The Economist pp7 Leaders “The genius of Amazon” “The pandemic has shown just how essential his firm has become-and that it has vulnerabilities”.
Jeff Bezos has gone from “packing paperbacks into boxes” in 1995 to being in 2020 the CEO of “a digital conglomerate worth $1.3trn that consumers love, politicians love to hate, and investors and rivals have learner never to be against”.
Over the years Amazon has become more vertically integrated building on e-commerce by adding logistics and cloud computing known as Amazon Web Services.
During the pandemic Amazon benefited from “pantry-loading” and Q1 sales rose 26% YOY. This surge caused Bezos to move back to frontline management and adding “170,000 staff, equipped with 34M gloves, and leased 12 new cargo aircraft, bring its fleet to 82". AWS cloud computing and payment systems increased Q1 sales 33% YOY.
Will the surge decline? On the surface that seems likely but for Amazon older folks have added accounts, bricks and mortar retailers are falling by the wayside and their long-term customers are likely to carryon. “High tide raises all boats” so competitors like Walmart, Target, eBay and Costco report gains as well. Another concern, in the American business tradition, lookalikes like Shopify, Netflix and UPS have “outperformed Amazon this year”.
Besides “re-energized competition” what are the other current challenges for Amazon?
“A fraying social contract”. The business model is disruptive but “There is little evidence that it kills jobs” and with a recent increase of minimum wage to $15/hour Amazon’s pay is “above the median for retail trade”.
Being accused of monopoly or unfair practices. With 40% of American ecommerce and with 6% of all retail sales, claims of monopoly are unfounded. Unfair practice is probably a softer underbelly as AWS could easily give preference to its own services versus third party.
Amazon becoming too big. Interestingly as Amazon has grown and diversified, its balance sheet has become more asset heavy. “today it has $104bn of plant, including leased assets, not far off the $119bn of its old-economy rival, Walmart”. Without AWS, the margins for Amazon are not surprisingly thin being retail and being the low-priced leader. Bezos hopes to avoid anti-trust action on AWS and seeks to “become more than the sum of its parts by harvesting data and selling ads and subscriptions”.
Going forward, it will be a balancing act for Bezos. Does he spin of AWS to avoid regulators leaving Amazon with lower margins? Does he raise prices to satisfy stockholders while risking market share to competitors?