Amazon…From Earth’s Biggest Bookstore To The Biggest Store on Earth?

The Robin Report - Issue 11 - AmazonJust like the original “Pacman” of the earliest video games, chomping through all of the pac-dots to victory, Amazon appears to be rapidly chomping its way to becoming the biggest store on earth by taking on every product and service category within its reach.

While Amazon’s first slogan “Earth’s Biggest Bookstore” did describe the business they were in, it did not describe the vision of the business they are becoming. That vision, as defined by Amazon’s founder and CEO, Jeff Bezos, had no boundaries, and apparently still does not. Books were always just the beginning in Bezos’s mind.

Furthermore, one might say that it is Amazon, not the Internet, that is changing the face of retailing today by changing the way consumers shop and buy. If the Internet is a fundamental globally disruptive, game-changing event, then Amazon is its most disruptive pioneer.

The company has singlehandedly changed consumer behavior: “running an errand” replaced by “going online;” instantaneous price-shopping from one location; actually bringing retail closer to a perfectly competitive marketplace. Amazon also paved the way to meteoric e-commerce growth for all other retailers by making consumers comfortable with it. Conversely, Amazon has already put Borders and other retailers out of business. Who’s next? Or who will be forced to completely change its model in order to survive?

Indeed, the Internet by itself is just a tool, albeit one for which its uses are still being discovered, with Amazon leading in such discovery. Bezos has stressed the point that Amazon must provide enormous added value to change consumers’ shopping behavior. In fact, early on he called the Internet “a primitive infant technology.” By now, of course, Amazon has taken that technology light years beyond its infancy, but, would concede there are light years remaining for its growth.

So, how big is Mr. Bezos’s vision of the “biggest store on earth?” Who knows? And I would suggest that even he does not have a volume number in mind. Currently, Walmart holds the “biggest” position, at almost $450 billion, against Amazon’s $34 billion in 2010. However, one must note that “Pacman” has grown a blistering 300% since 2006, (vs. Walmart’s growth during the same period of 21%), and is expected to hit about $50 billion in sales in 2011. And, while Walmart has 200 million visitors a week, Amazon is now hosting over 300 million per month, based on comScore estimates, and saw its traffic rise by 15% on Black Friday weekend. Amazon now has an over 20% share of total worldwide e-commerce traffic. Also, more than half of Walmart’s revenues come from groceries and other nondiscretionary items, categories that Amazon has not even attempted to break into.

And, as far as Bezos is concerned, it is still “Day 1” at Amazon, as quoted in his 2010 Annual Report letter, which contained, as do all his Annual Letters to shareholders, a reprint of his original 2007 “Day 1” declaration.

So, how long does it take a $50 billion business, growing at a 300% pace every five years, to reach $400 billion in sales? You do the math. Answer: it’s about 8 years.

Furthermore, Amazon is growing beyond just being the biggest store on earth to being the biggest marketplace on earth where anybody and everybody can set up shop.

“Get Big Fast” and “Omnipotent – ize” the Consumer

As pointed out in Robert Spector’s book Amazon.com: Get Big Fast, Bezos, from Day 1, focused on two things: 1) getting “big fast;” and on 2) making Amazon the “most consumer-centric company on the planet.”

Click to See Chart Full-Sized

Founded in 1994, Amazon went public in 1997, and by 1999 its stock had rocketed up 5600% without making a penny in profits. When asked at an annual shareholders meeting when they would be profitable, Bezos’s response was deafening in driving home his crystal clear, long term vision and how he planned to fund it. First of all, he did acknowledge to all shareholders and investors that he understood the imperative that long term a business must trade on a reasonable (price/earnings) multiple, and that market cap must reflect the current and present value of future cash flows.

Having given that nod to the traditional investing mindset, he then very clearly stated his strategic vision: that Amazon was focusing on investing in all of the “insurmountable opportunities” provided by the Internet, where e-commerce sales were growing at 2300% a year.

