Amazon Faces Bright (Dark?) Future
New research from Forrester on Amazon.com got me thinking (stretching actually) about Schrödinger’s cat experiment. That’s the one in which an imaginary cat, locked up in box with an equally imaginary deadly poison, could be thought of as both dead or alive as long as the container remained closed. Open up the box and you get the answer that it is either alive or dead.
Okay, so I know that Amazon.com is clearly alive. In fact, by most analyses, it’s thriving. So where does the dead part come in?
A recent blog by Forrester’s Brian Walker discussed several scenarios whereby Amazon could face challenges that could result in a bleak, even fatal (my stretch, not Mr. Walker’s) future for the company founded by Jeff Bezos.
First, start with Amazon as an influential source of product information. Today, according to Forrester, 30 percent of all consumers begin their online product research on Amazon versus 13 percent with Google. When Forrester asked consumers the same question in 2009, 18 percent answered Amazon while 24 percent said Google.
The growing influence of Amazon makes it tough for retailers that are part of its marketplace of merchants. While Amazon is a high-traffic sales channel for these companies, it often is a competitor as well. Mr. Walker argues that Amazon has counted on affiliates to continue its growth and defections would take away one of its engines.
Another potential threat to Amazon is that it doesn’t pay very well and talent could wind up walking one day. Mr. Walker suggests that many of Amazon’s headquarters personnel joined because the company granted stock options. As Amazon’s stock price flattens out, those options will be worth less and talent may begin to seek greener pastures.
Other potential failure scenarios include Amazon getting too big to succeed, the company becoming distracted by Mr. Bezos’ side projects (such as private space exploration), and not being able to replicate its North American success in markets overseas.
So, I ask you, will Amazon stay alive? And, how did that cat make out?
Discussion Questions
Discussion Questions: What do you see as the biggest challenges/potential pitfalls for Amazon.com going forward? Where are its greatest opportunities?
None, zero, nada. Amazon will continue to dominate and thrive. Name and site recognition, best in class investment in predictive analytics, strong retention and recall practices. The list goes on. They do it all correctly. There is no weakness and where there might be it is only on the edges. Leadership is smart enough to recognize any form of attrition or dip in site use, conversion and repeat activity to respond efficiently and effectively.
They delight at every turn. Want the Paul Simon Graceland 25th anniversary boxed set? Yes. Went online, Amazon had the exclusive. I bought two — at a very expensive price point but still a price advantage and delivered without express or premium shipping nor any proprietary credit or subscription shipping in the order and got it in two days.
Want a complete set of workout equipment for muscle toning including weight bars, bands, bosu balance ball? Got it all at 50% savings vs. the inconvenience of running around to 3-4 stores.
The strength of their order processing/checkout, confirmation methods, proactive follow up post order and suggestive sell is unparalleled.
As long as Bezos is at the helm, Amazon will thrive. He keeps the company lean, innovative, and customer-focused. I have always been impressed with his refusal to think short-term despite what Wall Street wants. His strategic thinking and patience set him apart.
Amazon has shrewdly accepted sales tax laws in several states knowing it was a losing battle, but also allowing them to open distribution centers that can deliver products more quickly. Throw in Kiva, and suddenly they can do next-day delivery cheaply. The playing field is still tilted in Amazon’s favor.
All of the doomsday scenarios spelled out by Brian Walker are valid exercises in worst-case planning. But I see a few shorter-term threats that Amazon needs to contend with:
1. How and when does the company start to deliver consistent operating profit? Its gross margins are lean yet manageable, but the bottom line results are consistently depleted by its high SGA and investments in infrastructure.
2. Amazon’s key advantage (no sales tax charged to most customers) is threatened, not only by legislators looking for more revenue but also by its own growing network of distribution centers.
3. The Kindle Fire tablet faces more credible opening-price competition soon, depending on the price points chosen by Apple (for its mini-iPad) and Microsoft.
4. The “showrooming” trend has played into Amazon’s hand, but you should expect stores like Best Buy to develop successful strategies to combat this issue.
In short, Amazon is not as invulnerable “here and now” as its growth and dominance make it seem.
The two words most feared by a lot of retailers are “Amazon Prime.” As long as Amazon can beat the price of many retailers, and can deliver quickly, they’ll remain viable. And if their much-rumored same day delivery materializes, they’ll enjoy a significant advantage.
Some of Amazon’s affiliates are terrible on price, service, quality, and quirky shipping charges. Only MySears hodge-podge offerings are worse in price.
