Amazon: Gorilla Mode – The Foundation
Jeff Bezos, who undoubtedly has a great public relations team, asserts in almost every interview that Amazon currently has three pillars: Amazon Marketplace, Amazon Prime, and Amazon Web Services. While these pillars are useful in categorizing revenue, we’ve found it helpful to explore the foundational cornerstones of what enables Amazon to compete in almost any industry it chooses.
Some of these cornerstones are tangible, some revenue-oriented, and some are more philosophical. All contribute to the company’s operational heft and market dominance.
CUSTOMER-OBSESSED
Bezos has talked at length about Amazon’s strategic vision. It all centers around the customer’s needs. The company mission statement starts, “We seek to be Earth’s most customer-centric company…” This approach may sound fairly intuitive on the surface (who doesn’t put customers first?), but few companies could claim to take the prioritization as far as Amazon does. And it admittedly sometimes makes others involved (i.e. third party retailers, employees) unhappy in the process. If it’s right for the customer, though, it seems to be right for Amazon, and the loyalty data suggests it pays off for them in spades.
Bezos focused on customers before the first line of code was written. He recalled a tale told by one of his instructors, Richard Howorth, owner of one of the largest bookstores in the country at the time, from the four-day book-selling seminar. A person in Howorth’s bookshop was unhappy and a lower-level employee came to get him to help smooth things over. The woman’s car had been parked outside the bookshop, and mud had somehow gotten on her car. She wanted to know who was going to clean it. He offered to take her to the car wash. When the car wash turned out to be closed, he took her to his house, got a bucket, and washed the car himself. As Bezos puts it, “That day I realized how far you have to go to please a customer. And then I decided to make sure Amazon was customer centric.”
Being customer-obsessed means constantly analyzing feedback loops. Bezos gave Charlie Rose this example for expanding product categories on Amazon:
“I sent an email message out to the customer base, actually a thousand randomly selected customers, and I said, besides books, music and video, what would you like to see us sell? And the list came back incredibly long. It was basically just whatever the person had on their mind right now. One of customers said, I wish you sold windshield wipers because I need windshield wipers for my car. A light kind of went on in my head. You know, people -- people will want to use this new fangled e-commerce way of shopping for everything. Because people are very convenience-motivated.”
Being customer-obsessed also means constantly advancing the customer experience and benefits, never claiming it is “good enough,” even if changes make it harder for those on the supply and sales side of the equation. One example from this summer is changing the company’s promise of “Hassle-Free Returns.” Prior to October 2017, the “hassle-free” part applied to any item sold by Amazon, but not necessarily those sold through the Amazon Marketplace. The Amazon Marketplace is a major contributor towards Amazon’s scale of offerings and price competitiveness, and therefore an important partnership population for the company.
After October 2, 2017, third party sellers in the Marketplace are required to offer hassle-free returns. If you’ve ever reviewed an income statement for a retailer, you know returns are costly. The fact that Amazon is requiring third party sellers to accept returns, and in some cases without a physical return of the product, is a cringe-inducing change for third party sellers, but will undoubtedly please customers.
What’s important to Amazon is how all this customer obsession pays off. The continuous annual revenue growth is one indicator, but perhaps Amazon Prime is the most pointed. At $99 per year, it’s a quantitative commitment from an estimated 64 percent of American households, 75 percent of households earning $112,000 per year or more. For many, being Prime has become as much a utility as a smartphone and more of a utility than cable.
And Primers are telling their friends and sticking around. Consumer Intelligence Research Partners (CIRP) estimates that there has been a 38 percent growth in the number of Prime accounts just between spring 2016 and 2017. CIRP also estimates that 73 percent of 30-day trial subscribers convert for the first year of membership, 91 percent renew for a second year, and 96 percent renew for a third year. That’s astounding.
Most notably (and hardest to copy) is that the obsession is based on developing a long-term relationship with the customer. Amazon isn’t concerned about you specifically buying your next two books from them, although they will most certainly make recommendations. They want to be your default purchasing engine for decades to come.
SEARCH ENGINE
Why do over half of Americans (62 percent among 18- to 29-year-olds) start their online purchase searches on Amazon? Convenience and inventory.
