A global powerhouse, Amazon has risen from a book retailer and publisher to the world’s largest online retailer. The rise of Amazon has catapulted its founder and Executive Chairman, Jeff Bezos, to one of the richest people in the world. With a proactive, entrepreneurial mindset and ethos, the future of Amazon is secure as a premier global retail powerhouse.
Throughout its lifetime, Amazon has moved from innovation to innovation, defining segments and product offerings, creating robust efficiency gains where its competitors were unable. Here is an analysis of Amazon’s strengths, weaknesses, opportunities and threats that define its corporate strategy.
1. Amazon has instant brand awareness.
The iconic “smile” created in the Amazon logo is known across the world for fast, efficient and reliable online retailing and distribution. This “smile” is present throughout its business identity and its different business silos.
The brand worth of Amazon is $415 billion. (Statista)
2. Its market position is very strong and secure.
Firmly entrenching itself as the leader in the online retailing space in North America, Amazon’s North American competition includes the likes of eBay and Walmart. In emerging markets, Alibaba is Amazon’s main rival. The position of Amazon in the market is a result of a corporate ethos of robust efficiencies that are present throughout its operations. This ensures that costing models are as low as possible, and the value to clients and partners is maximized.
Amazon holds 45% of North America’s eCommerce market share. (Fortunly)
3. Amazon is a market leader.
By investing in the future, Amazon manages to keep ahead of its rivals by ensuring near faultless service offered to both its independent partners, as well as its end-users. Its next-day Prime delivery service has so far proven to be a difficult service to compete with, and Amazon is ensuring that these value-adds will be firmly entrenched in Amazon’s offering in the years to come.
Amazon achieved a market capitalization of $386.06 billion. (Statista)
4. It uses advanced logistics and distribution strategies.
Amazon’s main retail business model involves a myriad of complexities, managing the logistical needs of its multitude of independent partners, third-party sellers and content creators. Amazon has partnered with more than 2,200 delivery businesses in the United States, which in turn employ more than 95,000 drivers. Warehousing activities are a 24/7 operation, which goes into overdrive during holiday periods and retail holidays such as Black Friday.
Third-Party sellers sold more than 3.4 billion products in a 12 month period leading. (AboutAmazon)
5. It has a large number of independent partners in the United States.
Small to medium-sized businesses rely on Amazon as a distribution channel in North America. This creates opportunities for individuals and companies across the United States and Canada to take advantage of the incredible distribution efficiencies and scale of Amazon. Due to the importance of third-party sellers on the Amazon platform, not only to Amazon but the economy at large, Amazon invests heavily into the support and nurturing of these entrepreneurs.
Amazon works with more than 2 million independent partners in the United States. (Amazon)
6. Amazon offers a minimum wage of $15 per hour.
A proponent of fair wages, Amazon has a $15 per hour minimum wage applicable to all full-time, part-time, temporary and seasonal employees in the United States. This move increased the livelihoods of Amazon’s staff, as well as made Amazon a more attractive place of work. As a result, Amazon’s competitors soon started offering increased minimum wages.
Amazon’s $15 per hour minimum wage lead to a 4.7% increase in the average hourly wage among other employers in the same labor market. (Amazon)
1. Amazon has focused on its North American market, while emerging markets are acquired by its competitors.
Emerging economies across the world offer an incredible opportunity for retailers. With a global rise of income-per-capita, technological penetration, and internet connectivity, the international marketplace continues to expand.
This not only allows an increased consumer base for digital content that Amazon provides, but also encourages market penetration for its third-party resellers. Having said that, Amazon has thus far focused on the North American market, allowing competitors such as Alibaba to gain market share in emerging economies.
61% of Amazon’s sales are generated through the North American market. (Fortunly)
2. Amazon loses revenue in some areas, including shipping.
Shipping and logistics are a massive part of the Amazon business. Whereas many online retailers charge the customer for items to be shipped, Amazon includes free shipping in many of its products. Considering that Amazon outsources 50% of its shipping services to third parties, it does not control the cost base as much as it would otherwise be able to. The result of this is a loss of revenue on the shipping portion of an order, as well as exposure to the risk of cost fluctuations in the price of shipping.
