Question

Assignment: A complete analysis should include a summary of the case, a SWOT analysis, a financial analysis, identification of strategic issues and challenges, and a strategic plan. You must support your case analysis with at least 3 sources in addition to the textbook.

The case describes the business model of one of the world’s largest e-tailers, Amazon.com, Inc. (Amazon). Amazon had been at the forefront of innovation, adding and refining technology and changing the way customers shopped. It had a sustainable and innovative business model that intensely focused on its long-term growth opportunities as opposed to short-term profit margins. The case discusses the business model innovation at Amazon and how it evolved from just an online bookstore into one of the largest e-commerce platforms in the world where customers could find and discover anything they wanted to buy online in a more convenient way. The case outlines the four pillars of Amazon’s business model — low prices, wide selection, convenience, and customer service. Amazon attracted customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer service.In 2015, Seattle-based e-commerce giant Amazon.com, Inc.(Amazon) surprised investors by posting an unanticipated second quarterly profit in a row after struggling with profitability the previous year. In the third quarter ended September 30, 2015, Amazon’s revenues increased by 20% to US$23.2 billion, while net income was US $79 million, compared with a net loss of US$437 million in the corresponding quarter of the previous year. The revenue growth was attributed to the company’s rapidly growing cloud-computing business, higher sales in North America, and initiatives to attract more customers. On the back of these unexpected quarterly results, Amazon shares surged, making it the most valuable retailer in the world surpassing Wal-Mart Stores Inc as of July 2015. BUILDING AND EVOLVING THE BUSINESS MODEL Over the years, Amazon had disrupted the online retail industry and transformed itself from an e-commerce player to a powerful digital media platform focused on growth and innovation. It constantly reinvented its business model and found new ways to create value for its customers. According to analysts, Amazon’s business model was innovative because it combined the company’s online retail expertise with its ability to understand the needs of its customers. Amazon moved beyond books to foray into completely new product categories such as e-readers and enterprise cloud computing services. AMAZON’S GROWTH WHEEL In 2001, Bezos and his employees outlined a virtuous cycle called the “Amazon Flywheel”, which they believed powered their business. Bezos once invited well-known author and business consultant Jim Collins (Collins) to participate in Amazon’s executive retreat in 2001 to discuss the company’s future. As part of the discussions, Collins told Bezos and his executives that they had to decide what they were best at. Drawing on Collins’s concept of a flywheel, Bezos and his executives drew their own virtuous circle placing customer experience at the core of Amazon’s flywheel. Internally, it was referred to as Bezos’ napkin diagram as he drew it on a napkin... GROWTH NOW, PROFITS LATER Amazon generated revenues by selling millions of products to customers through its retail website and by charging third party sellers who sold products on Amazon’s website. It also served as a platform for independent publishers to publish books on Kindle with a 35% or 70% royalty option. In addition, Amazon generated revenue from its cloud business by providing web technology infrastructure to developers and enterprises. It followed a high fixed costs and low marginal costs business model. According to Eugene Wei, a former Amazon employee... RESOURCES AND PROCESSES THAT SUPPORT THE STRATEGY Amazon was one of the most innovative companies in the US. From the beginning, it had been at the forefront of innovation, adding and refining technology and changing the way customers shopped. On invention being a second nature at Amazon, Bezos said... CHALLENGES According to industry observers, Amazon over the years had disrupted other online retailers and brick-and-mortar stores and leveraged its e-commerce operations to become a retail Goliath. However, some critics felt that Amazon was too ambitious as it had been growing alarmingly and investing heavily. They felt that the strategy could backfire and that Amazon needed to be selective about the opportunities it pursued as it could not take customers and the competition for granted... THE ROAD AHEAD Going forward, the company planned to launch new digital products and service categories, build more fulfillment centers, power AWS, and expand the Kindle Fire Ecosystem. The company also planned to hire 100,000 people in North America for the holiday season.

Answer 1

Strengths

1. Low cost structure, the largest merchandise selection and a huge number of third party sellers

Amazon is the largest online retailer in the world. In 2017, the company earned US$140.235 billion purely from online sales, more than any other retailer in the world.[1] In 2015, we predicted that Amazon would become the 2nd largest retailer (as measured by revenue) in the world, behind Wal-Mart by 2018 and the Amazon’s extraordinary growth has allowed the company to achieve this milestone.

Figure 1. Amazon growth rate compared to e-commerce sales growth in U.S.

