How Amazon’s Bottomless Appetite Became Corporate America’s Nightmare
How Amazon’s Bottomless Appetite Became Corporate
America’s Nightmare
By Shira Ovide March 14, 2018
Amazon makes no sense. It’s the most befuddling,
illogically sprawling, and—to a growing sea of competitors—flat-out terrifying
company in the world.
It sells soap and produces televised soap operas. It
sells complex computing horsepower to the U.S. government and will dispatch a
courier to deliver cold medicine on Christmas Eve. It’s the third-most-valuable
company on Earth, with smaller annual profits than Southwest Airlines Co.,
which as of this writing ranks 426th. Chief Executive Officer Jeff Bezos is the
world’s richest person, his fortune built on labor conditions that critics say
resemble a Dickens novel with robots, yet he has enough mainstream appeal to
play himself in a Super Bowl commercial. Amazon was born in cyberspace, but it
occupies warehouses, grocery stores, and other physical real estate equivalent
to 90 Empire State Buildings, with a little left over.
Investors have grown to love Amazon.com Inc. despite, or
perhaps because of, its contradictions. Shareholders pushed its value above
Microsoft Corp.’s for the first time on Valentine’s Day and to an all-time high
of $774 billion on March 12. Only Apple Inc. and Google parent Alphabet Inc.
remain more valuable, and unlike them, Amazon breaks all the rules of the
modern corporation. It’s also wielding its power against an unprecedented range
of other businesses.
Bezos’ brainchild has been fast-growing, influential, and
anomalous for most of its 24 years, but it’s entered a new phase. Its dominance
can’t be contained to a few areas such as books, electronics, or even computer
networks. Remember my colleague Brad Stone’s book The Everything Store? That
title may have undersold Bezos’ ambitions. He seems to want to establish his
place in every industry. Parcel delivery, supermarkets and packaged foods,
apparel, trucking, auto parts, pharmaceuticals, real estate brokerages, makeup,
concert ticketing, swimming pool supplies, and banking are just a sampling of
the fields battered at various points in the past year because of Amazon’s
encroachment or even rumors of its interest in entering them. Amazon declined
to comment for this story.
The company has grown so large and difficult to
comprehend that it’s worth taking stock of why and how it’s left corporate
America so thoroughly freaked out. Executives at the biggest U.S. companies
mentioned Amazon thousands of times during investor calls last year, according
to transcripts—more than President Trump and almost as often as taxes. Other
companies become verbs because of their products: to Google or to Xerox. Amazon
became a verb because of the damage it can inflict on other companies. To be
Amazoned means to have your business crushed because the company got into your
industry. And fear of being Amazoned has become such a defining feature of
commerce, it’s easy to forget the phenomenon has arisen mostly in about three
years.
In 2014 everything was going wrong. Amazon introduced the
Fire smartphone, one of the bigger flops in the history of consumer
electronics. It posted its steepest quarterly loss before taxes and interest—an
ignominious milestone for a company with a history of slim or no profits.
Revenue growth in the 2014 holiday season was the second-worst since 2001, and
executives started to sound downright pessimistic, as if the business was
starting to mature or even stall. They promised the company would be more discerning
about spending on projects that might not pay off for years or decades. At one
point, Amazon’s top finance executive even tried to blame disappointing sales
on students trying to save money by renting textbooks. It was a lame excuse
befitting a stodgy company struggling to adapt, not a rising technology
superpower.
Investors lost patience. Over the course of 2014,
Amazon’s stock price fell more than 20 percent, making the company much less
valuable than Walmart Inc. or China’s Alibaba Group Holding Ltd., an Amazon
look-alike that went public that September.
A year later, however, Amazon had leapfrogged to No. 6 on
the list of most valuable companies. Since the end of 2014, its market value
has quintupled. This was a case of preparation meeting opportunity. As the
company started to clear key thresholds in several of its important businesses,
it also revealed that it was sitting on a gold mine made of clouds.
