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The Alexa Advantage

15052018 Amazon Alexa

The Alexa Advantage

Amazon’s Alexa is pushing the boundaries of what speech recognition technology can achieve. While this new technology is still developing, one thing is becoming apparent: Alexa is strengthening Amazon’s moat in nuanced ways.

Amazon’s speaker, the Echo, is controlled by Alexa, a digital assistant who can order you pizza, play music, search the internet, and much more. The benefit here is convenience, with the ability to speak your commands rather than type them –you can achieve what you want to do whilst your smartphone remains in your pocket. Amazon’s Alexa manages this through a natural-language processing system that is activated when the user says “Alexa”(there have been reported problems for users whose names are Alexa). Why is this shift to voice significant?

There are a number of implications of the rise of voice assistant technology for Amazon, the most significant of which is arguably the ability to steer product demand to private label products. Amazon has been doubling down on its private label business, AmazonBasics, where it has its own brands in a myriad of categories. Selling private label products is strategic: it allows retailers to pocket a greater share of the product’s margin. There is also a limited need to spend on advertising or product placement on store shelves. Let’s dig further into this.

Traditionally, large consumer packaged goods (CPG) companies have had advantages over smaller brands, leveraging their scale and relationships with retailers to secure coveted shelf space and prime in-store positioning. To some extent, the power of these brands has been buttressed by their distribution. Retailers needed these brands, and whilst they introduced their own private label products, they were mindful of striking a balance between their own home brand offerings, and those of branded goods that still drive foot traffic and sales. Amazon is not constrained in this way, due to the unlimited shelf space enabled by the internet.

Amazon can sell all the brands whilst also selling its own private label items. This is problematic for CPG companies, and there’s the potential that this issue is exacerbated due to voice. Consider an order for detergent made via Alexa. Upon giving the instructions to purchase some detergent, Alexa will make a product suggestion. At this point, Amazon has enormous scope to control which products are recommended to the user –typically “Amazon’s Choice”products are recommended, although it is murky what drives these recommendations.

While at this point in time the precise mechanics behind Alexa’s product recommendations are unclear, Amazon is controlling a key point of distribution infrastructure at a time when the demand for voice assistant technology is increasing. It is likely that over time this will give Amazon even more power over brands, and could pose headwinds to CPG companies seeking to maintain their dominance.

George joined Montgomery Global Investment Management in September 2015 as a Research Analyst. Prior to joining Montgomery, George was an investment analyst at Private Portfolio Managers where he covered global equities across various industries, using a value investing framework. George’s prior experiences include equities research and investment banking roles at both Citi and Greenhill & Co.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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3 Comments

  1. Dilan Waduge
    :

    I think if this happens it would be problematic to Amazon because they would have an unfair advantage over CPG. Wouldnt this be similar to what happened to Google in Europe over search results. I think Siri and Google voice would have a better chance than Alexa due to the fact thier are in mobile devices.

  2. dane campbell
    :

    Would people really place an order via this technology for [insert product category here] and leave pricing/brand/quality decision to a machine designed by the seller of said product??? Not sure if I’m the only person who think that would be plain crazy…

    • George Hadjia
      :

      People are already ordering in this fashion – although the voice assistant makes only a recommendation of a brand/product, with the ultimate decision left to the consumer.

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