Source: Amazon financial reports[1] and Digital Commerce 360[2]

Note that Amazon has grown much faster than the entire U.S. e-commerce market, meaning that the company has actually increased its market share by taking it from competitors.

What is the key to such success? According to Jeff Bezos, the founder and CEO of Amazon.com, the company’s success lies in its low-cost structure and wide variety of merchandise.

Figure 2. Jeff Bezos “napkin sketch” outlining Amazon’s strategy

Source: Seeking Alpha[3]

A low-cost structure leads to lower prices, which combined with a huge range of products, results in a better customer experience. Satisfied customers invariably return to the Amazon websites, creating ever-growing traffic, which subsequently attracts 3rd party sellers to Amazon’s marketplace. All of these factors lead to faster business growth for Amazon.

Amazon follows a cost leadership strategy, but so do many other online and offline retailers. Why then does Amazon outperform them?

• Low cost structure. By mainly selling online, Amazon doesn’t incur huge costs related to running physical retail outlets. Online marketplaces also potentially allow for selling more units without any increase in marginal costs. Amazon constantly invests in both additional fulfillment centers and to existing centers to enable a reduction in order fulfillment times and shipping costs. These time and cost savings result in lower prices that are passed on to consumers.

• Selection. According to ScrapeHero[4], Amazon sells around 562.3 million of various products in its Amazon.com Marketplace. In comparison, Walmart offers only 38 million SKU’s[5] in its online shop, or just 7% of the number of products that Amazon offers. This vast difference in range is the reason why online customers are more likely to visit Amazon.com rather than Walmart’s e-shop.

• Third party sellers. Amazon’s business model includes accommodating third party sellers who are able to offer their own merchandise on Amazon’s sites and whose products therefore compete against Amazon’s. Third party sellers are mainly attracted to because of the high volume of traffic on Amazon sites. They often offer products that are not available through Amazon’s retail division. In 2016 (no data for 2017), Fulfillment by Amazon (FBA) service shipped over 2 billion third-party sellers’ items.[6]This number does not included the items shipped by third-party sellers themselves. eBay is the only other online company that has as many third party sellers as Amazon.

Low prices, a huge product range and the vast number of third party sellers are all key factors in improving the Amazon customer experience and in driving more traffic to their sites. Few companies can compete with Amazon in any of these areas.

Weaknesses

1. Very low margins on retail business

In 2017, Amazon earned US$177.866 billion in total revenues. Retail sales, both in online and physical stores, were US$114.152 billion or 64.2% of the total revenue. The rest of the revenue included revenue from the third-party seller services, subscription services, AWS and other revenue.

Figure 3. Amazon revenue breakdown by product

Source: Amazon financial statements[1]

Despite, being the major source of the company’s income, the retail business has notoriously generated mostly losses over the company’s entire existence. Since the company’s first sales in 1995, the company has not generated any profit until 2003.[24]Since then, Amazon only sometimes earned profits on its billions worth retail business. In 2017, the company has lost the money on its retail business again. The company reported the sales of US$106.110 billion and the operating income profit of US$2.837 billion in its North America segment and the sales of US$54.297 billion and the operating income loss of US$3.062 billion in international markets. These revenues do not include AWS business income, but include the revenue from the services, which often are much more profitable than the retail business. This means that Amazon has actually lost more than US$225 million from its retail business yet again.

In the past, Amazon’s low profitability was explained by the need to fuel its rapid expansion. Today, Amazon is huge and its capacity does not need to grow as fast as in the previous years. Amazon should streamline its operations to make its retail business, which generates the sales of US$114.152 billion a year, profitable again.

Opportunities

1. Rising demand for private label goods

Private label goods have been in retail stores for years. Usually, private label brands are much cheaper than the same quality national or local brands, and in addition, offer better margins for retailers.[30]

Most of this growth is attributed to growing customer loyalty and the better quality of private label merchandise. Results from various surveys show that customers also value private label products more than they did a few years ago. According to the Nielsen survey, as many as 65% of customers think that private label products are as good as national brands, and more than 77% believe that their quality is the same or better than a few years ago.[30]

While it’s not clear how sales of private label non-grocery brands compare to sales of national brands, it seems that Amazon will benefit from selling private label brands.

