Amazon warehouse © Getty Images
Amazon warehouse © Getty Images

The secrets behind Amazon's success

21 January 2016

Patience, relentless investment and serial innovation have helped Jeff Bezos’s company “shred the competition”.

At some point in the near future, 85% of the world’s products will be available on Amazon. That was the startling view, privately expressed, by the head of consumer markets at a big global management consultancy to me two years ago. This was the goal, he said, towards which chief executive officer Jeff Bezos was marching Amazon. Once reached, this would be a strategic, operational and financial game changer for the business.

Back then, the e-commerce juggernaut had begun diversifying away from its core products – books, CDs and DVDs – and it has now moved into online groceries, cloud computing (forecast to generate $16bn in revenue in 2017) and film and TV production which, Bezos hopes, will soon win the company its first Oscar. Among the 200m or so products already available on Amazon you will find 3.4m books, waffle makers and such arcane offerings as fake body fat (“Buy 5lb for $70 and save $14.24!”).

After some back and forth with the consultant about Amazon’s performance – and why it wasn’t consistently generating more profits – he paused and said: “What’s really happening out there is that Amazon is shredding the competition, and the competition just doesn’t know what to do about it.”The year just gone can help us define what he meant by shredding. Calculations by Ben Schachter, a retail analyst at American investment bank Macquarie, suggest that 26 cents out of every $1 spent online in the US in 2015 ended up in Amazon’s coffers.

If you look purely at the growth in e-commerce, the story is even more spectacular for Bezos: of every additional $1 Americans spent online in 2015 (compared with 2014), his company captured 51 cents. It helps that 25% of American households now belong to the Amazon Prime membership scheme. By 2020, Schachter suggests, at least half of American households will subscribe to it.

Data from Consumer Intelligence Research Partners suggests that Prime members in the US spend an average of $1,500 a year with Amazon, compared with $625 for non-members. No wonder Schachter has said: “Amazon is truly in a league of its own.”So how did we get to a point where it seems as if, to quote the New York Times, “the internet is Jeff Bezos’s world and the rest of us are just shopping in it”? Until five years ago, there was nothing savvy or innovative about Amazon’s pitch to customers. Although the company pioneered online shopping, the core proposition was broadly, “pile ’em high and sell ’em cheap”. Steep discounting was great for capturing market share but not so clever if you wanted to make money – which, in the long run, Bezos definitely wanted Amazon to do.

So the company did two clever things. It began to create an Apple-style ecosystem that tied consumers more closely to it with such devices as the e-book reader Kindle. This hasn’t been as successful technologically as Apple’s – the Kindle Fire smartphone flopped – but developing films and TV shows has encouraged millions to join Prime, helping Amazon to consistently make more profit per shopper.

The second masterstroke was to invest relentlessly, spending billions on infrastructure and technology. In a report analysing Amazon’s competitive edge, the usually staid management consultants McKinsey described the level of spend as “maniacal”.

Amazon grasped the importance of speedy shipping earlier than many rivals and invested accordingly. With more than 100 warehouses in the US alone, it has kept accelerating its delivery – from 48 hours, to next day, to the evening of the same day. This process is far from complete: the company has sought a patent for predictive purchasing (delivering goods you’ll like even before you order them). Predictive shopping may work. If it doesn’t, it won’t kill Amazon. It is investing in an intriguing array of technologies, including an army of 30,000 robots.

Drones, designed to deliver packages in 30 minutes, may be of more use in India than in the tightly regulated US. In developed markets, Amazon has launched Dash, an electronic ‘wand’ which can scan barcodes and take voice commands to ensure, via online grocer Amazon Fresh, that you never run short of kitchen rolls. It is also piloting schemes to deliver goods to the boots of Audis and Volvos. It is easy to forget that, as recently as 2013, a bad quarter’s results led some analysts to wonder if Amazon’s core business, shopping, would really work. Bezos’s multi-billion dollar faith in the company was impressive, but was it enough? Sceptics still point out that even in the third quarter of a booming 2015, it only made a profit of $79m on revenue of $24.5bn.

So is Amazon really such a success story? Silicon Valley’s venture capitalists think so. Questioned by the New York Times, several who had ploughed millions into e-commerce said they weren’t keen to invest in the sector now that Amazon had become so powerful. Retail titan Walmart is investing billions trying to catch up, but when the paper asked stock analysts if Amazon’s dominant position in e-commerce in America and Europe could be challenged, some of them laughed out loud. Walmart has to spend billions just to narrow the gap on the indomitable shopping machine Bezos has built. While it is doing that, he can invest more, if he wishes, as his online sales are growing faster (up 20% in 2015, compared with 10% for Walmart). And it’s not just the size of the spend, it’s knowing how to spend it.In business, no success lasts forever and several things could go wrong for Amazon. Like a chess grandmaster playing 103 opponents simultaneously, Bezos is making several large gambits at the same time.

Despite losing a straight confrontation with Chinese e-tailer Alibaba, Amazon is making a play in the country’s online grocery sector with a $20m investment in fresh food e-store Yummy77. Its next audacious move is a $7bn bet on the Indian e-commerce market, which could become as important to it as the US. In its home market, the internet retailer is poised to take logistics beyond the warehouse and direct to doors as it seeks to slash shipping costs (which reached $1.2bn in the third quarter of 2015). Opinions differ as to whether Amazon intends to take all its business away from – and go head-to-head with – logistics leaders UPS and FedEx, or simply wants to strengthen its negotiating position with them, but it has explored leasing or buying Boeing jets.

Amazon has also entered the thoroughly disrupted, hyper-competitive, grocery market in the US and UK. In the latter, it has started with a low-key trial of Amazon Pantry, which offers Prime members around 4,000 grocery and household products from top brands, but not fresh foods – at the moment.

In military history, there is a concept called ‘victory disease’, referring to the process by which a general, army or country, intoxicated by success, begins to lose sight of strategic realities – with dire consequences. Amazon’s rivals hope that Bezos may be suffering from this phenomenon, especially since he personally acquired the Washington Post. (Great newspapers have long been a fascinating and expensive distraction for tycoons.)

Yet Amazon’s strength is not all about Bezos. As Paul Vogel, retail analyst at Barclays, put it: “The thing about retail is, the consumer has near-perfect information. It’s selection. It’s service. It’s convenience. It’s how easy it is to use their interface. And Amazon’s got all this stuff already. How do you compete with that? I don’t know, man. It’s really hard.”

Amazon's investments and acquisitions
Amazon has invested in or owns some/all of these companies:

Acquia (US)
Drupal content management
BankBazaar (India)
Financial technology Clique (US)
Fashion site WhoWhatWear
ComiXology (US)* Digital comics platform
Double Helix Games (US)* Video games
Dragon Innovation (US)
Start-up incubatorEvi (UK)* Search engine software
Housejoy (India) On-demand house cleaning
Internet Movie Database (US)*
Invoxia (France) Voice-activation
KivaSystems (US)*
RobotsQwikCilver (india)Gift card technology company
Teachstreet (US) Education platform (US) Live streaming video
Yummy77 (China) Online groceries
Zippr (India) Location-sharing apps

* Acquired by Amazon

Bezos has also invested personally in AirBnb, Uber, HR cloud company Workday, blogging network Business Insider, US on-demand trucking company Convoy, small business lender Fundbox, the Washington Post and founded aerospace company Blue Origin

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