Amazon Shipping costs rose from $37.9 bn in 2019 to $61.1 bn in 2020. (Statista)
3. Amazon’s position on customer security and safety has been questioned.
Amazon’s scandals have been handled relatively well by its Public Relations team; however, there have been instances where the safety, security and privacy of Amazon’s clients have been exposed to external risks due to violations of Amazon’s own security policies.
An instance of this is the infiltration of Amazon smart devices within the homes of consumers by actors with bad intentions. Hackers managed to gain access to smart devices in peoples’ homes to listen in on the household, and communicate with members of the household, including babies through smart baby monitors.
Despite consumer data usage violations, Amazon purchased the security startup, Ring, for $839 million in April 2018. (Bloomberg)
4. Working conditions for Amazon staff have been criticized by staff.
Despite the increase of the minimum wage, Amazon has had its time in the spotlight for its labor policies and practices. Warehouses have placed increasingly stringent and burdensome working conditions on staff to ensure deliverables of its service, especially during peak times such as the holiday season and Black Friday.
Workplace injury rates at Amazon-operated warehouses are often some of the highest in the country. This has resulted in accusations of exploitative labor practices within the organization.
Amazon reported a serious injury rate of 7.7% per 100 workers in 2019. (Reveal)
5. Fraudulent reviews of Amazon products are a problem.
Amazon’s customers have historically relied on its reviews to verify the authenticity and deliverable of a certain product. This has been one of Amazon’s competitive advantages, as a product on the Amazon platform can have a few thousand seemingly relevant reviews, whereas on a competing platform, only a handful. This has given the perception that Amazon is a more trusted platform for a consumer to use.
We now know that many of these reviews are fraudulent, with some of Amazon’s top independent partners and third-party sellers accused of deploying fraudulent tactics.
Amazon removed fraudulent 20,000 product reviews. (CNBC)
6. Profitability in Amazon remains problematic.
While Amazon’s revenues are some of the largest in the world, profitability remains a weakness. Amazon Web Services (AWS) remains its most profitable business unit. An adverse event affecting the profitability of AWS will have a significant impact on the profitability of the company as a whole, placing many of Amazon’s eggs in one basket.
Amazon Web Services accounted for 63% of Amazon’s profits, at $13.5 billion. (GeekWire)
1. Amazon is well-positioned to develop a market presence in emerging markets.
With an increase in technology penetration and user uptake, an increase in internet access and in disposable income in emerging markets, having Amazon expand into emerging markets would help its existing base of third-party sellers and independent partners offer their services to a wider market. This expansion would also increase Amazon’s exposure to new third-party sellers and partners in these markets.
Amazon generates $104.41 billion in revenue outside of North America, less than half its total revenue. (Statista)
2. Amazon’s ecosystem can be improved.
Stiff competition in tech ecosystems such as the Apple smart ecosystem, the Android world and others place pressure on Amazon to improve the offering of its overall ecosystem. This will ensure existing users stay, and perhaps encourage users to move away from Apple and Android.
The number of Apps available on the Amazon Appstore decreased by 0.72% between 2019 and 2020. (Statista)
3. Amazon could include more economically-responsible programs and policies into its business practices.
Historically, Amazon has ensured that its competitive advantages are in its operational efficiency. Its logistic operations create roughly the same amount of carbon emissions as the country of Norway in a year. Amazon has pledged to use 100% renewable energy by 2030, with a net-zero carbon target by 2040.
Amazon is creating a 62-megawatt renewable energy project in Singapore capable of producing enough clean energy to power 10,000 homes. (Amazon)
4. Expanding the number of physical stores could further market penetration.
While eCommerce has surged in recent years, there is a growing demand in physical brick-and-mortar stores. Amazon has an opportunity for disruption of the traditional store model. It has said it sees the future of retail as a blended model, rather than solely online.
Amazon intends to deploy some of its eCommerce practices into the brick-and-mortar system, such as frictionless checkout. Finally, stores help mitigate the effect of rising shipping costs.