–
In April 2015, Amazon had what technology analyst Ben
Thompson called a second initial public offering. It disclosed for the first
time the staggering profitability of Amazon Web Services, which started in 2006
as an experiment to rent out computing horsepower to companies that needed it.
It proved to be a big idea that allowed young businesses to get off the ground
more quickly and cheaply than before. Large companies, notably Netflix Inc.,
also started using AWS—first for side projects, then eventually to support
essential operations.
Amazon had always been the clear market leader in this
kind of cloud computing service, but few outside the company were prepared for
just how valuable AWS had become. Inside Amazon was a division with the
muscular profit margins of Starbucks Corp. and higher annual sales than the
entire Chipotle Mexican Grill restaurant chain.
The AWS disclosure changed the way investors and stock
watchers valued Amazon. Suddenly there was evidence the company could be
consistently and nicely profitable if it chose that route. It was also among
the biggest signs that Amazon’s head-scratching investments could pay off in a
huge way. In 2015, AWS was responsible for two-thirds of total operating
profit. Last year it was more than 100 percent.
Two other long-gestating Amazon businesses also found
their groove in 2015. The company tested the loyalty of its 10-year-old Amazon
Prime program by holding its first Prime Day, a fake shopping holiday during
the summer retail doldrums. The program, which delivers fast, free shipping
and other benefits to members, gave Amazon not only a predictable stream of
membership fees but also a psychological advantage with shoppers. Once they pay
their annual dues, they have an incentive to buy as much as possible from
Amazon. A year later, on the second Prime Day, total orders rose 60 percent
above the first outing. Like Costco Wholesale Corp., Amazon had found a way to
compel customers to pay them for the privilege of buying more stuff.
The year 2015 was also a milestone for the last of what
Bezos calls his “three pillars,” as Amazon topped $100 billion in sales for the
first time. About half the merchandise sold on Amazon’s vast online mall comes
directly from the company. But the other half is sold by millions of
independent shops that open mini-storefronts on the site, a panoply Amazon
calls its Marketplace business. It’s the equivalent of Walmart setting up swap
meets in its parking lots and mixing stuff from its own shelves alongside the
pickings of strangers’ card tables. The independent merchants bear most of the
costs of distributing orders, and Amazon collects about 15 percent of the price
of their merchandise, plus more fees if they want to be, say, included in
Prime. (That’s another 15 percent.) Those rents amounted to $32 billion of
revenue last year, or about half of Target Corp.’s yearly sales.
That holiday season, Amazon recorded its first quarterly
operating profit of more than $1 billion, an achievement it’s notched five more
times since. Management theorist Jim Collins coined the term “flywheel” to
describe a virtuous cycle that makes successful companies ever more successful.
For Amazon, it took 20 years for the flywheel to kick in. Bezos now loves to
explain how happy customers (who happen to be locked in) give Amazon the ammo
to add products and cut prices, which in turn draws more customers, more
merchants, and the efficiencies to lower prices further, including by squeezing
more money from partners.
No other company in Amazon’s ballpark is growing as
quickly. Its roughly $180 billion in annual sales remains dwarfed by Walmart’s
$500 billion, but sales at the big-box retailer inched up 3 percent in the year
ended on Jan. 31. Amazon’s revenue rose at least 25 percent in 2017, excluding
sales from Whole Foods. That also means Amazon is growing faster than it did
three years ago, when it was half its present size.
All the things Amazon did before 2015 seem hopelessly
small compared with its more recent ambitions. In late 2014 it introduced Prime
Now, an added Prime tier, in New York City, promising one or two-hour
deliveries of a small variety of consumer staples. Today, Prime Now operates in
more than 30 U.S. cities and delivers a much wider range of goods, including
electronics and restaurant meals. Three years ago, Amazon owned or leased about
100 million square feet of space around the world, including 109 distribution
warehouses and 19 U.S. package-sorting facilities. Now the square footage tops
250 million, and it has 150 warehouses.
