eIQ [Guest Post]: Why Amazon Will be The First Trillion Dollar Company

Written by: Guest Post on March 29, 2017

The five most valuable companies of today account for almost $2.4 trillion in market capitalization combined while only employing around half of the people that normally attend the New Year’s Eve celebration in New York City’s Times Square.

This number may not tell us much per se but when we think that the whole continent of Africa with a population of 1.2 billion people has a combined GDP of $2.2 trillion, (International Monetary Fund) we realize that there was never a time in recent history where so much wealth was generated by such a small number of people.

If we think of these tech giants in simpler terms, we have a company connecting people (Facebook), another one organizing the world’s data (Google), one that’s aspirational (Apple) and another that makes businesses more efficient (Microsoft).

Amazon, on the other hand, is set out to become the world’s marketplace.

And even to this day, they continue to hold true to its original mission statement, which we can consider as their “Box Two”, which is to be “earth’s most customer-centric company, where consumers can find anything they want to buy online and at the lowest price” (Amazon.com).

In its annual letter to shareholders, Jeff Bezos characterized Amazon as an “invention machine” which three main pillars or “Box One” are: Prime, their marketplace and AWS. Not only will Amazon Prime members account for 50% of American households this year but they also spend more than twice as much and order much more frequently than non-members.

Members not only get free and fast delivery but other benefits such as video streaming, which in the end results in higher conversion rates and retention. The company is allocating almost $6 billion on original content next year.

With more than 63 million members spending around $1,300 each year and a retention rate of more than 90% (Consumer Intelligence Report, 2016), numbers seem bright for Amazon. We also see that last year, Amazon alone was responsible for 51% of the growth in US ecommerce while expectations are set on the fact that total global sales are predicted to reach $28.3 trillion by 2018 with ecommerce accounting for 8.8% (eMarketer, 2014).

Lastly, when looking into Amazon cloud service, AWS, we find that they lead adoption rate with 57% and around $10 billion in revenue this year. Spending on public cloud Infrastructure as a Service (IaaS) hardware and software are also expected to reach $173 billion within the next ten years – the market growth potential is massive.

Amazon ‘Box Three’

The new global logistics paradigm

Not that long ago, only a handful of retailers offered free shipping. Now, everyone is forced to try and do so, hoping they won’t run out of oxygen before it happens. Amazon has changed the rules of the game for the retail industry with its tremendous access to cheap capital that allows them to make multi-billion dollars investments in their fulfillment infrastructure.

They have opened more than 180 fulfillment centers across the globe surpassing any other retailer and only last year, they opened 28 sorting centers, 59 delivery stations and more than 65 Prime Now and Fresh delivery hubs with the intention of delivering goods to consumers in less than 60 minutes.

Amazon also offers a platform called Fulfillment by Amazon (FBA), which is a way for third-party retailers to take advantage of Amazon shipping infrastructure. FBA saw its active users grow more than 50% last year while nearly 50% of total third-party units delivered was through this platform.

To this day, the Achilles heel for Amazon continues to be its shipping costs, which account for 11% of its overall sales and have increased each year to almost $12 billion in 2015. Shipping fees collected – mostly through Prime users – are only 50% of all shipping transportation costs making this situation unsustainable in the long-run.

Amazon needs to reduce its dependency on external providers and change the role it plays in the delivery of products.

The Seattle-based company has not sat quietly and recently made of series of moves to strengthen its logistics arm:

  • obtained a freight-forwarding license through one of its Chinese contractors that allows them to sell space in cargo ships potentially becoming a sort of travel agent for freights
  • leased 40 US cargo planes that could account for 20 to 30% of its cargo volume independently
  • started testing the usage of parcel-drone delivery under the “Prime Air” platform
  • utilizes more than 30,000 robots at its warehouses
  • started delivering packages under the “Amazon” brand with leased truck trailers.

Amazon has also recently focused on its “last mile” strategy, which is the final and normally most expensive part of a package’s trip to a customer’s front door.

Amazon started to team-up with delivery startups in Europe, mostly the UK, and introduced its own crowd sourcing delivery service called “Flex” that uses contract drivers to deliver its regular packages directly competing with FedEx, UPS and if thinking about future possible business models, with Uber.

