The Latest from 360pi

Are Amazon’s Glory Days Behind Them?

Dr. Stephan Liozu provides his insights on Amazon's business model and deliberates on the future of the company.

Amazon’s trial balloon re raising the price of its Prime Membership by up to 51% earlier this year met with some strong consumer headwinds.

Rising costs were cited as the primary trigger for this potentially significant price increase, despite the fact that Amazon Prime would still be a steal in terms of perceived value. Assuming Amazon decides to proceed with this unpopular increase, does this change foreshadow others that will change the way Amazon does business in order to be able to continue the company’s steep growth curve?

Some of these are probed below:

1)     Profit before growth?: It’s common knowledge that Jeff Bezos’ plans for Amazon are to make it the “store of everything”. The company has given priority to growth and as such, has not delivered consistent profitable results, despite having been in business for nearly 20 years. Growth is great, but not at the sacrifice of profits. As shown in the chart below, it appears that Amazon over-discounted, relative to other retailers this past holiday season, which contributed to their earnings disappointment and associated share price slide.

Black Friday Price Changes 2013

Is it time for Amazon to pivot from growth to profit focus? If yes, will they be able to modify the mindset of a customer base accustomed to cheap prices and nearly free services?

2) Ability to succeed beyond North America?: No doubt, Amazon has been wildly successful in North America. However, they have been struggling in Europe due to the complexity of fiscal and regulatory boundaries and different shopping behaviors. As well, Amazon competitors have planted the flag first in many emerging markets like Latin America and Southeast Asia. Granted there are still several categories that Amazon could pursue in the North American market, but the domestic retail landscape is shifting and Amazon is somewhat geographically constrained.

3) Supply chain sustainability?: Amazon has been pouring billions of dollars into building large warehousing and distribution centers in an effort to continue the integration of new categories and to win on and further improve their supply chain excellence. However, with physical presence come potential challenges: facilities cost and maintenance, labor conflict, rising labor costs, and perpetual need for the latest technology, to name a few. Amazon employed 108,000 people in 2013. How much of a potential wage increase or technology upgrade would Amazon be willing to absorb vs. pass along to customers? We’ve already seen pretty clear signals with respect to Amazon Prime.

4) Price for convenience vs. experience: Amazon is a convenience store. But let’s be real, convenience is only one piece of the puzzle. You can’t bottle the human experience. Emotional and impulse shopping is still made in-store. It’s difficult to compete with the percentage of shopping dollars raked in by holiday spirit.

5) Is there an Amazon beyond Jeff Bezos?: In early January, Jeff Bezos was flown to a US hospital when vacationing in the Galapagos Islands over the New Year’s Day holiday. That made front-page headlines of every financial and business news outlet globally. After addressing Bezos’ health status, the next question on everyone’s mind was: what does this mean for the future of Amazon? This is exactly what happened in Apple’s post-Steve Jobs crisis – sending investors into panic mode. What will become of Amazon when they lose the face of their company? Can anyone succeed Bezos?

6) Ability of Amazon’s Supply Chain to compete with retailers using their physical stores as fulfillment centers?: Recently Amazon announced that they are studying, and potentially patenting, the concept of artificial intelligence to allow anticipatory shipping. Similar to the announcement of the drone technology, there is still a lot of work to do prior to implementation. Amazon is going to be fairly limited in terms of delivery speed. The recent delivery issue with UPS and FedEx during the last holiday season serves as proof that delivery guarantees within a 24-period may not always be possible. Some retail chains are fighting back by offering shoppers the opportunity to place online orders and guarantee in-store availability within 6 hours. This combination of online convenience and quicker availability time, in addition to price-match guarantees, may end up shifting consumers’ interests to brick and mortar retailers after all.

There is no argument that Amazon has emerged as a formidable retail competitor over the past 20 years; however, their aggressive pricing strategy may no longer be sustainable. Cracks are beginning to appear, and investors are starting to demand more profitability from Amazon. This provides a unique opportunity for nimble competitors.

Many of these insights were shared in our latest webinar.

About the Author
Stephan Liozu is the Founder of Value Innoruption Advisors and specializes in disruptive approaches in innovation, pricing and value management. He also has a Ph.D. in Management from Case Western Reserve University and can be reached at sliozu@case.edu.