09 November 2012

Amazon's Strategy Problem

I used to write about Amazon often.  What's not to like - a prototypical fast growing entrepreneurial concern that created new markets and beat up the incumbents.  Nowadays, I just can't seem figure the company out.  I looked to Amazon as a big box category killer, but its' investments in new businesses and out of scope areas leaves me scratching my head a bit.  What really is Amazon's strategy?
I thought their ultimate desire was to take on Walmart.  And they were successful at it.  They surprised many by successfully building out efficient distribution capabilities.  While traditional retailers were good with logistics, they were slow to adapt to ecommerce.  Amazon has both.  In addition, online competitors were no match for Amazon's low pricing and world-class customer service experience.  They simply outperformed online and bricks and mortar competitors while taking share from both.  All of this success was compounded by the 15% overall annual growth in the e-commerce industry.  Carving out a greater piece of the pie in a growing market is a great recipe for success. So why is Amazon changing its course?
Traditional ecommerce is now on the backburner. Apple, Netflix and other projects seem to be on Bezos' mind.   I realize that digital products may pay off over time given their better margins, but isn't it a distraction from their core business?  Amazon Web Services (AWS) is a great growth story, but what does it have to do with diaper sales ?  From buying companies that build distribution robots to its recent decision to open an online bank, they seem to invest time and money into anything and everything.  
Business Schools tell you to pick a strategy and focus on building strengths and a sustainable advantage around it.  Trying to to do too much could leave a firm "stuck in the middle."  Apparently Jeff Bezos never got the message.  Does Amazon have the management discipline and capability to run seemingly disparate set of businesses?  These are not separate portfolio companies that run independently - they all seem to tie in somehow to Amazon's special sauce. I just can't figure out how.
Unseating Walmart is a full-time job and retailers are catching up (Walmart's online and site to store capability is really good).  Amazon's sales tax advantage is gone.  Online competitors are better funded and managed now.  My anecdotal experience on Amazon's site shows prices creeping up and the service experience dropping.  The sky is not falling, but Amazon does seem to be putting its core business at risk by delving into other endeavors. 
One thing I can say is that it is hard to bet against Amazon.  Their recent operating loss for the first time since 2003 has spooked many investors, but makes no difference in the long run.  Amazon has consistently defied the odds for so many years that quarterly results and business school textbooks may not apply in the end.  With its execution so good in core retail, I thought that Amazon's Seattle Headquarters should point at Bentonville not Cupertino.  Perhaps Bezos' quest for worldwide domination leaves room for both - its just hard to see a clear path to it from here.


  1. Interesting question on core strategy and how much you want to perhaps let on to the market. Hindsight is 20/20 - but most pegged AMZN as a book seller probably a decade ago... they aspired for more - but never fully articulated it. To your point, I've noticed similar changes in terms of customer service - which IMHO will likely lead to margin expansion as people are locked into AMZN for Prime, staples such as diapers, and probably Instant video for kids stuff(extensive selection of Dora and Diego).

    I agree they have a lot that they are spending on that shareholders should ask questions about (e.g. content creation, online bank) - perhaps even AWS... But their PE multiple is still insane so someone believes in the multi-faceted story. I do know if the stock take a dip - I'll be buying some AMZN

  2. Good point. Amazons pe multiple is still ridiculous despite its missteps. I don't really think they have a real hidden strategy per se, It seems they are doubling down on digital products and streaming media. With such competition, I just don't see why they wouldn't continue to invest where they are strong. I liked the ecommerce story and not so much the kindle one.

  3. Amazon's early successes ultimately stemmed from their first mover advantage. Of course, they executed well, but I wonder if they are trying to recapture that feeling again? They obviously feel the new sectors they are targeting will eventually enhance their bottom line, and I have no problems with them pursuing new businesses if they can continue to execute and if they have the funds to do so. A business cannot ever solely rely on what they used to do; they have to adapt to remain relevant in the ever changing world.

  4. Good point. Certainly amazon was first in a lot of fronts and took advantage of it with good execution. At some point you have to build a competitive advantage based on strength rather than chase the next fad. In this case some of amazons moves (ie kindle) are not innovative at all and are moving into an already crowded field.

  5. I believe the purchase of Kiva Systems was for the purpose of lowering the costs of their fulfillment centers for their core business while at the same time preventing their competitors from taking advantage of Kiva System's services (as I believe there are not too many in that space). Seems like quite a smart purchase, take a look at the videos of Kiva's Systems at work. Very interesting. The age of mass automation to the next degree is on it's way. And yes the PE multiple of amazon is still insane, but it always has been. And on a user note, I am quite satisfied with many of their services, I use Amazon Prime, pay for their cloud storage service, pay for video content not included in amazon prime, love giving them feedback on the products I've ordered from them in the my account section of website, enjoy browsing the site every week or so, am highly considering buying that kindle paperwhite reader this december, would maybe consider the kindle fire over the ipad mini, and still love their super friendly, efficient service when you have to return something or something is wrong. I just really like how they operate and the products and services they offer, so I will continue to buy their stock.

  6. Good point on Kiva - it was a classic of buying a strategic supplier. But how many different directions and deals can Amazon do without losing focus on its core strengths? Also - it becomes a capital allocation question when resources become limited. As long as AMZN continues their torrid sales growth and keeps their high PE, then all is good. Watch out though if the rope the investors gives starts to shorten.

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