By Karla Kim
Imagine a company that, within 24 years, is the second U.S. company to have briefly met the $1 trillion market cap threshold, is founded by the richest man in the world with a $131 billion net worth, is the second largest employer in the U.S., and is the biggest e-commerce marketplace and cloud computing platform in the world. Amazon’s extraordinary path from an online bookstore in Jeff Bezos’s garage to an empire of online retail and cloud computing exemplifies the success of a small startup with a visionary mission. However, as Amazon continues expanding, there are increasing concerns about Amazon’s dominance and the implications for many traditional companies. Through Amazon’s domination of the online marketplace and integration into other industries, Amazon’s unparalleled growth poses a threat to traditional retailers and corporations in their respective industries and is supported by Amazon’s strategy emphasizing international expansion, logistics, technological growth, and changing consumer behavior.
An overview of Amazon’s present market share and influence reveals the enormous scope of Amazon’s disruptive business model. Currently, Amazon captures almost 50% of all U.S. e-commerce retail sales, with eBay trailing behind in second place with 6.1%. What is striking about Amazon’s sales, which are projected to be over $282 billion in 2019 alone, is that 60% runs through its Marketplace—the online Amazon platform for third-party sellers. Amazon supports its growth with a wide range of business activities from developing in-house brands, to acquiring Whole Foods, to drone technology, and autonomous vehicles.
This expansion will continue as Amazon strategically focuses on international expansion, higher efficiency and development of logistics, technological innovation, and alignment of changing consumer behavior. Geographically, Amazon is far ahead of the competition in North America and Western Europe. However, Amazon faces challenges expanding into other international markets as it competes with Chinese internet giant Alibaba Group. Even though Amazon dominates the U.S. e-commerce market with a 50% market share, globally, Amazon only has a 13.7% market share, indicating that there are high growth opportunities internationally.
As Amazon goes head-to-head with Alibaba, India and Latin America are seen as key regions for expansion. According to a Morgan Stanley research note, international sales are projected to make up 105% of Amazon’s profit growth. This is important because much of Amazon Prime’s subscription growth is coming from international subscribers. With expansions already underway, Amazon is looking to capitalize on its overseas influence. Logistics-wise, Amazon is developing numerous methods to lower its shipping costs and have faster, more accurate delivery. With over 700 operational facilities, Amazon’s distribution network is one of the key components of the firm’s ability to deliver its products to consumers quickly and efficiently. However, because operational expenses are estimated to reach $25 billion, Amazon has been looking into drone technology and autonomous vehicles for operational support. PrimeAir is Amazon’s goal to use drones to deliver packages in 30 minutes or less, and so far, Amazon has already been issued patents for its drone technology. Furthermore, recent investment in Silicon Valley startup Aurora, an autonomous vehicle company, represents Amazon’s efforts to cut shipping costs while increasing efficiency and safety of deliveries. In the middle between drones and future autonomous vehicles is Amazon Scout, a smaller delivery robot that is in the field-testing stage. Beyond autonomous transportation, Amazon continues developing its AI capabilities with Alexa and cloud computing software.
The goal of these innovations is central to Amazon’s core value proposition. Ultimately, the technological advances are meant to make life simpler, more convenient, faster, and more efficient for Amazon’s customers. Amazon is strategically investing and internally developing all these different technologies and strategies because of changing consumer preferences. More and more people are willing to buy retail items from Amazon, including clothes, groceries, and electronics that were traditionally seen as in the exclusive domain of brick-and-mortar retailers. As it becomes easier for people to order and pay online, the demand for online retail will continue to grow. This means that it is critical for Amazon to expand its technological and logistical capabilities to meet the growing demand for its products and services.
At the same time, Amazon’s aggressive growth strategies are threatening traditional retailers and companies in multiple industries. For instance, Amazon is looking into the pharmaceutical industry with its acquisition of PillPack, an online pharmacy that prepares and delivers prescriptions. The goal is to deliver medication for patients through an online delivery service to reduce the costs of medicine. Within one day of Amazon’s PillPack announcement, Rite Aid, Walgreens, and CVS lost $12.8 billion dollars in market value as their stocks tumbled. This is pushing pharmacy retailers to react as CVS announced its own one and two-day shipping plans.