Amazon has also filed a patent to use transient warehouses that would allow smaller vehicles to access items from places other than brick-and-mortar locations.

This is Amazon’s move into expanding across the supply chain by focusing on logistics components that were previously outsourced — first inbound logistics and then home delivery.

Once they have built a sustainable and efficient transportation network over the next 5 to 10 years, others will be able to use it and Amazon will market it accordingly, just like they did with their cloud computing business.

This way of doing business is explained by Freightos CEO Zvi Schreiber in Techcrunch as being part of the development process at Amazon. First, you identify some inefficiency and start developing a technological solution internally, then as you scale that solution and it becomes a platform, you can offer it as a paid service to third-parties.

Amazon has done this for things like product development and warehousing to payment systems.

Figure 1. Amazon’s vertical integration in the supply chain (Freightos, 2016)

In the following years, we are going to see a disruptive change in the current transportation business as Amazon will not only compete domestically but it will also become a global delivery company capable of moving goods directly from China to consumers in the US or Europe through its transportation network that ranges from cargo ships to drone deliverance.

Nowadays, ocean freight continues to be mostly a “paper-based” industry with room for technological improvement with consumers keen to have faster and cheaper access to a broader range of products from around the world and merchants eager to have a broader market.

This is what Amazon believes is a unique opportunity to enter both the $1 trillion market of cross-border online sales and tap into the $350 billion ocean freight industry.

Disrupting fashion

Although most of Amazon sales comes from either books or consumer electronics, there’s one category that has seen tremendous growth over the past few years: clothing.

Amazon has invested heavily in setting itself as a fashion destination for anyone looking to buy clothing online. Many designer brands have decided to be on the platform to take advantage of its huge consumer base, its excellent supply-chain management and the fact that Amazon has promised them full price on their listings.

Figure 2. US sales of apparel and accessories (Quartz, 2016)

On the other side, we see that all major department stores have witnessed their stocks fall last year as their long-term market outlook seems rather obscure with more people turning to Amazon for apparel.

Macy’s had to close 100 stores last year and it’s said that others like Nordstrom and Sears would have to cut down around 30% their stores in order to have the same level of sales per sq foot as pre-recession (2008) times.

Amazon has shifted its initial strategy about fashion to start offering more high-end designer names in its listings somewhat successfully with “accessible luxury” brands but most higher-end luxury labels still don’t want to be associated with what they consider to be a “simple marketplace” and diminish their brand equity.

Luxury is defined mostly as a customer experience that is difficult to replicate online and by no means in a template-ized format where their listings would be next to fast fashion or lower-end brands. But this could turn out to be a good opportunity for Amazon to acquire brick-and-mortar stores in exclusive locations -Macy’s for example – and build what could become an aspirational brand in the future, much like how Apple went from being a tech company to a luxury one.

Even when they are not officially on the platform, high-end luxury brands like Louis Vuitton also have products listed on Amazon. We can see that even when their products rank higher than other prestige brands, the bulk of their sales happened in the grey market through third-party sellers.

This phenomena involves mostly apparel and fragrances brands who can’t control the flow of counterfeits or legitimate discount listings.

Amazon keeps a close eye on the volume of these listings but only for partner brands, as is the case with Calvin Klein who after signing a partnership with Amazon went from having 7,824 SKU fragrances in 2014 to only 38 one year later.

This is the way that Amazon forces high-end brands to become partners and have an official store inside the marketplace.

Amazon’s move into the fashion industry does not only involve increasing brand equity by bringing higher-end brands into its platform but also positions them as a key player.

To do this, the company has launched its own private fashion label hiring executives from top luxury fashion companies and launching seven in-house brands.

They understand that branding is shifting towards the consumer and with its loyal and affluent Prime user base,they will surpass every department store out there and become the largest clothing retailer in the US by 2017.

Amazon entering our house

In a recent conference, NYU professor Scott Galloway stated that our previous understanding of how market capitalization is made in the tech industry has completely changed in the last few years. In the past, we would argue that value was dependent on the amount of users we had and how engaged they were and we could cite Twitter as a clear example of this with its vast (but declining) user base.