In 2009 Amazon introduced AmazonBasics, a brand through which the company sells cables, batteries, discs and other related products. Since then, the company has expanded its AmazonBasics range and now sells private label brands, such as Pinzon kitchen gadgets, Strathwood outdoor furniture, Pike Street bath and home products, as well as Denali tools. In 2015 Amazon launched its Elements brand, which sells coffee, soup, pasta, water, vitamins, dog food and various household items.[31]

Supermarket News predict that the market for private label brands will be worth around US$200 billion in the U.S. by 2020.[32] Therefore, Amazon should increase the range of the private label products it sells to improve the margins and sales.

Threats

1. Risk of data breaches

Amazon is the world’s largest online retailer, having over 310 million active users and selling billions of items each year.[40] The company collects credit or debit card information from every customer who makes a purchase on its sites. Amazon stores that credit/debit card data and protects it from theft. Nonetheless, data breaches can occur and customer data does get stolen and exposed from time to time.

According to the Identity Theft Resource Center, instances of personal information theft are growing. In 2017, a record high of 1,579 identity thefts were reported.[41] Since 2005, billions of records of personal information have been stolen, with significant associated damages incurred by both affected businesses and their customers.

Some of the biggest credit/debit card information thefts have affected e-commerce giants such as eBay, Wal-Mart and even Amazon. All of these companies have lost customers and sales because of it. With the growing number of data breaches, there is always a potential risk of Amazon being breached again.

AMZN Financial Summary

For the fiscal year ended 31 December 2017, Amazon.com, Inc. revenues increased 31% to $177.87B. Net income before extraordinary items decreased 5% to $2.24B. Revenues reflect North America segment increase of 33% to $106.11B, International segment increase of 23% to $54.3B, Online Sales, Total increase of 19% to $108.35B. Net income was offset by International segment loss increase from $1.28B to $3.06B.

This is the link you may go through for further clarification

https://www.investing.com/equities/amazon-com-inc-financial-summary

2.Strategic Issues and challenges:

What are Amazon's biggest fears?

In its 2016 annual report, Amazon listed a number of typical concerns, including "intense competition" and rapid expansion "straining" management and other resources as well as dangers associated with doing business all around the world. Those are pretty typical risks for a company of Amazon's size and reach.

They have to be listed, but it's like the equivalent of your life insurance company having to factor in that you may get eaten by a shark before setting your rates.

Amazon's list of risks, however, does include two potential problems that may actually occur. Neither of these is likely to derail the company, but either of them could slow the online retailer's stunning growth or be a major drag on profit.

Shipping costs could be a problem

Amazon has so far done a spectacular job in optimizing its shipping operation. That's a key to the company's success as its ability to control shipping costs remains key to its success given that tens of millions of people pay $99 a year for free two-day shipping.

In the United States, Amazon has an estimated 65 million Prime members, about 52% of its total customers, according to data from Consumer Intelligence Research Partners (CIRP). Serving those customers and keeping them happy is the core of the retailer's business, but the company acknowledges that shipping could become a problem.

"A failure to optimize inventory in our fulfillment network will increase our net shipping cost by requiring long-zone or partial shipments," the company wrote.

In addition to potential inventory management issues, Amazon also acknowledged that the limited number of shipping companies it works with could cause an increase in shipping costs.

"If we are not able to negotiate acceptable terms with these companies or they experience performance problems or other difficulties, it could negatively impact our operating results and customer experience," Amazon added.

Data loss and security breaches

Perhaps the biggest risk facing Amazon is hackers. No company can completely guarantee that its security won't be breached. That's a large concern at a company that could have its store knocked offline or the hundreds of millions of credit cards it holds information on compromised. Amazon laid out its concerns in its annual report.

As a result of our services being web-based and the fact that we process, store, and transmit large amounts of data, including personal information, for our customers, failure to prevent or mitigate data loss or other security breaches, including breaches of our vendors' technology and systems, could expose us or our customers to a risk of loss or misuse of such information.

The online retailer also acknowledged that it does use some third-party technology and that could be breached as well. Amazon even admits that while it has "developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches," that "such measures cannot provide absolute security."

Should Amazon be worried?

Companies have to list reasonable risk factors in their annual reports and Amazon's are reasonable, but not anything that impacts its survival. Both of these issues, however, could impact the company's business.

As recently as 2013 Amazon had major shipping issues during its pivotal holiday seasons as both UPS and FedEx failed to meet its two-day delivery requirement resulting in refunds, make-goods, and customer anger. No major problems like that have happened since then, but it's certainly not inconceivable.

