|Industry||Online Retailer, Cloud Service Provider|
|Headquarter||Seattle, WA, USA|
|CEO||Jeffrey P Bezos|
|Revenue||USD 469.8 billion|
|Profit||USD 33.364 billion (7.1% net margin)|
|Competitors||Target, BestBuy, Walmart, Home Depot|
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Table of Contents
Amazon is one of the largest online retailers in the world. Started as an online bookstore, the company now offer a wide range of products, from book, music, electronic, home furnishing, clothing, jewelry, and hundreds of other product categories. Amazon also develops and sells its own electronic products, notably the Kindle e-book reader, Fire tablet, Echo, and other devices. Amazon is also a cloud service provider with its Amazon Web Service, an entertainment company with its Prime video streaming service, and a worthy competitor in the grocery business, through the acquisition of Whole Foods. Amazon’s operation is divided into three major geographic segments: North America, which is responsible for 60% of revenue, International makes up nearly 30%, and Amazon Web Service (AWS) fills the rest, about 15%. Amazon generates 70% of sales through its e-commerce platforms, 10% from Whole Foods physical stores and more than 5% comes from the company’s subscription services, including Amazon Prime membership, audiobook, streaming services, and others.
Today we are performing a detailed SWOT Analysis to understand where the company stands in 2020 and beyond.
Amazon’s Strengths 2022
World-class distribution network
A world class distribution network helps Amazon dominate the ecommerce market. The company currently operates 175 fulfillment centers where it stores, packs, ships items to millions of customers each year, 110 of them are in North America. Once packed, items are moved to trailer trucks and transported to the sorting center. Amazon has its own fleet of delivery trucks and airplanes, as well as partnerships with UPS, FedEx, and U.S Postal Service. For Prime membership deliveries, Amazon mostly uses its own delivery service since it can control the date of delivery, as promised.
Amazon’s fulfillment network allows it to offer same-day delivery to most of its US consumers. The same-day delivery offering also allows Amazon to upsell its Prime memberships, where Prime members can order a range of items and deliver them within a day in the US. 45 percent of consumers expect a maximum delivery window of 2 days, while the delivery time of a third-party shipping provider (e.g., UPS) in the US is 1 to 5 business days. Amazon’s first-mover advantage in building an extensive fulfillment network allows it to undercut third-party retailers’ delivery time and increase its cost savings.
Amazon holds the lion’s share of the US retail e-commerce market with a 41 percent market share. Its strong market share allows it to complement and upsell its other products (such as Amazon ads, Prime, and Kindle) through its marketplace platform.
Amazon ads reported $7.877 billion in revenue, and it is the third fastest-growing segment after AWS and “Others.” The ads segment provide advertisement services to its sellers, vendors, publisher, and authors through sponsored ads, display, and video advertising. The dominant market position of Amazon marketplace allows it to increase consumer awareness and scale its products organically without spending significant expenditure on advertising. The recently launched Amazon Aware (a range of sustainable and eco-friendly everyday products range by Amazon) is expected to benefit from Amazon’s position.
Amazon’s Weaknesses 2022
Declining financial performance
Amazon reported its first-quarter earnings recently, and it missed its revenue and profit estimates. Its revenue has grown by 7.3 percent while inflation in the period was 8 percent, which translates to no real growth in real terms after accounting for inflation. Amazon also lowered its guidance for its 2022 second-quarter earnings. Amazon forecasts revenue will range between $116 billion to $121 billion, which implies revenue growth of 3 to 7 percent. However, the guidance provided no real growth after accounting for inflation. The latest inflation figure published by the Department of Labor is 7.9 percent. Despite all these financial weaknesses, Amazon is still being valued as a high-growth tech stock with a PE and PS multiple of 52.6 and 2.33, respectively. If inflation and high oil prices persist in the coming quarters, Amazon’s market capitalization is projected to decrease.
High Oil Prices
Gasoline prices in the US have reached more than $5 a gallon for the first time in history. Amazon’s supply chain relies heavily on fuel prices for its inbound and outbound logistics. Amazon’s shipping cost in overseas containers has more than doubled compared to pre-pandemic rates. Amazon estimates that inflationary pressure accounts for approximately $ 2 billion in incremental costs when compared to last year, according to its 2022 first-quarter earnings call transcript. There has been no sign of oil prices decreasing since the Russia-Ukraine conflict, and the oil supply chain continues to be disrupted by geopolitical factors. If this trend persists, it will hurt Amazon’s bottom line by increasing its operating and incremental expenses.
Amazon’s Opportunities 2022
Grocery sector expansion
Amazon has recently launched Amazon Fresh and Amazon Go as its venture into the grocery and fresh food sector. There are currently 46 Amazon Fresh grocery stores around the world and one Amazon Go store in the US. Amazon Go is a large supermarket with an expanded selection of grab-and-go food and customizable meals launched in the first quarter of 2022. Amazon physical stores (which include Whole Goods, Fresh, and Go) have reported revenue of $17.1 billion, and Ascentia predicts that Amazon will overtake Walmart as the largest retailer by 2024.
Supply chain improvement
Amazon has suffered from an increased operating cost in the past few quarters due to high oil prices and inflation. Fulfillment productivity is more important than ever, and Amazon has recently launched a $1 billion venture investment program to invest in companies developing technologies in customer fulfillment, logistics, and supply chain. Amazon has spent $61 billion in capital investments (for the trailing 12-month period ended March 31 2022), and 30 percent went to investments in fulfillment capacity. The rate hike by central banks across the world is projected to lower inflation, and the high fulfillment costs will be transitory as Amazon’s productivity increases.
Amazon’s Threats 2022
Amazon faces enormous competition from multiple fronts – retail, supermarket, and cloud computing companies. Walmart is opening four new fulfillment centers to improve its supply chain capability on top of its 4000-plus store network currently being used as a micro-fulfillment center where retail workers pick and pack customer orders. Walmart has also introduced Walmart Plus to compete with Amazon Prime, where members can enjoy a discounted rate on fuel, free shipping, and exclusive promotions. On the other front, Amazon faces enormous competition from Microsoft, Google, and IBM Cloud. Microsoft has recently clarified that it will cost extra to run the Office software suite on Amazon Web Services in a bid to encourage cloud migration to itself.
US’s CPI (Consumer Price Index) increased 8.6 percent on a year-on-year basis, and US inflation has hit a 40-year high, according to the Labor Department. A high inflation environment reduces the purchasing power of consumers, and the latest consumer sentiment figure falls to the lowest recorded level since the University of Michigan started collecting consumer data in November 1952. Amazon has more than doubled its maximum base pay for corporate and tech workers. With the ongoing labor shortage in the US, Amazon employees and contractors are in a good bargaining position for better conditions and pay raises. Nevertheless, Amazon is still a cost leader in multiple domains, and certain sales ( such as groceries) are inelastic in times of an economic slowdown.
In conclusion, despite multiple challenges and weaknesses, Amazon still dominates in its core businesses- marketplace and cloud computing. Although it is troubled by inflation and high oil prices, Amazon is able to weather through this period better than its competitors due to its prior investments in supply chain productivity and technologies. Amazon’s upcoming revenue and net profits will increase as inflation and high oil prices revert back to their mean.
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