He argues that the algorithm for value is now based on how many “receptors” we have,

How much user data and user behaviour patterns we can collect and what we do with this data for the consumer in terms of intelligence.

Amazon had pioneered this idea long ago when they enabled shoppers to make informed purchases through user reviews while reinforcing search algorithms. This algorithm works by comparing historical and recent sales to determine a sales rank, which it then uses to support search placement.

Based on the user recent purchases and what product listings they visited, Amazon shows a customized home page relative to each person and while they provide users with the most information than anyone else about a product, they also ensure consumers that they are selling it at the lowest possible price.

While BestBuy and Walmart change their prices about 50,000 times each month, Amazon does it 2,500,000 times each day reinforcing the idea to Prime users that they don’t have to go anywhere else to buy something online.

Almost 20 years ago, the world of ecommerce was shaken when Amazon filed a patent for a “one-click” payment system that allowed customers to avoid the hassle of entering their personal information each time they make a purchase. This patent covered a business method with such a broad definition that created an initial technological lead by Amazon for many years.

With the recent introduction of the “Dash” button, Amazon now offers these “one-click” purchases within the household as a way for consumers to effortlessly order goods for their everyday lives but have no desire to spend time purchasing it, such as cleaning detergent, for example.

This was a bold move by Amazon to lure consumers away from brick-and-mortar stores and also learn even more about their users purchase history.

At the same time, it came at almost no cost for them because 150 brands were each sponsoring their own version of the “Dash”. But it doesn’t stop there, as Amazon launched a device called the Echo that uses cloud-based AI Alexa to perform tasks that range from answering queries about the weather to controlling smart home devices and making purchases.

Alexa has recently been opened up to external developers and more skills are introduced each week by the community – over 3,000 as of now. With sales reaching 3MM units this year, even other tech giants like Google had to come up with their own version of the Echo (using “conversational actions” instead of skills), to not miss the opportunity of entering ‘our’ house.

Conclusion

Not many companies have a broader “Box Three” than Amazon does at the moment. It has the ambition to disrupt not only the retail and fashion industries but also global logistics and content-on-demand to name a few.

Amazon is already the undisputed leader in ecommerce and cloud infrastructure (“Box One”) and have an affluent and loyal Prime user base.

My prediction is that Amazon will continue to secure this user base by spending more each year on generating original content for its users. The budget for next year ranks 3rd worldwide only after ESPN and Netflix.

It will also add more special perks such as “Prime Day” and finally continue providing an ever faster and cheaper service for consumers.

As Jeff Bezos said in a recent conference, “I don’t think anyone will ever want to spend more in shipping and have longer delivery times”. These users belong mostly to upper-middle class households that have yet to shift most of the purchases they do from offline to online.

Amazon wants to capitalize on that by offering a seamless experience to users through Dash and Echo for everyday item replenishment and through Amazon Fresh and Pantry for grocery delivery.

Amazon will surely open brick-and-mortar stores that will serve as warehouses and offer curated items with a 5-star user rating along with user reviews similarly to what they currently do in its Seattle bookstore or the recently opened cashier-less convenience store they call “Amazon Go”.

Amazon Go serves as proof that vertical integration is key to this kind of disruption as no other company would have ever pulled something like that off through corporate partnership.

As only 3 to 5% of the shopping we do is actually enjoyable and we prefer to do it in brick-and-mortar stores, Amazon understands that to capture the mid-high end market, they need to transform its brand into an aspirational one. For that, they need to provide a disruptive shopping experience inside its stores and make a name for themselves in the fashion industry.

Finally, through all this user generated data, Amazon machine learning algorithms will learn our purchasing behavior over time and eventually be able to “predict” what our purchases will be, only asking for confirmation before ordering the groceries for the week.

That way, most of today’s purchases, both offline and online, will happen through Amazon thus increasing the current Prime user yearly expenditure from $1,300 to $10,000 pushing market capitalization to a trillion dollars.

By Nicolas Metallo, the original article can be found here. Editing by ecommerceIQ

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