Essentially, from a fiercely competitive perspective, he was saying that he intended to rapidly scale the business in the wild new Internet frontier, where survival of the fittest was a harsh reality.

In short, “get big fast” was his mantra (also an imperative to accomplish his vision). And, Amazon would not turn its first profit until the third quarter of 2001, however meager at $350K, or 3% of net sales.

His long term vision continues to this day, extending out even longer. Quarterly earnings are not the drivers of his vision. Investing in “getting big fast,” is. Share gains now mean profits later. His belief is that first movers can get big fast if they focus more on gaining share of a totally new market than worrying about revenues.

Now, 10 years since turning its first profit, and some 18 short years into the wild west of the Internet, Amazon continues to make money, albeit not much: a five year operating margin of only 4% vs. an average of 6% for department and discount stores. So, it’s apparent that Bezos believes there is still an enormous number of “insurmountable opportunities” in e-commerce, as Amazon keeps investing in acquiring, expanding and innovating itself to ever-greater volume and share. And, those investments pay off in another way. With no physical stores and faster inventory turns, Amazon’s five-year average return on invested capital is 17% vs. traditional retailers’ average of 6.5%. This gives Amazon a market value of $100 billion, which is about equal to that of Best Buy, Staples, Target, Sears, JC Penney, Macy’s Nordstrom and Kohl’s combined.

And, if there is any doubt about share dominance, check out the accompanying chart and Amazon’s whopping number one share of e-commerce sales at 35%. The “runner-up,” Staples at 10%, is not even close. Also notice that Walmart and Sears are the only traditional, broadline retailers that even made the cut, so to speak.

By the way, another strategy often used by Amazon, particularly for new products like the Kindle or Fire e-readers, is to set an opening price below cost, in effect, losing money to grab dominant share of market “fast,” knowing they will make it up on book sales. They will also use hot selling items as “loss leaders” for the same objective: remember the pricing “share wars” against Walmart and Best Buy over flat screen TVs.

How to Define Big and Fast

So, how does one define “big” and “fast?” Well, both are relative. Many would say that at an estimated $50 billion in 2011 sales and having grown at the rate of 300% over five years, Amazon is certainly big and has grown really fast, at least for a retail business. However, relative to Walmart, Amazon is not yet that big. On the other hand, compared to Walmart’s early days following its launch in the 1960s, Amazon’s scale speed is mind-warping.

To put it in a more understandable context, think about the fundamental new retail model facilitated by the Internet, (kind of like from horse and buggy to automobiles). For roughly 50 years Walmart has grown primarily by opening new stores and/or selling more goods out of existing stores. Both require huge investments in money, human capital, and time. Conversely, Amazon’s stores already existed, housed in the millions of personal computers around the world – located not across the street but adjacent to each consumer’s keypad, literally at their fingertips. Thus, Amazon reaches a vast global audience, instantaneously, from one central location, with most of its costs fixed (except for order fulfillment and customer service).

Think about it. Just as Henry Ford introduced assembly line production of automobiles and got “big fast” to own the number one share of that new frontier, Bezos is doing the same in the new Internet frontier. But, rather than manufacturing more cars faster, or opening one or more physical stores as fast as Walmart may be able to, Bezos can literally put anything and everything known to mankind into the Amazon marketplace instantaneously, and for incredibly low costs. And then, of course, Amazon delivers whatever is ordered, often the very next day. Thus, it gets even bigger, faster.

Bezos’s vision has no end, because the Amazon model is limitless.

The Omnipotent Consumer

Bezos’s other mantra: making Amazon the “most consumer-centric company on the planet” is the absolute driver of every new technology, system, process, and web innovation that Amazon creates under their “SOA” (Service-oriented architecture), which they initiated early on, and which has now become the buzzphrase around the Internet.

In last year’s annual report Bezos writes: “Many of the problems we face have no textbook solutions, and so we – happily – invent new approaches. Our technologies are almost exclusively implemented as services: bits of logic that encapsulate the data they operate on and provide hardened interfaces as the only way to access their functionality. This approach reduces side effects and allows services to evolve at their own pace without impacting the other components of the overall system.”