In the past few years, Amazon has also started leasing
its own cargo planes, obtained a license to handle ocean freight, and committed
billions of dollars to developing India’s nascent e-commerce market. Its
Hollywood studio collected an Academy Award, and its Echo smart speaker
basically invented a whole new product category, becoming the envy of Apple and
Google. Oh, and last summer, Amazon paid $14 billion to buy a supermarket
chain.
A few years ago, Amazon’s getting into supermarkets
would have seemed like evidence that its corporate strategy was scatterbrained
and profit-averse. After all, the company spent a decade laboring over a
grocery delivery service with little success. But the deal for Whole Foods was
hailed as a coup. That’s the story of Amazon in its new, terrifying phase:
Outsiders look at the same sorts of facts that used to prompt derision, and
tremble.
For many companies, perhaps what’s scariest is that
Amazon has lots of room to grow, even in retail. In the U.S., more than 90
percent of all retail sales still happen in physical stores. In some big
categories, including home furnishings, personal-care products, toys, and
food, the brick-and-mortar numbers are even higher. As the share of online
shopping continues to increase, Amazon seems likely to benefit the most. It’s
responsible for roughly 44¢ of every dollar Americans spend online, and it’s
now mixing in retail stores.
Besides the 470-odd Whole Foods locations, since 2015
Amazon has opened more than a dozen bookshops and dozens of mall kiosks that
sell Kindles and other branded gadgets. There are also 30 Amazon outposts on or
near college campuses, offering snacks, phone chargers, other impulse items,
and a central point to pick up packages. Some 238 cities entered bids for
Amazon’s second North American headquarters. And the company is experimenting
with a cashier-less convenience store as well as drive-through locations where
people can grab groceries they purchased online.
Just as it was difficult to predict that Amazon would buy
upscale supermarkets, it’s tricky to be certain which industries the company
might torch next. On Feb. 27, it bought Ring, a maker of home security cameras,
and shook the rest of that industry. On March 12, Bloomberg News reported that
Amazon plans to team up with a bank to offer a credit card to U.S. small
businesses, an area dominated by American Express Co. Shares of AmEx dipped
about 1.4 percent.
There are more hints in the smoke. Amazon has shown
interest in other categories of physical stores, including custom-made
clothing, furniture, and home appliances. Like groceries, those are big retail
areas that remain stubbornly offline. Amazon has also spent much of the last
several years assembling the pieces of a delivery operation that analysts say
might allow it to directly challenge FedEx Corp. and United Parcel Service
Inc., companies with combined sales of about $126 billion. And health-care
companies have been wringing their hands about Amazon’s potential foray into
drug distribution or the possibility of its becoming a middleman for
health-care benefits. Walgreens Boots Alliance Inc., the drugstore retailer,
recently began negotiating a full takeover of AmerisourceBergen Corp., one of
the largest distributors of prescription drugs. One major motivation is the
desire to outpace a possible Amazon entry into the pharmacy business.
Amazon is far from invulnerable. All the same old red
flags are there—a puny 2.7 percent e-commerce profit in North America, massive
outlays to establish delivery routes abroad—but few are paying attention.
Anyone buying a share of Amazon stock today is agreeing to pay upfront for the
next 180 years of profit. By one measure, it’s generating far less cash than
investors believe. And its biggest risk may be the fear of its power in
Washington, New York, and Brussels, a possible prelude to regulatory crackdown.
Few tech companies manage to stay this kind of dominant
for long, and Amazon can’t sneak up on anyone anymore. It has more outside
threats than ever, and there remains a very real risk that it will choke on its
own ambition. For now, however, little is being done to contain its or Bezos’
power or aims, and it’s difficult to imagine the company lacking a seat at any
table it wants. On March 7, Amazon fixed a bug that left its voice-assistant
software, Alexa, cackling aloud, unprompted. Shame—that summed things up
nicely.
—Ovide is a columnist for Bloomberg Gadfly.
Comments
Post a Comment