About Amazon: An Introduction
|Company Name||Amazon Inc.|
|Headquarters||Seattle, Washington, United States.|
|Industry sector||E-commerce and Cloud industry|
|Founder & CEO||Jeff Bezos|
|Net Revenue in 2019||$280.5 billion|
|E-commerce Revenue in 2019||$245.5 Billion|
|Cloud Revenue in 2019||$35 Billion|
|Net Income 2019||$11.6 billion|
|R&D Expenses 2019||$35.9 billion|
Amazon (AMZN), the leading e-commerce player in the world, is also the largest cloud player. The company has continued to strengthen its position in the US and international markets through a higher focus on technological innovation and continued investment in improving customer experience. With the pandemic, Amazon’s position has grown more cemented in the international markets as people worldwide switched to online shopping in vast numbers. The changes in consumer behavior brought about by the pandemic and lasting, and their impact will remain there even in the post-pandemic world. However, while Amazon is the largest cloud player that provides a diverse range of cloud computing services through its AWS cloud platform, compared to its e-commerce platform, AWS has experienced somewhat slower growth during the pandemic.
Apart from everything, Amazon is among the world’s four largest tech brands based on its market cap. As the number of smartphone and internet users continues to grow worldwide each year, the number of people buying products and services online has also grown. These trends have proved profitable for the e-commerce leader. Amazon is now also selling a wide range of products created in-house on its e-commerce platform to grow its profitability.
2020 has proved to be a highly profitable year for Amazon Inc when its net sales and operating income have risen sharply compared to the previous year. During the first three quarters, its revenue from e-commerce grew by around $60 billion in 2020 compared to the previous year. The company’s net revenue during the first three quarters of 2020 grew by 35% compared to the same period in the previous year. Until 2019, the international segment of Amazon had been unable to generate positive operating income. However, in the first three quarters of 2020, it has changed. The international segment of Amazon generated a positive operating income of $355 million compared to an operating loss of $1,076 million during the same period in the previous year. Amazon’s market cap stands at above $1.6 Trillion, and the company might be poised for faster growth. However, there are also some challenges before the company that we will discuss in this analysis.
Learn more about Amazon in this SWOT analysis:
SWOT ANALYSIS OF AMAZON 2020
Strong brand equity:
Amazon is the undisputed leader in the e-commerce sector. Its market-leading position and global dominance are backed by the strong brand equity the company has built. Amazon was known as a highly customer-centric company right since its foundation. Apart from great quality customer service, its focus was on delivering a superior customer experience. The company has always been outstanding in technological innovation, which has continued to drive its popularity higher. Brand equity is directly related to the trust that customers place in a particular brand name.
With time, as Amazon’s empire continued to expand globally, and the company gained a strong competitive advantage through technology and the large selection of products on its platform, its brand recognition also grew stronger. Amazon’s algorithms that help people choose from a vast selection of products available on its platform, as well as make specific suggestions tailored to the preferences of specific customers, have also played a central role in driving the popularity of the brand higher. To improve the customer experience, the company has continued to make improvements to its product and services offerings and its platform.
Amazon prime has also played a strong role in making Amazon’s e-commerce platform popular. If Amazon’s memberships in the US and worldwide grew at a swift rate, then a major reason behind it was prime. Even after so many years of its release Amazon Prime continues to enjoy an impressive growth rate in the United States. From December 2013 to December 2019, Prime memberships grew by more than 4 times. In December 2013, the number of prime memberships stood at 25 million but grew to 112 million in December 2019. Apart from movies and shows, Amazon Prime offers same-day or next-day delivery in several markets, including the United States. Amazon’s global distribution network makes the fastest deliveries possible and helps Amazon deliver a superior customer experience. Compared to the other retailers, including physical and online retailers, Amazon’s competitive edge has strengthened with time. Overall, by combining prices and product quality with customer convenience, amazon has achieved higher brand equity that drives sales and revenue growth.