Amazon is not sharp on price anymore in certain categories like food, supplements, hardware, and even books. Out of the last ten price comparisons for various items I searched on pricegrabber, Amazon never scored in the top five and when they did, they were last, with the highest price, regardless of affiliate source. Something’s gone terribly wrong with their current model
Brian Walker should quit the speculative game and just buy some Amazon stock.
Given the Forrester statistic that 30% of shoppers begin their product search on Amazon along with the ‘showrooming’ challenges brick & mortar retailers are trying to deal with, I believe an interesting opportunity for both retailers and Amazon would be some form of affiliation/link whereby consumers are rewarded for making their purchase in-store after an Amazon search or comparison.
Savvy retailers are shifting the majority of their product SKUs to their e-commerce sights while reducing and optimizing their in-store SKUs to compliment local relevance. Perhaps there is an opportunity for both retailer and Amazon to enhance this local relevance for consumers such that both are rewarded?
We’ve all seen companies fail when they spread themselves too thin, or offer products/services that don’t fit their core. Amazon has expanded to the point where it is competitive with more products and services anyone could have imagined. In order to thrive (not just survive) they have to keep a watchful eye on many competitive landscapes and on their financial strategies. Many organizations could not manage that. However, Amazon led the way into this new vision of enterprise and so far, there’s no good reason to believe they can’t keep up the momentum.
As time marches on Amazon, eBay, and their lookalikes are becoming a thing of the past. The sudden rise to greatness and fall from favor is nothing new in the IT industry. It is in fact very much a part of the lifestyle. The key to longevity in the IT industry is powerful new and easy to use technology, speed and information; nothing else survives this market.
Any company which strays from its core mission is in jeopardy for future success. In a similar way, retaining talent is important as well as maintaining relationships with suppliers and affiliates.
It seems that Amazon operates with a culture that weakens its future position in each of these areas. For the moment, tending to its core mission, offering a wide selection of well priced goods and services and staying at the top of the list for consumers as their internet superstore, will be enough to keep it alive and thriving.
I believe that for Amazon to severely falter in the future, there would have to occur some form of “perfect storm” where several of the factors noted come into play to the detriment of Amazon.
One thing Amazon has going for it that other internet and social media companies do not is that it has actually worked out a model for profitability. That in itself gives it a big edge for survival.
The greatest challenges for Amazon are to leverage a growing mass of customer data to continue to personalize the experience for their base in a way that other companies will struggle to duplicate. This challenge is Big Data taken to the extreme, and will challenge people, processes, and technology to keep pace.
The key success factor for Amazon is customer experience — if they use the data to support that factor, they will continue to prosper.
Unspoken among these weaknesses is Amazon’s dependence on retail outlets. Perhaps because the Forrester pundits seem too often to believe in the “everything ends up digital” theory.
But essentially, Amazon has been poaching (not meant negatively — just meaning without paying for it) the opportunity for consumer to see products in retail showrooms before making an online purchase.
It’s never healthy for a company to have a hidden/unacknowledged source of critical consumer communication. With Amazon, the inherent competition with the retail outlets that also drive its business is a long-term challenge.
How much of a threat? Hard to say. Amazon’s financials are strong for a very long time. But this opens the door for retailers who are savvy enough to tear down the silo walls between internet and brick & mortar — to deliver consumers the ubiquitous shopping opportunity they want most.
None of the scenarios mentioned in the article seem like a serious threat to me. Living just up the hill from their HQ and knowing several employees personally, I see no sign of a coming wave of employee attrition. Two potential long-run threats I see are the potential emergence of unforeseen competitors and also how they deal with the post-Bezos era once he retires. Also, its possible that they go overboard with the Kindle business (a Kindle phone for example) and end up wasting too much capital and management attention on a hardware business that might not succeed in the long run. Overall though, I am still very bullish on Amazon and believe we will continue to see them innovate and grow for a good long while.
What a(n intriguing) way to start an article! And I think it’s an important topic as well, since “analysis” of Amazon frequently consists of little more than polishing its halo. Unfortunately though, Mr. Walker’s comments seem like weak tea, and the fan club came out in full force on the forum … but Richard hit the mark: as highlighted in a recent WSJ article, its biggest problem is simply that it isn’t all that profitable.
Just as Walmart is not invulnerable, neither is Amazon. However, neither are even faltering. Neither are even being challenged in any significant way by a close competitor.
