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WIKI ANALYSIS
If Amazon’s 66 million active customers all lived in the same country, it would be the world’s 19th most populous country, with more citizens than every European country except Germany. And if every US household spent $170 at Amazon.com this year, the total amount they’d spend would still be less than Amazon’s 2010 revenues of over $34.2B.[1] Amazon has used the internet to create a truly global business platform, one which is poised for incredible growth in the coming decade. The question in many investors' minds these days is how profitable that business can be.
While most people naturally think of Amazon as the internet superstore that sells products in over forty categories, from books to electronics to groceries to jewelry to auto parts, the company has gradually expanded beyond that simple business platform; today Amazon is simultaneously an e-commerce and internet technology platform, a fulfillment and logistics platform, a search technology, an internet advertising platform, and even an internet startup incubator.
That's not just logic. That's rlaely sensible.
Recent News
Amazon has been testing a grocery delivery service called "Amazon Fresh" in Seattle, which will compete with companies like Peapod and Freshdirect.[2]
Company Overview
Business Model
Founded in 1995 by Jeff Bezos as an online bookstore, Amazon has since greatly expanded its business. Today, Amazon’s stated mission is to be a place where “people can come to find and discover anything they might want to buy online.” Its key pillars of lowering price, offering convenience, expanding selection, and increasing availability are interrelated in what the company calls a virtuous cycle, and together make up the foundation of the fabulous growth that has taken Amazon from a bookstore started in a garage to a $14B retail machine. Amazon’s direct-to-consumer online model allows it to keep its inventory in a small number of strategically located large warehouses, letting the company offer a vast selection of goods (removing the granularity risk of relying on any particular product line) and without the capital investment and inventory risk that traditional brick and mortar retailers face.
In comparison to brick and mortar retailers, whose input costs (e.g. rent, utilities, and labor) generally rise over time, Amazon and other technology-dependent internet retailers reap the benefits of technological progress as computational power, bandwidth, and data storage technologies all improve in quality and decline in cost over time.
In addition, due to sophisticated inventory forecasting, fast inventory turns, and overall operational efficiency, Amazon has managed to build a retail business with a negative operating cashflow cycle, which means Amazon gets paid for products by customers before they have to pay their suppliers for the goods. Working capital has effectively become a source of investment cash for the company.
Category Expansion
Although roughly 64%[4] of Amazon's worldwide revenue still comes from media categories (books, music, video), Amazon's product footprint in the US has expanded into over 40 categories. New product categories represent significant growth opportunities for the company, given the lower online penetration rates in many of these categories. Revenue and income growth rates for these categories have regularly outpaced the growth in media categories both in the US and abroad.
Amazon’s digital media store has seen substantial investment from the management, and investors have been anxiously awaiting the launch of new initiatives in downloadable music, video, and text.
International Expansion
International businesses have represented a significant area of growth for Amazon. Although Amazon ships to almost any country in the world, it has selectively chosen to establish country-specific websites and fulfillment networks. Beginning with its expansion into the UK and Germany in 1998, and subsequently to France (2000), Japan (2000), Canada (2002), and China (2004), Amazon has expanded its geographic footprint into the world’s major e-commerce markets. International growth rates have consistently beaten that of North America.
This is due in part to the relative maturity of the US market, as well as to the strategy Amazon has employed in rolling out new product categories and features to its international properties. Amazon has typically introduced most of its new stores and features in the US market first, eventually replicating the most successful ventures in international markets. Amazon's international businesses have thus been able to benefit from experience gained through US experiments to grow at an accelerated pace.
Third Party Seller Marketplace
Years ago, Amazon also made a strategic decision to open up its website and create a Marketplace of third party sellers who effectively compete with Amazon for any given sale. These merchants sell a variety of new and used products for which Amazon receives a commission on products sold via its Marketplace, and although gross margins on these transactions is generally less than that if Amazon sold the item directly, the Marketplace strategy creates a one-stop shopping destination with a consistent experience for the customer. It has also helped Amazon dramatically increase its selection of available products. The bet seems to have been a smart one -- 30% of items sold on Amazon are sold by third parties.
Other Businesses
Amazon is not just in the business of selling products via the Internet. It has also started businesses to:
- Sell its technology to other retailers (E-commerce platform sales)
- Sell its fulfillment and customer services capabilities to sellers (Fulfillment by Amazon)
- Sell its technology infrastructure via a set of web services technologies that enable developers to use Amazon's servers (EC2, S3, SQS)
- Operate a family of other websites:
- A9.com (search subsidiary)
- Alexa.com (web search and metrics subsidiary)
- IMDb.com (Internet Movie Database)
- Endless.com (shoe and handbag store)
- Clickriver.com (internet advertising platform)
- Mechanicalturk.com (human task marketplace)
- Askville.com (question/answer marketplace)
- Amapedia.com (product wiki)
In addition, Amazon has had a longstanding policy of being very quiet about new initiatives it is working on, so it is safe to assume that there are many other projects in the works that are not known to the public.
Unfortunately for investors, another one of Amazon's longstanding policies is of being extremely tight-lipped about reporting financials broken out by its various business lines, so there is little visibility into how any particular sub-business contributes to the company's financial performance.
That being said, it is still possible to evaluate the company according to important issues that these businesses face.
Super jaezzd about getting that know-how.
References
- ↑ AMZN 4Q10 Earnings
- ↑ Nielsen sees Web grocery growth, plans new service (7/20/11)
- ↑ AMZN 2008 10-K pg. 21
- ↑ Company Q3 2007 earning call slides
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