But as retail becomes more experiential and consumers demand greater customization, Amazon's margins - and its competitive advantage - may shrink. JL
Christopher Mims reports in the Wall Street Journal, photo Joseph Nair, AP:
There is one problem with the idea that Amazon will eat the entire universe. Amazon is good at identifying commodity products and making those cheap and available. (But) 66% of the money Amazon shoppers spent world-wide was for goods sold by companies other than Amazon. The strategies that allows Amazon to continue growing will be its limitation. “If the platform needs to be one-size-fits-all across product categories, it('s) difficult to create specific experiences for different products.”
Amazon.com Inc. AMZN 1.28% is a colossus. In the near future, it could even surpass Apple Inc. as the world’s largest publicly traded company.
But whether you think it will get there depends on how big you think the market is for the products and services Amazon is best at. One secret to Amazon’s amazing scalability is this: Not everything is an Amazon business.
Amazon is the largest online retailer in the U.S. by a huge margin. In cloud-computing services, it is the world leader by nearly every measure. With the Echo speaker, it was the surprise early leader in voice-based computing, and that business has exploded as well.
Meanwhile, Amazon is leasing planes and buying semi trailers to compete with FedEx and UPS for delivery of its own goods. This year it is on track to spend as much on video content as Netflix did in 2017.
And though no one knows what Amazon will do with Whole Foods, its push into physical retail has rival Wal-Mart scrambling to match Amazon in other ways, such as e-commerce.
All of these moves fit into Amazon’s core mission as a data-driven instant-gratification company. Its fanaticism for customer experience is enabled by every technology the company can get its hands on, from data centers to drones. Imagine the data-collecting power of Facebook wedded to the supply-chain empire of Wal-Mart—that’s Amazon.
There is one major problem with the idea that Amazon will eat the entire universe, however. Amazon is good at identifying commodity products and making those as cheap and available as possible. “Your margin is my opportunity” is one of Chief Executive Jeff Bezos’s best-known bon mots. But this system isn’t very compatible with big-ticket, higher-margin items.
Could Amazon’s Lab126—famous for both the successful Echo and the failed Fire phone—ever produce something as premium as an iPhone or an OLED TV? Its success in electronics has come from driving their prices to the very bottom.
The same goes for Amazon’s other businesses. For example, could Amazon Studios, which has shown little ability to create hits, ever produce a franchise like Marvel’s Avengers or HBO’s Game of Thrones?
How Amazon Does It
Amazon now increasingly makes its money by extracting a percentage from the sales of other sellers on its site. It has become a platform company like Facebook Inc. or Alphabet Inc.’s Google, which serve as marketplaces for businesses with less reach of their own.
There are likely a million active sellers on Amazon’s marketplace, says Euromonitor International, a consumer-spending research firm. (Amazon says it has two million sellers total, but many may not be active.) In 2017, 66% of the money Amazon shoppers spent world-wide was for goods sold by companies other than Amazon, Euromonitor estimates. Amazon typically takes a 15% margin from other sellers, and can generate extra revenue by warehousing and delivering their goods, as well.
Eventually, Amazon could become the ultimate platform for retail, the “retail cloud” upon which countless other online retail businesses are built, said Juozas Kaziukėnas, founder and chief executive of Marketplace Pulse, a business-intelligence firm focused on e-commerce. “Maybe eventually you can even outsource your manufacturing to Amazon,” he added.
Amazon famously adheres to the rule that any new business should be built by a team small enough to be fed with two pizzas. These teams are “a way to scale thousands of product categories,” said Benedict Evans, partner at venture-capital firm Andreessen Horowitz, because they are nimble and can have independent profit-and-loss statements.
Think of Amazon as an umbrella company composed of disconnected and sometimes competing businesses, though critically they can access common infrastructure, including the retail platform and cloud services.
Ultimately, these smaller businesses must feed the core mission. Amazon’s video business isn’t just its own potential profit center; it’s also a way to keep people in Amazon’s world longer, where they spend more money, Amazon Chief Financial Officer Brian Olsavsky said in October. Amazon Prime Video also makes customers more likely to renew their Prime subscriptions, he said.
Whole Foods may one day prove to be a launchpad for swarms of same-hour delivery drones, though for now it’s a brick-and-mortar incentive to customers. Notice how prominently Amazon took credit for the grocery store’s recent price cuts, said Victor Rosenman, chief executive of Feedvisor, a company that helps sellers on Amazon’s marketplace price their goods.
“I grew up in Russia, and it reminds me of an old joke: When the summer is warm, they’d say it was because of the Communist Party,” Mr. Rosenman said. “They’re wanting to build awareness that thanks to Amazon, things are getting better—and cheaper.”
What Amazon Can’t Do
Amazon may be mastering commodity goods; its own Basics line went from about 250 products in 2013 to over 1,500 today. But making items widely available at low prices runs directly counter to the way higher-profit businesses work.
Amazon may be a dominant player in touch-screen tablets, for example, but to get to that position it not only undersold nearly every competitor, but it also killed off its own tablet lines that more closely resembled Apple’s iPad in quality and price.
Consider the makers of high-end handbags, which limit who can distribute their wares and, as a result, who can buy them. Not surprisingly, many of those brands refuse to sell on Amazon at all.
Yet fashion is one of Amazon’s fastest-growing retail categories, an Amazon spokeswoman says. The company recently launched Prime Wardrobe, which competes with other online retailers that ship assortments of clothes to customers and allow them to try on and return items they don’t want. The company also carries some luxury brands like Hugo Boss, Milly, AG Jeans and Stuart Weitzman.
Cloud computing might not seem to have anything in common with handbags, but Amazon Web Services has limitations similar to those of Amazon’s retail business.
Why hasn’t the massive success of Amazon Web Services hurt the revenue or valuation of its chief competitors? Yes, it’s partly because the pie has expanded so fast, every competitor is growing. But it’s also because Amazon offers a commodity—basic cloud services. Google, Microsoft Corp. and Salesforce.com Inc. offer more specialized services, and Oracle Corp., for one, charges a premium on white-glove treatment for business-essential assets.
Ultimately, the strategies that allow Amazon to continue growing will also be its limitation. “If the platform needs to be one-size-fits-all across many, many different product categories, it becomes difficult to create specific experiences for different kinds of products,” Mr. Evans said.
The bulk of our everyday goods and services may one day come from Amazon, and everyone from CVS to Uber should watch their backs. Even so, there will continue to be countless competitors that would never dream of branding any of their products “Basic.”
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