Amazon will continue surprising and amazing the retail world by their ability to sell more and more items that no one has imagined. Just as Walmart has done this in bricks, Amazon is doing the same in clicks. Sniping at them, wringing hands over them, or criticizing won’t stop them. While all that is happening they will just march on.
When he had but weeks to live, Steve Jobs is said to have held one-on-one meetings with some of Silicon Valley’s young “stars.” Google’s Page and Brin got to talk to him. What he apparently told them is to stay focused. Don’t try to be all things to all people, he said. Don’t be Microsoft. And look at what Google is doing. Axing a lot of side-projects to focus on what they are really good at and what is strategic to their long term success. I think Amazon could heed this advice as well. Amazon is trying to be all things to all people. The uber merchant. The uber cloud provider. The hardware company. Problem is their cloud had had several outages recently and some customers are walking out. Merchants are now taking a strong stance against showrooming. Amazon has won the first battle(s), but it hasn’t won the war. It may want to focus on winning the wars it is involved in at the moment before it opens more battlefields. Hey even Microsoft is heeding this advice and showing focus and determination not seen in well over a decade.
My contacts within Amazon tell me in glowing terms of the a culture that is equal to Google and Apple (I know folks there as well.) A culture of getting things done quickly and smart, knowing how to triage, accountability, innovation, teams with top talent. AMZN’s cloud functionality beats Rackspace when I talk to valley developers; pretty cool! I have no stake in the game but I’d would look at more than Forrester before making any firm judgements on their future.
Until another retailer gets as serious about the single most important factor in selling — the meeting of the seller’s and buyer’s minds — Amazon will continue to have free range across the global retail space. The rest of retail is mostly logistics — exchanging goods for payment — and Amazon seems to have mastered these quickly enough.
Amazon will continue to dominate, perhaps for the next five years — or more. One significant vulnerability to their core business (online retail) lies in their user shopping and purchasing model.
How’s that? Every website and mobile app e-commerce experience is just about the same as Amazon’s — search, shop, compare, buy.
But with hundreds if not thousands of innovators gunning for the giant directly or indirectly, head on, or around the edges, a new and better model will emerge (already some hints of that now) — and like many incumbents of the past (see Innovator’s Dilemma), Amazon could either fail to respond, or will decide it will not be in their interest to respond quickly.
Insiders say Amazon has internal teams that play this out — and are assiduously focused on making sure that doesn’t happen — but odds are not in their favor, longer term.
Mr. Walker’s blog is flawed. Amazon is a retailer, and by retailer standards it pays well, has an incredible work environment, and high job satisfaction. You have to go to their HQs and work with their employees to know this. Amazon is a competitor for its marketplace listing dealers, but it brings so many consumers to its website, that any savvy dealer only has to know how to attract better sales through better warranties, short-term price discounts, product bundling, etc. to beat Amazaon at its own game.
Probably best, when going forward, not to go backwards or even to stand still.
Some great discussion and comments. Clearly an emotive topic and a very important one.
It seems to me Amazon has a model that is working very well today. Clever eh? They seem to have headroom to grow and some space to survive individual issues like some of those outlined in the article or comments. Short of Bill’s “perfect storm” I see them doing pretty well for the foreseeable future.
What is interesting to me is that the potential disaster scenarios laid out seem to be about a few things (1) product set (2) Bezos as the leader (3) financials (tax/profit etc.); none, or very few of the issues laid out or comments made are about the future of how consumers will shop. I do see a threat here. Let me explain….
It strikes me that most of what Amazon does is very much in the mold of most other retailers today only they do it digitally, they do it smarter and they have some advantages (e.g. sales tax, diversification etc.). But, they still largely operate in a “push” model of selling “to” the customer or “at” the customer.
As consumers get more savvy, more data literate and better mobilised I think this model will need to shift to retailing “with” the customer or “for” the customer. I’m not suggesting some harmonious “kum ba yah” model, but an adjustment in the dynamic that requires a greater share of the value going to the customer directly. This may only impact a small % margin, but in retail this is material.
There are a number of possible businesses that could drive this change, including new brands in the broad e-wallet or digital loyalty space, maybe even coupled with manufacturers directly. Regardless of where it comes from I believe this will present a challenge for all retailers … and Amazon won’t be immune. Will they be nimble enough to respond or could they be overtaken? In theory they have the technical agility and data to adjust, but I think this will be more of an organizational and cultural challenge. So let’s wait and see…(if this ever happens as I envision!).