On the data side, no company is completely safe, and consumer reaction to breaches can be unpredictable. The biggest risk for Amazon may be a credit card breach. If customers have new cards issued by their provider, they would need to give the changed information to the online retailer. That's something they may be wary about doing after a breach, which could put a major dent in the company's customer base.

Both of these risks are possible and were either situation to occur it could damage Amazon's business but neither would be insurmountable in the long term. Shareholders should be aware that these risks exist, but they represent possible potholes in the road for the retailer, not survival-threatening events.

3.Strategic Plan

The more recent applications of AI at Amazon are highly visible, for example, the Amazon Echo assistant and technology in the Amazon Go convenience store that uses machine vision to eliminate checkout lines.

In their 2017 report, they describe the increased use of machine learning and AI ‘behind the scenes’ at Amazon:  

"much of what we do with machine learning happens beneath the surface. Machine learning drives our algorithms for demand forecasting, product search ranking, product and deals recommendations, merchandising placements, fraud detection, translations, and much more. Though less visible, much of the impact of machine learning will be of this type – quietly but meaningfully improving core operations".

mazon is dominating e-commerce, and by acquiring Whole Foods and initiating Amazon Go, Amazon is about to change the retail as we know it. With all these news, what is Amazon's strategy behind these moves?

Amazon has acquired Whole Foods in June 2017 for $13.7 Bn. It was refreshing news to everybody in the industry since Amazon was an e-commerce and technology company and was stealing market share on grocery shopping via its online services. However, Amazon took a strategic decision, which led to the acquisition of Whole Foods.

Amazon did not stop right there. They have made a more exciting decision in January 2018.

Amazon has launched a new kind of retail experience in January 2018 in Seattle. This store was called Amazon Go, which has no store staff to help you on your shopping, and you do not need to pass your credit card or your billing information to any machine other than your smartphone, via Amazon Go app.

It is quite impressive, and it has created a significant buzz in the industry. Now, let's take a step back, and see what might have happened there for Amazon to make these decisions starting from understanding global consumer behavior, Amazon's penetration in the United States market, and Amazon's move on acquiring Whole Foods.

The consumer shift to online grocery shopping is increasing, and Amazon is already there. However, the shift is slow.

According to Nielsen's "What's In-store for Online Grocery Shopping" research (January 2017), findings show us the rate of growth in online grocery shopping. According to the results, the percentage of consumers who prefer home delivery was 25% in 2014, and it is 29% in 2016. The same research also shows that consumers who are not willing to use home delivery have decreased from 21% to 14% comparing 2014 with 2016.

According to PwC's "Total Retail Survey" research, 70% of the global shoppers still prefer classic brick-and-mortar retail stores when they shop for groceries. Even though consumer preferences for online shopping is increasing, the growth rate is not dramatic. People still want to go to retail stores for their grocery shopping and make in-store purchases.

Continued with that, 91% of the spendings in the US are in physical stores. Size of offline retail is ~$4.5 trillion, where online retail is ~$409.2 billion.

Let's have a look at Amazon Tech.

Amazon has an e-commerce area on grocery shopping called AmazonFresh. In addition to AmazonFresh, Amazon has Amazon Prime, where Amazon customers can get their orders in a lightning-fast way. Prime Now membership offers its customers to choose 2-hour delivery or 1-hour delivery in selected cities. A faster shopping experience for shoppers compared with retail shopping, right?

In addition to those virtual services, Amazon has produced Alexa-powered assistant devices and Dash, which are hardware products for consumers to make their lives easier.

Dash, allows its users to scan barcodes of their products and order them from Amazon right away; it also comes with a microphone, so users can also order groceries by just telling their names.

Alexa is a voice assistant that powers Amazon's Echo products, allows its users to complete hundreds of customizable actions. Using Alexa, customers can order groceries from AmazonFresh, or shop from connected services.

What is Amazon doing with brick-and-mortar investments?

According to Statista, Amazon Prime has 90 million members in the United States by September 2017. The number of members was 65 million in September 2016 - so members have grown by 25 million in just one year.

According to the prediction of eMarketer, 35.6 million people in the United States have and using Amazon Alexa. Considering 29.9% of millennials have voice-enabled digital assistants and Amazon Alexa-powered Echo products have 70.6% of that market, Amazon has and is investing in the right place for the future of shopping.

Wait. Amazon already has a significant growth on online grocery shopping. Why did they acquire Whole Foods, and why everything is connected?

For sure there is no clear answer to why Amazon acquired Whole Foods or opened Amazon Go store. However, considering the consumer behavior we went through, we can tell some answers.