Amazon’s leading market position in the United States and several more leading markets, is a strong source of competitive advantage for the brand. Its empire is the largest in the world and much larger compared to any e-commerce player. It also offers a complete range of products and services when compared to the other e-commerce players. Compared to Alibaba or Flipkart, Amazon’s market position is a lot stronger globally. In the US, its influence has continued to strengthen, driven by higher customer convenience. However, this is a cause of worry for the leading physical retailer Walmart since Amazon’s growing market share continues to drive pressure on Walmart higher. During the pandemic, the digital shopping trends continued to strengthen as a larger number of people switched to online shopping mainly. These changes in consumer behavior are going to last in the post-pandemic world. So, the pandemic has cemented Amazon’s market position as the global e-commerce leader. In the US, while Amazon enjoys a market share of around 38% in the e-commerce sector, Walmart, the largest physical retailer, and the number two e-commerce player in the market trails far behind with a market share of lower than 6%. Ebay’s share in US e-commerce is smaller than 5% now. Earlier, it was forecast that US e-commerce sales were going to climb by 13%. However, this rate has grown during the pandemic, and e-commerce sales in the US could climb by 18% compared to the previous year in 2020. While the US is the core market of Amazon, in the other markets too, Amazon has experienced superior growth in 2020. Overall, Amazon’s position continues to grow robust and has become a significant threat to other retail brands.
Largest Cloud technology business:
Apart from being the largest e-commerce player globally, Amazon is also the largest cloud technology business enjoying the highest market share and an impressive annual revenue run rate. The cloud industry continues to grow at an impressive rate. During the second quarter of 2020, the total spending on cloud infrastructure services passed $30 billion. Compared to the same period in the previous year, it represented a growth of around $ 6.5 billion. While Amazon made its mark early as the cloud leader, it has maintained its lead and market share very well. Amazon’s cloud technology business is named Amazon Web Services (AWS). Its nearest competitors are Microsoft Azure, Google Cloud, and Alibaba Cloud. However, according to the latest report by Synergy Research Group, AWS market share during the second quarter of 2020 was equal to the other three largest players. While the market share of AWS was at 33% in the second quarter of 2020, that of Azure, its nearest rival, was at 18%, and that of Google cloud at 9%. Alibaba’s market share in the cloud industry stood at 6%. The largest eight players in the cloud industry held a market share of 77% in the second quarter of 2020, with Amazon in the lead. The cloud industry has remained unimpacted by the pandemic, and Amazon is enjoying a strong competitive edge compared to its rivals. In the third quarter of 2020, AWS posted a year on year growth of 34%. AWS revenue during the third quarter of 2020 grew to $9.95 billion compared to $7.4 billion in the third quarter of 2019.
Largest R&D spender :
Much of amazon’s growth in the global market in both the e-commerce and cloud sectors has been driven mainly by the company’s focus on technological innovation. Since its foundation, the company maintained a heavy focus on innovation that helped the company grow its influence in the US market as well as internationally faster. Apart from a smarter and more intuitive e-commerce platform that produces more accurate and personalized search results, the company’s investment in technology has also driven higher consumer engagement. The use of AI, machine learning and other latest technologies has enabled the company to deliver a superior customer experience. A large number of people shop online from their smartphones. However, while Amazon is their preferred app for shopping, they also use it mostly to check and compare prices of specific products. The differentiated customer experience that Amazon offers has been made possible through a heavy annual investment in research and development. The R&D expenses of Amazon have continued to climb fast each year. Check the table below:
|Year||R&D expenses ($Millions)|
|2015||$12,540 (Source: Statstic.com)|
In 2019, Amazon’s research and development expenses grew to $36 billion compared to $28.8 billion in 2018. The result has been that the company has gained significantly in the areas of ecommerce as well as cloud technology. The sales and revenue of the company improved fast. While Amazon became the preferred shopping app of millions of users worldwide, it is also the most preferred site for carrying out product research. The number of total visits to the website in Feb 2020 was around 2.01 billion and it grew to 2.44 billion in September 2020. Apart from the growing competition in the industry, the need for customer engagement has also been driving higher focus on research and development at Amazon. Its competitive moat grows stronger as the company continues to invest more in R&D. In the e-commerce industry, technology is the main differentiator and apart from everything has a direct impact on customer convenience. Superior customer experience translates to higher popularity and demand. In the coming years too, Amazon is expected to continue to raise its R&D expenses to maintain its dominance in both the cloud and e-commerce sectors.