If you’re looking for a product, you already know where to find it. Amazon knows your credit card, address, browsing history, and purchases. This is the data that makes one-click buying possible. This is the data that makes imitation impossible.
What enables Amazon to offer so much is the Amazon Marketplace. Over half of product offerings come from third party sellers. Meaning, Amazon is a monstrous distributor. In the same way department stores and superstores curate products from multiple brands in physical locations, even, for example, two visually identical white shirts at different price points, Amazon has done so online for the last two decades. As Andreessen Horowitz’s Benedict Evans put it,
“Half of their business is actually is taking margin on something someone else is selling - that they don’t even set the price on.”
Beyond the estimated 398 million products is all the supporting information. Customers can make a better informed decision online than in a store, talking to a salesperson. Of course the price is listed, as well as any known cautions on available inventory. There are also product specs, descriptions, pictures and video, and frequently asked questions.
Then there’s social proof. Ratings and reviews are a fascinating subject unto themselves, but Amazon has normalized the peer-to-peer process for everyday items. Amazon has equipped the customer with as much information as possible.
Think back a decade. Most retailers with an online presence did not list reviews on their website. You could see the product and price, but why in the world would a brand let someone say something negative about their product for other potential customers to read in their own real estate (even if the real estate is digital)? Well, it turns out that trust is more valuable than missed sales.
Now even brands like Lululemon, which have avoided assimilating into the Amazon shopping experience, know that reviews are standard. And it’s why most of the sale selection in such websites is stocked with lower-rated items.
But what makes Amazon dominant, even if every retailer were to copy their product page design, is the scale. More customers. More options. More inventory. More reviews. More everything. When you start a search, you generally want options.
DISTRIBUTION
Perhaps one of the more under-the-radar cornerstones of Amazon’s empire is their distribution influence and resources. As mentioned earlier, the company is spending many billions on shipping. The company has more than 100 million square feet of distribution center space just in the U.S., and a coordinated program for third party sellers called Fulfillment by Amazon. But let’s begin with the transportation component.
One of the most entertaining topics to hear Bezos speak on is shipping. As he told Recode’s Walt Mossberg in 2016,
“No [we’re not aiming to take over the last mile]...
We’re aiming to supplement it in any way we can…
We are driven to supplement their capacity…
We will take all the capacity the U.S. Postal Service and UPS [can provide], and still we’re supplementing as long as you guys keep shopping.
[Turning to the audience] Thank you.”
In essence, Bezos is saying they use everything available, but still need more.
Within the U.S., it is estimated that Amazon ships about 40 percent of its packages through the U.S. Postal Service (USPS). Boxes now make up roughly 25 percent of USPS revenue, a dramatic increase that trends alongside growth in online shopping. But the USPS gives Amazon a major discount for funneling the volume. It’s so significant that it’s questionable whether it even covers the costs. A Citigroup analysis in April 2017 said that if package costs were to cover their “fair share” of USPS system costs, each delivered box would cost approximately $1.46 more.
But volume is volume. USPS wanted it so much that in 2013 they offered to start delivering packages on Sundays. These days, it’s pretty normal to see postal trucks in neighborhoods on Sundays. One arrives at my house almost every Sunday.
For their part, Amazon stated, “Our partnership with USPS is reviewed annually by the Postal Regulatory Commission... The Postal Regulatory Commission has consistently found that Amazon’s contracts with the USPS are profitable. Amazon has invested hundreds of millions of dollars in a network of more than 20 package sortation facilities that inject directly into the USPS last mile network bypassing most of USPS network. This investment resulted in more efficient processes as well as thousands of jobs and related economic benefits in local communities.”
So let’s just say there’s mutual dependency in the Amazon-USPS relationship. The same is true with UPS, the largest package delivery company in the world, which delivers 19.1 million packages per day.
One of the more interesting recent developments in regard to UPS is the company’s 2017 introduction of holiday surcharges. While the fees themselves are nominal, they occur around two important online shopping periods: Black Friday and Christmas. Amazon will pay surcharges alongside every other retailer, but as Motley Fool’s Rich Duprey put it in his article, “Because of Amazon's size and scope, it has the financial wherewithal to absorb the fee increases, whereas small and medium-sized businesses trying to compete with the e-commerce king do not. If they absorb the fees, these smaller rivals risk their profitability; if they pass them on to customers, they risk losing sales.”