At the end of the letter he says: “As always, I attach a copy of our original 1997 letter. Our approach remains the same, and it’s still Day 1.” And, his first two commitments read: “We will continue to focus relentlessly on our customers,” and, “We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”

Bezos has also said: “When people ask me if our customers are loyal, I say, ‘absolutely, right up to the second that somebody else offers them a better service.’” Bezos repeats: “that we were going to obsess over our customers and not our competitors.”

And, following is a sentence out of Amazon’s general description of their business: “We seek to be Earth’s most customer-centric company for three primary customer sets: consumers, sellers, and enterprises.” Here again, this statement embodies Bezos vision beyond just Amazon as a store to a mega-marketplace, as he includes “sellers and enterprises” as customers he aims to please.

And, of course, all three customer sets can be pleased by Amazon’s superior execution of convenience, price and service, comprising the most significant competitive advantages for Amazon. While the convenience of Internet shopping works for all competitors, Amazon has not only aggregated the broadest selection of merchandise ever on one site (truly a one-stop shop), it is also quickly and easily navigable (no more than three clicks to find anything). Further, they invented “1-Click” checkout and an online system that permits customers to exchange unwanted gifts before they even receive them.

While all Internet players have pricing advantage over traditional retailers, (also enhanced, so far, by not having to collect state sales taxes where they have no physical presence), Amazon has further advantage, again, by the ability to leverage their scale and sheer breadth of products to win share by losing margin, potentially to be offset by higher margins in other categories.

Bezos also had a philosophy about competitive pricing that was indicative of his visionary way of thinking. In the Spector book, when asked if he worried about online shoppers having ready access to information that lets them compare prices among all retailers, he answers: “….it’s a concern in one sense, but it’s a concern in the way that gravity is a concern for Boeing.” He goes on to explain this will be the way of e-commerce. “Customers are going to have near-perfect information. The merchants who don’t understand this, and don’t build their business plans on that basis are, I think, going to have the most problems.” And, are they ever.

Service in retailing has many components, and while e-commerce cannot provide the human “touch” of sales associates in a physical store (although it’s hard to find), they can make up for it in other ways. And, Amazon is always raising the bar. Not only the convenience, 1-Click checkout and return/exchange processes mentioned above, but, Amazon knows who you are, what you like, when you bought something with suggestions for new selections and generally their site is customized for you.

And, if you have any issues/problems, the site makes it quick and easy for resolving them.And, by the way, if a consumer cannot find what they want from Amazon.com or any of the other sellers, brands, and/or retailers on the site, Amazon’s “All-Products Search” search engine will locate it elsewhere on the Web, and the consumer might often be led to a competitor’s site. Of this, Bezos said also in the Spector book: “In the categories where we are selling things directly, if we can’t be competitive, then we shouldn’t be standing in the way of our customers” – consumer-centric, indeed.

And, just as quickly and easily as you can navigate, select and purchase anything you want, wherever you are, Amazon can deliver it, free of shipping charges, over night through their Amazon Prime program. This capability is largely made possible by Amazon placing their roughly 15,000 U.S. distribution centers in close proximity to UPS shipping facilities. By the way, Amazon Prime is another example of Amazon forcing the entire industry to change.

I must say, however, that while the on-site shopping and buying process is convenient, quick and easy, the visual presentation of the brand and its marketplace is very utilitarian, and frankly very stale when compared to most other e-commerce sites. If Amazon has some research that found consumers identifying the look and presentation as compatible with their image of Amazon as a low price commodity provider, so be it. On the other hand, as they expand their marketplace, including more upscale brands, they would be well-advised to re-image and modernize the style and look of the site.