Amazon has seen faster international growth in 2020 driven by higher demand globally for both ecommerce and cloud services. The company’s e-commerce business is divided into two segments including the US segment and the international segment. While the US segment has been operating profitably, the international segment of Amazon was running in operating losses until 2019. During the first three quarters of 2019, the international segment of Amazon had incurred a net operating loss of $1,076 million. However, in 2020, it has generated more than $350 million in operating income. It shows that the company has achieved superior sales internationally during the pandemic. While the international shipping and fulfillment costs of the company increased during the pandemic, the higher costs were easily offset by the higher unit sales, growth in advertising sales on the platform as well as higher third party sales. The pandemic has brought profound changes to consumer behavior globally and that has resulted in a larger number of people shopping online using their smartphones. These changes are going to stick for a longer period and will continue to benefit Amazon’s international segment.
Impressive growth in sales and operating income:
Over the past two years and particularly in the latest fiscal Amazon has experienced impressive growth in both its e-commerce and cloud businesses. While Amazon’s popularity and influence have grown in recent years, the growth in internet penetration in almost all corners of the world as well as the growing number of smartphone users and increase in number of products sold on the platform have also led to growth in sales, revenue and operating income of Amazon during 2019 and 2020. In 2020 particularly, the pandemic drove the growth of ecommerce and cloud platforms faster since a larger number of people from around the world are relying on online sources for shopping and entertainment. The demand for cloud based services has also been growing at an enormous rate during the recent years. It grew even robust during the pandemic as a larger number of businesses switched to the online model to beat the impact of the pandemic on demand and sales.
According to synergy research, the revenue of cloud infrastructure services for 12 months trailing July 2020 had reached a whopping $111 billion.
Amazon’s ecommerce revenue took a solid jump in 2020. At the end of the third quarter, net revenue of the brand from e-commerce for the first nine months had reached around $228 billion, yoy growth of around 35.7%. During the same period in the previous year, the company’s net revenue from e-commerce was $168 billion only. The company’s cloud revenue also tooka bold jump during the same period.
For the first three quarters ending September 30, Amazon’s cloud revenue jumped to $32.6 billion compared to $25 billion during the same period last year.
The operating income of the company, which according to Amazon is its measure of profitability jumped to $16 billion for the first three quarters of 2020 compared to $10.7 billion during the same period in the previous year. Overall, Amazon’s sales and profitability have surged during 2020. It also marks the beginning of a new chapter in Amazon’s history.
Global distribution network:
Amazon’s other leading strength is its international distribution network which supports its global business empire. According to its website, Amazon operates more than 175 operating fulfilment centers of which more than 110 are located in North America. The e-commerce leader uses a large array of sophisticated tools and technologies including robots inside its warehouses to make packaging and delivery easier and faster. The company has maintained a strong logistics network that makes delivery in all corners of the world possible. Apart from Amazon trucks, the company also gets help from its delivery service partners that have their own team of drivers operating around 20 to 40 vans. The company has also grown its own fleet of cargo airplanes to make delivery around the world during the Covid-19 pandemic easier. According to sources, the number of airplanes in Amazon’s fleet has reached 80 in June 2020 after the company added 12 new cargo airplanes during the month. The company also makes use of the services of UPS, Fedex and United States Postal Service to make faster deliveries to its customers in the US and in foreign countries. The company is continuously working on developing new technologies to strengthen its distribution network including Unmanned aerial vehicles or drones.