Data is one of these reasons. Whole Foods has a significant background data which includes shoppers' purchase and consumption behavior (frequency, correlations between decisions) in the in-store shopping which allows Amazon to play with it on Amazon Prime and other services, and also in the retail area for better intelligence.

Whole Foods is a strong brand, and it has an extensive list of private-label products.We know that Amazon has ~40 private-label brands. If Amazon has the best shopping experience, the fastest delivery, the best prices, and now the best products, why would you shop anywhere else? So Amazon did not just buy Whole Foods, it also acquired hundreds of private-label brands of Whole Foods.

This acquisition increases Amazon's reach and service quality. As mentioned by Credit Suisse, when Whole Food's existing store footprint is cross-referenced with Prime Now's delivery zones, there is a 50% overlap. This data shows that Amazon can expand Prime Now's presence up to good rates in those cities. (Prime Now is only available in the zip codes of 198 Whole Foods stores out of 393 total stores.)

The pace of the transition to online shopping will increase. Amazon started selling Amazon Tech in Whole Foods stores. Furthermore, Amazon has connected Amazon Prime program with Whole Foods to offer new purchases to consumers. Amazon did put Amazon Lockers into Whole Foods stores. Hence, we can see that Amazon is connecting the physical and digital world, and starts evolving Whole Foods shoppers to become digital shoppers with integrations.

Considering Amazon is connecting its every service with each other, grocery shopping will change by these actions. People who use Amazon for online shopping will increase due to the connection between Whole Foods, better service thanks to the purchase data, and people will start preferring Whole Foods for their retail shopping because Amazon owns it and provides a known/guaranteed customer service along with other perks.

This is where everything connects with each other.

Starting from the day 1, Amazon has learned a lot. It has a nearly-perfect suggestion system, covers every need of a consumer, provides high-quality customer service, has the best shipping in the universe.

"The traditional brick & mortar retail shopping experience needs to be reinvented, and this store is a good first step." -Brian Nowak (Morgan Stanley Analyst) on Amazon Go

Behavioral Economist Dan Ariely says the more someone reflects on spending money, the less stoked they are going to be to spend that money. This statement expresses that the more abstract the payment is, the more a consumer spends.

Amazon is playing in that area. 1-Click Ordering, Dash buttons, Amazon Alexa, and the latest, Amazon Go. Fewer steps on the path-to-purchase reflect shoppers with more purchases.

Amazon Go is the Amazon online shopping reflection on the in-store shopping experience. Conquering the online shopping, Amazon is changing the world of retail now.

As mentioned on our previous article about Amazon Go, it helps Amazon to extend its market with offline retail, collect and leverage shopper data in a better way, and it makes Amazon a leader in the retail area with the technologic innovation they brought.

Amazon's master plan here is covering grocery shopping 360-degrees and increasing the pace of consumer shift.

Amazon Go, Whole Foods, AmazonFresh, Amazon Prime, Alexa, they are all connected with each other and helps consumers fulfill their needs with a great experience. Integrations make consumers' lives more comfortable, and it will break the walls of grocery shopping - and start a war between the brands on breaking down the commodity.

When we observe the consumer states when they shop for groceries, we see three states.

• First one is our on-the-go needs. When we are moving from point A to point B, we are having quick needs like a bottle of water, a can of coke, gums, or snacks. To fulfill these needs, we are going small convenience stores like 7-Eleven.
• The second one is our regular grocery needs at home. If we do not want to go out to shop, we are ordering groceries using our laptops/smartphones; we are going to Amazon and select products according to our needs.
• The third one is regular shopping when we have flexible time. Considering we have a structured shopping list and time, we are visiting grocery stores like Walmart or Costco, and making our purchases from there.

Amazon acts visionary on this area, and according to the shopper behavior, they are on the right path. Covering shopping 360-degrees, allowing consumers to make their purchases without a time, location and product list constraints are what makes consumers happy - and providing a good experience in all these areas is making Amazon irresistible.

Amazon's retail strategy will push traditional brick-and-mortar retailers to innovate and compete with each other via innovations other than basic discount techniques. In the past, coverage and prices were the main differentiators, but with the newest disruptor in the market, the commodity is a reality more than ever; and these values are no longer as vital as they were in the past.

Amazon is tapping into the traditional industry; which will make Amazon steal a significant market share from its traditional competitors, and will increase the consumer shift to online grocery shopping with right moves.