Tomorrow the World

Amazon Acquires UPS, Controls the Entire Publishing Industry, Launches Thousands of Neighborhood Showroom Stores

Does this sound a lot like vertical integration? It sure does. And, I believe Amazon through Bezos’s vision is going to pursue such strategies in several areas. If you think about “preemptive distribution,” as defined in our book The New Rules of Retail, Amazon can “retail” the entire world. It is a key tap away, 24/7, in front of millions of consumers’ faces, first, faster and more often than its physical competitors, and can deliver over night through their proximity to UPS. Well, why not acquire UPS (market cap of $69 billion)? Think not? Think again.

Actually, Amazon is also redefining “competition.” If Amazon is a marketplace, (or “mall,” using the vernacular), no one is a competitor. Or, maybe everyone is a competitor. Amazon will allow anybody, including competitors, to sell in their marketplace. Furthermore, the Amazon brand image integrity does not confine it to serving just one consumer segment. It’s a truly democratic model, conceivably offering everything from discount to luxury sector goods without tarnishing its image. Amazon founded the MyHabit upscale designer flash sale site, which competes with Gilt Groupe, Rue La La and others. By the way, as Gilt Groupe approaches $1 billion in sales and gains international coverage, don’t be surprised if Amazon acquires them. Having tested consumer desire for flash sales through MyHabit.com, why not own the market leader, just as it tested Amazon customer appetite for shoes before acquiring Zappos?

And, regarding the second of the three “new rules” in our book: value chain control; what about Amazon’s recent launch of its hard copy and electronic book publishing business? Headed by a publishing industry veteran, Laurence Kirshbaum, it is already wooing best-selling authors. As it grows that business, Amazon has the potential to disrupt and change the entire publishing value chain, beyond just the retailing link it has already altered. One of Amazon’s top executives was quoted in the WSJ: “The only really necessary people in the publishing process now are the writer and reader.” Whoa! Are we talking the “way of the buggy whip” here, for traditional publishing houses, agents, printers, etc.? Well, this is all about value chain control and dominance as well as gaining greater preemptive distribution capabilities, as outlined in the book.

What other industries might Amazon disintermediate, vertically integrate and control? Use your imagination and while doing so, keep in mind that Bezos’s vision and the Amazon business model have no limits.

Finally, and the third of our “new rules,” as a pure e-commerce model, Amazon has so far not been able to provide consumers a neurologically connecting, real-world, physical experience. And, while they have succeeded in creating a great experience online around service, convenience, and price, the “touchy-feely” all senses environmental experiences provided in physical stores, like Abercrombie & Fitch, or Apple, for example, simply have not been possible online.

Well, I believe that is about to change. And, I believe that Walmart and many other brick and mortar retailers will soon feel that “Pac Man chomping” sound on their backside. One reason: with some 15,000-plus distribution centers in the U.S. (10,000 internationally), and with the state sales tax break soon to disappear, how can one not see a simple and logical extension of those centers into small neighborhood showrooms, stocked with samples of local consumer preferences, (since Amazon’s data base is said to be larger than that of the Pentagon with knowledge of what brand of jeans a working mom in Molina, Illinois wears)? And, there might be screens for further shopping and ordering, all in an experiential environment: coffee, music, and so forth? In fact, if you cannot imagine this, a former top executive of Walmart has confided that this is one of Walmart’s biggest fears.

On top of the threat of Amazon competing in the behemoth’s own “back yard” so to speak, with brick and mortar stores, Bezos’s Day 1 vision means Amazon will certainly continue to add products and services at a blistering pace and into infinity, because the business model has no limits.

Are you beginning to get the concept of no speed limits and no size barriers for Amazon? Indeed, their logo with the curved arrow under the letters of Amazon, starting under the ‘A’ and ending under the ‘Z’, was specifically designed to indicate everything from A to Z. Interestingly, it looks like a smile.
Amazon, as the biggest river in the world, now has its name attached to an Internet phenomenon on its meteoric rise to becoming the biggest marketplace on earth.

Welcome to “Day 1.”

Robin Lewis About Robin Lewis

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.