Human resource management:
For the technology businesses, human resource management is an important source of competitive advantage since most of their competitive strengths rest on the skills and knowledge of the employees. Technology leaders focus strongly on managing their human resources strategically and the technology sector also pays the largest salaries and perks in the entire industry. From recruitment to training and retention, the companies maintain a heavy focus to do everything correctly so that they can hire and retain the best. Amazon also has an elaborate recruitment strategy, whose focus is to hire talented people that have the right personality traits to fit in the company culture. As of 2019, Amazon had 798,000 employees. The tech giants are known to pay the fattest salaries and the big four including Apple, Amazon, Google and Microsoft pay the highest salaries in the industry even to the entry level techies. Apart from that, there are big bonuses and other perks that are meant to retain these developers and software engineers for longer. There is a major difference between what companies like Amazon pay to their software engineers and developers and the average in the market. However, Amazon also strives to attract the best talent in the industry. In this area, there is also quite heavy competition among the big four technology players.
Increasing share of search advertising:
While Google is the undisputed leader in search advertising and will continue to remain in this position for the next several years, Amazon’s share in search advertising is growing steadily. It has come to light that most product searches begin from the Amazon website. Amazon has already surpassed Microsoft in this area. Its share of the US search ad revenue is now larger than Microsoft and it is the only company whose share of revenue from the US search advertising will keep growing in the coming years at the cost of the loss of market share of others like Google. In 2019, Amazon held an around 12.9% market share in US search ads. Google held the largest share at around 73.1% and Microsoft was the third largest player with a market share of 6.5%. However, it is estimated that while Google’s share could fall to 71% by 2021, Amazon’s share could improve to 16%. It is expected that Amazon’s search ad revenue from the US could jump to $11.7 billion by 2021. While with its growing share of online search ads, the company will be able to grow its profitability, it will also create a strong and new revenue channel for the company.
Weak performance of international segment:
Amazon’s business has grown very fast, and the company has also achieved impressive penetration of international markets. However, the international segment has not been performing as well as the other two Amazon segments, including North America and the AWS segment. Until 2019, the international segment of Amazon had been running in operating losses. During 2018, the international segment incurred a net operating loss of $2.14 billion, which reduced to $1.7 billion in 2019.
In 2020, while the company has started generating operating income from its international segment, the costs and expenses have also increased due to Covid-19. Overall, for the past several years, the company has been spending more on its international business than generating profits. In 2020, the company has generated a net operating income of $355 million from its international operations during the first three quarters. However, it is not even ten percent of what AWS or Amazon North America generated during the same period.
Lower profit margins:
The profit margins of Amazon Inc have been consistently lower for the last several years. Compared to the other technology brands like Apple, Microsoft or Facebook, its operating margins have remained consistently lower. Its operating margin in 2019 was just around 6.1%. While Amazon is one of the largest technology brands with a market cap of more than $1.6 Trillion, still it enjoys the lowest operating margin among all the leading tech brands.
Slowing cloud growth rate:
Amazon Web Services is the undisputed leader in the cloud industry. Cloud is also a major growth driver of Amazon. However, Amazon’s cloud growth rate has started slowing down while Microsoft and Google, its leading competitors in the cloud have acquired some major deals in recent period. In the third quarter of 2020, while AWS made 12% of the company’s net revenue, the growth rate of Amazon’s cloud business has kept slowing since the fourth quarter of 2019. AWS growth rate stood at 34% in the fourth quarter of 2019 but fell to 33% in the first quarter of 2020 and then to 29% respectively n both the second and third quarters of 2020. AWS is the dominant player in the cloud industry. However, its slowing growth rate might force Jeff Bezos to spin off AWS. Compared to AWS, the other two Amazon segments, including Amazon North America and Amazon International, have enjoyed higher growth rates.