40% of Whole Foods’ curbside pickup orders are first-time users. (Amazon)
5. Utilizing self-driving vehicles would save on driver costs.
Shipping costs are one of Amazon’s primary costs. Amazon is exploring various cost-cutting options, including “hives” of drones within city limits to perform last-mile deliveries, and autonomous vehicles.
Zoox, a recent Amazon acquisition, has secured $1 billion in startup funding over 6 rounds. (Crunchbase)
6. Amazon could further its own label (backward integration).
While it has caused some controversy within Amazon’s third-party seller network, Amazon could increase the control of its products, and profits thereof, in the development of its own private-label products. A prime example of this is Amazon developing its own publishing house to service its network of existing authors.
Amazon sells 22,617 products under its own brand, up three-fold since 2018. (Digital Commerce 360)
1. Aggressive competition is occurring in most of Amazon’s markets.
Strategic partnerships and innovation in marketplaces threaten Amazon’s market share. An example of this is the partnership recently announced between Walmart and Shopify allowing a hybrid “Click-And-Mortar” experience. Furthermore, the inclusion of marketplaces on social media platforms, coupled with the rise of “influencer marketing” is further impacting the future of Amazon.
90% of consumers claim that social media influences their purchasing decisions. (Yieldify)
2. Amazon has an uphill battle with third-party sellers selling fake items on its platform.
With such a large network of third-party sellers, it is sometimes difficult for the discerning buyer to identify which sellers are selling legitimate items, and which are not. This is reinforced by Amazon’s problem with fake reviews on its products. Amazon has developed products to mitigate the distribution of fake products, but the problem still persists.
42.5% of items purchased in a controlled study on third-party sellers on Amazon were counterfeit products. (Wirecutter)
3. Governments have targeted Amazon as they contemplate policy reform to hinder its activities.
Amazon’s size has raised flags with government agencies, with allegations of fraud, tax avoidance and antitrust issues. Recently, Amazon and Apple came under fire when Amazon struck a deal with Apple to remove third-party sellers of Apple products from its platform.
Amazon has been accused of monopolistic tendencies over its third-party sellers, forcing 80% into its Buy-Box distribution network. (CNBC)
4. Amazon captures third-party data on its customers’ clients to build products under its own label.
Backward integration is a strategy that has been identified by Amazon to capture more profits through its retail platforms. By developing its own private-label products, Amazon has more control over its market.
Recently, stakeholders have raised concern over the use of third-party data to further enhance its private label products, at the cost of the owners of the third-party sellers – the generators of this data. This is seen as a lack of good faith in its operations.
Amazon anticipates that its private-label brands should make up 10% of retail sales. (Business Insider)
5. 50% of Amazon’s product distribution is handled by outsourced suppliers.
A key competitive advantage of Amazon is its ability to meet tight delivery schedules, which is built into its value proposition. Amazon outsources 50% of its product distribution which exposes itself to external risks which can impact its operations. Amazon should look at bringing its full logistical and distribution requirements into its own domain to mitigate these risks.
Amazon distributed 2.5 billion packages in one year. (Investopedia)
6. There is a continued cybersecurity threat.
Although Amazon maintains a vast database of its clients’ details, security breaches have been limited. Its cybersecurity team is known to act swiftly and effectively in thwarting attacks on its systems. Although these systems are effective, malicious attacks are becoming increasingly sophisticated.
Amazon Web Services (AWS) thwarted a 2.3 Tbps High Volume Ddos attack on its servers – 44% larger than anything the company had previously experienced. (Cybersecurity Insiders)
Although there are areas of great opportunity for Amazon, it will continue to prove its strategy and operations in the markets that it operates. Amazon has shown incredible resilience in an environment that is characterized by change and disruption. By continuing to invest in its future, ensuring a hardened efficiency in its operations, and a continued pursuit of value, Amazon ensures that it has entrenched itself as a market leader for a long time to come. As the rate of change increases, time will tell if its futureproofing will pay dividends.
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