|Online Retailer, Cloud Service Provider
|Seattle, WA, USA
|Jeffrey P Bezos
|USD 280.5 billion
|USD 11.58 billion (4.1% net margin)
|Target, BestBuy, Walmart
Amazon is the world’s most popular e-commerce marketplace and cloud computing brand. But its more than that! Amazon also derives revenue from digital streaming and artificial intelligence products. Amazon reported revenue of $469.8 billion dollars and a net income of $33.4 billion for the 2021 financial year. It is one of America’s tech giants in the Big 5 FAANG group, including Facebook, Apple, Netflix, and Google.
Below is a SWOT analysis for Amazon. Here we will go over Amazon’s strengths, weaknesses, opportunities and threats.
Table of Contents
Amazon Strengths 2022:
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.
A world-class distribution network helps Amazon dominates the e-commerce market.
Amazon’s fulfillment network allows it to offer same-day delivery to most of its US consumers. Amazon currently operates more than 175 fulfillment centers worldwide. 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.
Market leader in non-core businesses, including smart-home devices and service subscriptions.
Amazon owns 12.8% of the U.S smart home device market shares by 2019 by expanding sales of Alexa devices, opening the ways to other subscription-based services. More than 100 million Fire TV, a device that turns regular TVs into smart ones, has been sold in 2020, paving the way for Amazon to get into the $148 billion TV advertising market. As the Amazon ecosystem grows among households, Prime Videos subscribers increase in quantity and spending amount. Amazon also dominates in infrastructure-as-a-service as more businesses move to cloud computing and the rising work-from-home trend ensures a stable revenue flow for Amazon.
Amazon’s Weaknesses 2022
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.
Amazon is becoming a conglomerate and spreading its resources across too many industries, which could lead to inefficiency, diseconomy of scale, and failure in certain businesses.
Started as an online bookstore, Amazon now has footprints in e-commerce, media streaming (video, music), media producer, logistic, hardware developer, groceries, game streaming, cloud service provider, and many more. To enter a new sector, Amazon usually acquires an incumbent player in that market, thus reducing the available capital for growing existing business. The company may lose its core strategies and vision since different industries require different tactics.
Amazon is willing to make sales at breakeven prices, or at a loss, and playing with a razor-thin net margin in order to capture market shares and suffocate small competitors.
The Fire TV, for example, is selling at a breakeven margin so that Amazon can gain the market for high-profitability connected-TV ads. Even though the company’s margin has improved over the last few years, this loss-leader strategy is not sustainable.
Weak representation in Europe and other emerging markets.
Only 7.9% and 6.2% of revenue come from Germany and the U.K, respectively, in oppose to 61% from North America. Its business model seems to have problems running in Europe, especially with the distribution centers and the delivery network.
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 Opportunities 2022
Cloud computing is here to stay and Amazon should capitalize on this trend.
Amazon, along with Microsoft and Google, are the major players in the cloud service providers. More businesses, from small to large enterprises, are switching to cloud computing after recognizing its flexibility, scalability, and cost-effectiveness. The work-from-home trend has contributed a substantial chunk to service providers’ revenue in 2020, and this trend is predicted to retain for a foreseeable future.
The online grocery market may see strong growth. Grocery is the largest retail segment but has the lowest e-commerce penetration.
Bolstered by the pandemic-induced habits, customers order groceries online more often, giving Amazon a chance to make headway, while physical stores are playing catch-up. Amazon is currently leading the service, with 62% of eMarketer’s U.S survey respondents indicated they relied on Amazon’s service, followed by Walmart and Target.
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.
The TV advertising market is a juicy new market for Amazon.
The $148 billion high-profitability connected-TV ads market could boost the profit margin for Amazon, in which the company is trying to penetrate through its Fire TV device. EMarketer projected 203 million connected-TV users in the U.S in 2020, more than enough space for Fire TV to expand.
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 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.
Amazon is likely to face antitrust lawsuits as it grows larger and deemed to be a monopoly by the Justice Department.
Google and Facebook are likely to face antitrust challenges from the U.S government in 2021 because of frequent complaints from customers, industry participants, and politicians. The Justice Department is motivated to investigate other big tech company, and Amazon is possibly the next target.
Fierce competitions in e-commerce and media streaming.
In the U.S market, Target, Walmart, and BestBuy are gearing up to take market shares from Amazon with attractive promotion and express shipping or instant in-store pickup. In the video streaming service business, Amazon is competing with big names like Netflix, HBO, Disney, Hulu, and the latest Apple TV+.
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.
Amazon SWOT Analysis Conclusion 2022:
Amazon is growing beyond its original online retailer and enters into other growing industries that, with proper investment, will definitely become profitable. The company has enough resources to discourage competitors in every industry it participates in, nevertheless, Amazon has to watch out for possible antitrust litigations from the Department of Justice.
ReferencesAmazon.com, Inc. (2020). Annual Report 2020.
Poonam Goyal, J. W. (2020). Amazon Research. Bloomberg Intelligence .