Presence of fakes and imitated goods on the platform:
Another major trouble that Amazon has been dealing with is that of counterfeit goods. The company made several efforts to solve the problem, but despite that has not been fully successful at eliminating counterfeits from its platform. It is also a reason that several influential brands dropped their plans to sell on Amazon. Apart from brand dilution, more risks arise from the threat of counterfeits. Nike had started a pilot program with Amazon that it dropped in 2019. When unauthorized sellers sell counterfeits and undercut prices, it diminishes the brand value of premium labels. Several other brands also feel uneasy doing business through Amazon’s platform. For example, Birkenstocks is a German brand of handmade shoes. However, a large number of unauthorized sellers were also selling their products in the name of Birkenstocks which led to a very high number of consumer complaints. Birkenstock found that counterfeits were flourishing on the platform, but there was no mechanism that could prevent these sellers. To make things worse, Amazon itself copied many products made by other brands, that were best sellers in their categories and started selling them under Amazon Basics.
Grow distribution network and pick up locations internationally:
Amazon has a strong international distribution network. However, its sales rose very fast during the pandemic internationally. The company should further strengthen its international distribution network to grow its penetration of the emerging markets. It will help the company grow its sales and profitability from the international segment. If the company adds more pickup locations in the markets including India and other emerging markets, it will find more popularity and growth there. Simultaneously, the company might be able to reduce the competitive pressure that comes from the local e-commerce companies in the emerging markets.
In house production:-
Amazon’s profit margins have remained consistently lower. However, it can expand its profit margins. While in the recent years, the company has expanded its range of in-house products, or the products it sells under Amazon basics, the company can use its size and scale to grow its operating margins. While it will help the company earn more of the profits it generates from the sales of products, the company will also be able to keep the prices of products sold through. its e-commerce platform under control.
Originals for Amazon prime:
One of the leading competitors of Amazon Prime is Netflix, whose leading strength is its vast set of original movies and TV shows. Netflix is also the leader in online streaming industry. However, if Amazon wants to grow its influence and market share in online entertainment, the company should add more of original movies and shows. This will help grow the Prime memberships and will also help Amazon strengthen an attractive source of revenue. It’s true that Amazon might need to increase the prices of Prime membership which is currently only a fraction of what Netflix charges, the company will still be able to increase its profits substantially from Prime. YouTube is the leading source of videos for the US audience. However, it is different from both Netflix and Prime which only stream movies and TV shows. However, according to Statista, while the number of average monthly users of Netflix was 46.5 million in September 2019, that of Amazon Prime was only 16.5 million. Amazon can grow viewership fast but then like Netflix it too would have to focus on growing tis selection of original content to appeal to viewers globally.
Expand AWS network in emerging markets:
Amazon is the leader in the cloud industry. However, to grow its penetration of the global market, the company needs to focus on the emerging markets. It will have to grow its cloud infrastructure in the emerging markets. Markets like India present a significant opportunity before AWS. Amazon is already planning a major investment in the Indian market that runs into several billion dollars. Apart from India, AWS is also planning to expand AWS regions in other countries, including Japan, Indonesia, Spain, and Switzerland. AWS has 77 availability zones and 24 infrastructure zones globally. In India, AWS is planning to launch a new AWS zone in Hyderabad by 2022. For quite some time, Amazon has been growing its investment in India, and in 2020 it announced that it was investing $1.6 billion in two data centers, which are planned to be established in Telangana.