It’s between a rock and a hard place for the average retailer, while Amazon has scale, strategic agreements with USPS and UPS, along with it’s own, growing shipping network.
Bezos may not want to be a direct competitor in last mile delivery, but his company is certainly not going to stand by and let customers wait longer for their packages. That would be against the mission statement, remember?
Amazon has been stocking up in the logistics department. On the transportation side, they lease more than thirty Boeing 767s, own thousands of 53-foot trailers, and have a dedicated air hub based in Wilmington, Ohio.
Perhaps more important is the growing physical space from which they can organize and distribute products. On the customer-facing side, there are Amazon Lockers, Whole Foods, and Prime Fresh delivery trucks. Internally, they have millions of square feet in warehouse space, a luxury few can afford. Most of this space is in fulfillment centers, but they also have sortation centers and specific Prime Now warehouses to speed up delivery.
Amazon regularly experiments with distribution. As one example, an interesting concept being tested is the Treasure Truck. In some ways this seems like the return of the traveling salesman who arrives in town with a novelty everyone needs. The gist of the concept is that Amazon handpicks an item to sell at a deep discount, arrives in a city with a truckload of said item, and then invites subscribing Amazon customers via text message to buy one from their mobile device, and come pick it up. That’s right, the customers come to the truck. But Amazon of course makes it fun by turning it into a social event, complete with celebrities, food, and interactive experiences. It sounds like something from a hip SF-based startup and not a retailing giant. But, that’s what makes Amazon so special.
If early signs at Whole Foods are an indication, they will also be experimenting heavily with what 456 brick and mortar stores in higher income areas, along with other real estate, can mean for the company, while continuing to alter consumer expectations for items typically bought locally (i.e. produce). They’re also working to extend the physical use of space by accepting Amazon returns at both Whole Foods and Kohl’s.
Even with all the partnerships, acquisitions and installations in the marketplace, Amazon seems dedicated to perfecting at-home delivery. The newly announced Amazon Key program will allow Prime members to ensure that their packages are never stolen - by allowing delivery drivers to enter their home through an Amazon-powered security system.
We’re not even going to get into speculation on drones and future distributions concepts.
Just in case you’re wondering, Amazon does reportedly lose money on shipping with $11 billion in costs and only $6.5 billion in fees collected. They’re not magicians, but scale is on their side; margin is made up elsewhere.
AMAZON WEB SERVICES
The most unique cornerstone of Amazon is also one of its biggest profit centers: Amazon Web Services (AWS). On it’s own, AWS would be a mid-listing on the Fortune 500. And there’s a strong likelihood your company is one of over a million using it. If not your company, definitely one with which you interact (think Netflix, General Electric, BMW, Ticketmaster, Yelp, etc.). Even the CIA awarded Amazon their cloud business. Most experts agree that AWS is the largest hosting company in operation.
Amazon Web Services was developed within Amazon to solve internal problems associated with collaborative deployment and scaling. It just turned out a lot of other people had the same problems.
How did AWS get so large? Let’s go back to Bezos’ interview with Charlie Rose from last year:
“One of the most unusual things that happened with Amazon Web Services is the amount of runway we got, which is a gift, before we faced like-minded competition… Typically, if you are lucky, you get about two years of runway before competitors copy your idea. And two years is actually a pretty long time in a fast-moving industry… For whatever reason, Amazon Web Services got seven years of runway.”
“I think the reason that that happened is because the incumbents in technology for enterprises… thought what we were doing was just so damn weird it could never work. And so we just kept very quiet about it. And we knew it was working, you know?”
Without getting into the technical jargon, AWS offers hundreds of features and services beneficial to developing, hosting and analyzing data, websites, and systems. This pillar of the corporation is supported on the backend by secretive data centers throughout the country, which the company established in 2006.
AWS is important not just because of its revenue generation for the corporation and symbolic representation of their technical sophistication, but also because other companies are incredibly reliant upon their network. If AWS has an outage, a lot of services come to a screeching halt.
