. While Amazon Prime Now is primarily focused on two-hour delivery, with everything on the website available through that fulfilment mode, the other two players are focusing on their range of products and offer fast delivery only for select items.

For Qoo10, fast delivery is only available if the merchant is based in Singapore and opts to offer the service.

For Lazada, it applies only when the items are in a Lazada warehouse and fulfilment is done by the company.

TRANSPARENCY IN PRICE AND QUALITY

Looking ahead, the entrance of Amazon into the local market will trigger competitive reactions. Two directions are possible: Either through aggressive price promotions or through added value.

There are other reasons why Amazon may refrain from competing on price alone. The Internet allows for transparency regarding price and value.

Value transparency, in the form of reviews, customer feedback, and ratings on retailers’ websites or social media, might immediately affect price-aggressive retailers if they cannot match value expectations.

Even when prices are low, consumers still expect good service.

Many sellers on Amazon’s marketplace, for example, are known to de-list any merchandise if the average rating is at three stars out of five or below.

That is for a good reason: Typically, shoppers can obtain an item from more than one seller, and for the same price, will gravitate towards sellers with better ratings.

Another approach could be to create perceived price attractiveness — a general belief that a retailer offers lower prices overall. To achieve perceived price leadership, a retailer can position several highly visible and select products in a very attractive way.

Traditional retailers advertise their most attractive items, which help shape customers’ price perception and generate footfall in their shops.

The airline industry frequently uses this strategy, where low-cost carriers advertise their base fares and offer attractive flight deals and then upsell travellers with ancillary services in the online sales process (eg, seat selection, luggage allowance, travel insurance) that all add up to the final price.

Adding to the value challenge are the costs of fulfilling each order.

Even Amazon in the United States, which has scaled in terms of sales and fulfilment, reports that the costs of packaging, storage and delivery have consistently risen in the past five years and are a significant driver of the operating margin.

Keeping this in perspective, an aggressive pricing strategy for retailers lacking that scale might not be a sustainable option.

Much more likely is increased competition by offering similar value, or even greater value, at similar price levels. One way could be by simply replicating the competing offer or even further increasing the shopping experience through customer service and branding, and/or the convenience aspect (in the case of Amazon, speed of delivery).

Increased value delivery is not restricted to just online channels. Brick-and-mortar retailers are responding to increased competition from online retail and are taking steps to enhance their online offerings.

In France, for example, the supermarket chain Carrefour set up its own online delivery service in Paris after Amazon entered the French market in June last year. In the Netherlands, 
Mr Albert Heijn also started Appie Now last year, a one-hour delivery service, which aims to meet consumer preferences for speed.

Often, brick-and-mortar retailers who are expanding across multiple sales channels also aim to enhance the shopping experience in their physical stores.

“Retailtainment”, as it is coined, describes a trendy mix of traditional marketing with entertainment elements, such as in-store cafes, tastings, or product demonstrations — something that online retailers cannot provide.

Knowing that online shopping lacks “richness” in product presentation (you cannot browse a digital bookstore the same way you can a physical one, for example), Amazon has started to open actual bookstores to provide that experience to shoppers. It opened its first store at the end of 2015.

By intelligently integrating its online business, such as with special prices for Prime members, Amazon is effectively targeting a much larger share of customers than by just focusing on online shoppers.

Is Amazon now a threat to the Singapore retail market — both online and offline? It certainly has proven to be in other markets, as its business model continues to fuel disruption of traditional markets.

This will also happen in Singapore, and retailers will need to carefully re-think their value propositions both online and offline, as well as decide how to position themselves in the future.

In that sense, Amazon Prime is a threat to existing businesses, but only if they neglect to adapt to today’s and tomorrow’s market environment.

ABOUT THE AUTHOR: Jochen Krauss is the Singapore Managing Partner of Simon-Kucher & Partners.