Amazon can also create more growth through diversification. The company has a strong presence in the e-commerce and cloud industries. However, in the entertainment sector, while Amazon has a significant presence through Amazon Prime, it will need to make an extra investment in this area to grow its penetration of the global market, which is currently dominated by Netflix. Amazon is also said to be diversifying into other business areas including internet connectivity and self-driving cars. Amazon announced in June 2020 that the company planned to acquire Zoox, a California based company that works to design autonomous vehicles from the ground up. While Amazon has not made the terms of the deal clear, according to sources, it will pay more than $1.2 billion to acquire Zoox. Amazon is reportedly also plannign entry into broadband services. It has named the project Kuiper and received FCC’s approval for the project in July 2020. As a part of this project, Amazon will build a low earth orbit (LEO) satellite constellation of 3,236 satellites capable of providing reliable, affordable broadband service to unserved and underserved communities around the world.
While Amazon is one of the world’s largest companies, it is also facing significant competitive pressure in various areas. Apart from e-commerce, the company is also facing growing competitive pressure in the cloud and online streaming sectors. In the e-commerce sector, several local players worldwide present a threat to Amazon’s business. For example, Flipkart in India and Alibaba in China are among Amazon’s leading competitors in e-commerce. Walmart has also been strategically investing in e-commerce over the past several years and has grown its share of the US e-commerce market. Walmart is now the second-largest player in the US e-commerce. Its market share is still much smaller than Amazon, but the company has been able to grow its market share with time. Microsoft Azure and Google Cloud are among the most significant competitors of AWS in the cloud sector. They have also acquired some influential deals recently. While the cloud industry is growing fast, Google and Microsoft are also working aggressively to grow their market share.
Regulatory pressures have kept growing in the tech industry as governments in the US and other nations are keeping a tight vigil over their actions and strategies. The size and cloud of businesses like Amazon, Apple, Google and Facebook has become a cause of worry for the government in the US as well as other regions including Europe, and Asia Pacific. In 2020, the US government has intensified its antitrust action against the leading tech players. While these organizations have access to a vast pool of data, their ability to set the rules of the game and control the game, as well as stop their competitors from gaining opportunities can lead to unbridled power that hurts free competition. The antitrust committee presented several such concerns in its report this year. In October 2020, the U.S. House Judiciary Committee antitrust subcommittee presented its 451 pages report and 83 pages were dedicated solely to Amazon. In brief, the report raised concerns about Amazon’s tendency to exploit the sellers, enabled by its market dominance that raised serious concerns related to competition.
HR related issues:
While Amazon has overall managed to maintain a strong reputation in terms of HR management and employee welfare, HR related issues still keep cropping up from time to time. The tech industry already faces a heavy turnover rate and companies have to invest heavily in their employees to retain them for longer. In November 2019, a group of Amazon employees petitioned the management to improve the working conditions at its warehouses. Employees worked 12 hour long shifts during the busy season and the injury rate was also high. Workers have also complained of being forced to work like robots at the warehouses handling work that can be very complex for a human being. Apart from that safety related concerns also abound at these warehouses. These concerns have again grown highlighted during the coronavirus crisis. While several warehouse employees in areas severely affected by the virus simply left their jobs, Amazon’s warehouse workforce has grown its efforts to win better pay and safer working conditions from the management during the crisis.
A few last words:
Amazon has achieved astounding growth during the past few years. Particularly, during the coronavirus crisis, its sales have grown at an exponential rate. The company has experienced a swift rise in its e-commerce sales from its North American and International business segments. While Amazon’s e-commerce platform saw its growth rate accelerating, its cloud platform has started slowing down. However, Amazon is still the undisputed leader in both areas. The company’s profit margins have been historically low. However, the massive sales it achieves more than makeup for the lower margins. Amazon’s immense clout in e-commerce has also brought the brand under the government’s scanner. The US government has intensified the antitrust action against the leading tech brands, including Amazon. However, there are other challenges before Amazon, including that of the counterfeits on its platform due to which brands like Nike dropped off from Amazon’s e-commerce platform. Still, 2020 is proving to be a highly profitable year for Amazon when it has experienced enormous sales growth. The changes Coronavirus has affected will stick. It has altered consumer behavior worldwide in ways that will favor brands like Amazon in the future.