The pharmaceutical industry is just one of the many industries Amazon is targeting: mass retailers, apparel and fashion, beauty and cosmetics, electronics, and groceries. For each of these industries, similar market reactions occurred. The key driver behind this is that Amazon is building its own in-house brands and finding ways to integrate products and services into its online ecosystem. For example, Amazon has recently launched its own in-house skincare beauty line called Belei, offering customers moisturizers, eye creams, and spot treatments for anywhere between $9 to $40. This directly impacted companies such as Ulta Beauty, which saw its stock drop 1.68%. Perhaps the biggest and most aggressive expansion Amazon is pursuing is its disruption of the grocery and supermarket industry. With its $13.7 billion acquisition of Whole Foods two years ago, Amazon plans to open grocery stores in key locations for more convenient pickup and delivery points for customers. As a result, Walmart, Costco, Krogers, and Target’s stocks dropped as Wall Street worries that Amazon’s 4% grocery market share will grow bigger at the expense of these companies. Furthermore, Amazon’s 140 in-house brands could be offered at a lower price in its grocery stores, competing on higher margins through lower cost of production and lower price points than Amazon’s competitors. Through Amazon’s expansion into other industries beyond its core areas, the threat of disruption and eroding market share for traditional retailers grows.
While innovation and disruption are generally seen as positive forces, Amazon’s unprecedented growth and wide scope of expansion raises a dilemma: is this increasing or stifling competition? Arguably, Amazon is accomplishing both through the “Amazon effect,” a term used to describe the influence Amazon is having on consumer behavior and the shopping experience through online marketplaces and fast delivery. In a 2018 McKinsey study of more than 2,500 consumers worldwide, results showed that more than 70% of consumers engaged in some form of online buying behavior. Amazon’s capitalization on the online marketplace has changed the way people perceive and engage in online retail, and increasing numbers of people are subscribing to Prime and ordering their products online. This has direct impacts on competition. In 2017, more than 6,403 retail stores closed, and in 2018 that number was 3,800. In this way, Amazon’s domination of the market has hurt many traditional retailers and mass-market stores. The key difference between Amazon and any other company is that Amazon’s growth is spreading into multiple industries, whereas other companies generally try to dominate within their respective industries. Therefore, many industries that were thought of as safe, such as pharmaceuticals and grocery, are now being disrupted by Amazon. This decreases competition as Amazon gains more market share in other industries. However, on the flip side, Amazon’s Marketplace platform and Amazon Business, the business-to-business (B2B) program for businesses, government, and education organizations, enables companies to sell their products online and develop their businesses through greater audience outreach and low fixed price relations with Amazon. Furthermore, Amazon is changing the way investors have traditionally valued companies. Now, the factor of online presence and capabilities is a major component in company investments and growth. For example, as a demonstration of their interests in technology, JPMorgan and Berkshire Hathaway are the leading partners with Amazon for its pharmaceutical venture. This means that new and innovative companies that possess technological abilities and products will have more opportunity in investments and growth.
Ultimately, the Amazon effect and its disruption model will continue to push the boundaries of the business landscape; however, this kind of change has more positive, lasting effects on society. Whether it is the Prime ecosystem, new technology, or the Amazon Marketplace, the most essential function of Amazon is being the facilitator between producers and consumers. Amazon earned its success because it introduced a new and viable way for consumers to have easier access to a wide spectrum of products. This is beneficial for both parties because consumers increase efficiency in shopping and producers can broaden their audience reach. Even though this hurts traditional retailers, new technologies and the disruptive ideas underpinning Amazon force businesses to innovate in order to meet changing consumer needs and behaviors. Therefore, the end impact is a positive change to society as people progress their relationship with technology to make traditional activities easier and more efficient. Despite this, there are still many factors that are coming into play, and until we see how traditional retailers and businesses pivot, the full effects of Amazon are uncertain.