Amazing Amazon – A
working paper for NAMs…?
Retail Consultant and CEO
vision ‘to be the earth’s most customer-centric company;
to build a place where people can come to find and
discover anything they want to buy online’, the problem
in many categories is that Amazon’s vision is becoming
The purpose of this paper is to highlight some of the
reasons why suppliers perhaps need to reassess their
approach to Amazon in terms of overall impact on their
trade strategies, and to encourage discussion on the
implications for NAMs and KAMs everywhere.
Essentially, having started trading in 1994, Amazon has
grown fast, and in relatively low profile to its current
global scale of US$48bn, growing over the four years of
the global financial crisis at a CAGR of 26%, producing
a net margin of 2.2% and an ROCE of 9.06% in fiscal
2011. In other words, serious customer-centric
retailing, from a standing start, rather like Walmart -
only faster - with an EDLP platform that seems to retain
its excitement for consumers, everywhere.
Given the impact Amazon has already had on many
categories’ traditional routes to market, coupled with
an online consumer purchasing process that threatens the
often clumsier online alternative mechanisms of its
rivals, makes Amazon one to watch. Moreover, Amazon has
driven this development via a database of such degrees
of integration it puts even government agencies
‘equivalents’ to shame. This makes it vital that its
business model be explored by any NAM wishing to develop
real world trade strategies that have some hope of
fulfilment in these unprecedented times.
In other words, think about Amazon having 50% of most
categories within the next five years, and assess the
impact on the remainder of your business.
In terms of new product introductions, think of the
scope and impact of an efficient pre-used market
developing independently of your company in response to
the global financial crisis - both prolonging current
use and also meeting a high proportion of ‘new’ need
that might have been available to your new products in
When it comes to market coverage, Amazon is managing to
combine three customer sets: Consumers - who want to buy
products on Amazon, Sellers - who want to sell products
on Amazon, and Developers - who want to use Amazon
developing services. It is also successfully combining
key elements of effective and long term customer
optimisation via e-Trust, attraction, retention and
relevance with site personalisation, without intrusion.
In other words, Amazon does simple things done very,
very well in taking lifetime ownership of the consumer.
Amazon is raising not only the online commerce bar, with
all of its potential efficiencies, but is also going to
the heart of state-of-the-art retailing, providing much
more than store level assortment. It is, in effect,
tailoring the offering to individual consumer level,
better than any other provider.
In terms of global retailer response to Amazon, it is
intriguing that Walmart is currently conducting joint
experiments with P&G via kerbside vans/bus-shelter
virtual shops to drive traffic to their online delivery
service in order to counter Amazon’s advantage of next
day delivery in Manhattan (see
Amazon’s latest annual report for fiscal 2011 (see
KAMTips below for key highlights) makes for
spell-binding reading, not least because of the fact
that the company appears to carry little baggage in
terms of what an annual report should look like, and
contains many details not always found in traditional
There are obviously downsides to new growth of this
nature, in a virtual world that is evolving faster than
government and regulatory regimes struggling to adapt
traditional ways of controlling and monetising online
business. However, with Amazon’s customer-centric focus
so deeply embedded in its business model, it is unlikely
that the company will stray far from its basic objective
of meeting customer need, continuously…besides
generating sufficient funds to apply state-of-the-art
guidance in managing local rules and regulations.
In other words, Amazon is going to be around for a while
yet, certainly long enough to be worth incorporating
into your trade strategies…
If still in any doubt, try Amazon’s 1-click purchase
combined with next day delivery and compare it with a
visit to your nearest Tesco, real or virtual… Worth a
KamTips: The Amazon 2011
A reality wakeup call…
2011 Annual Report -
available on its website
- makes for
refreshing reading, unlike those of ‘normal’ companies
and contains a wealth of potentially useful insight for
NAMs and KAMs.
We have picked out sections worth particular study
as follows, but urge you to browse for items of personal
Chairman’s Introduction shows a series of mini-case
studies featuring satisfied users. “To us, the value of
Amazon Web Services is undeniable – in twenty seconds,
we can double our server capacity”, etc. etc.
Also features useful background on Kindle development.
As always Amazon reprints
a copy of its 1997 letter to shareholders, pointing out
that its ‘approach remains the same, and it’s still
Day 1 (for the Internet)’! This includes the
determination that ‘a fundamental measure of our
success will be the shareholder value we create over the
long term via our ability to extend and solidify our
current market leadership position’.
measure ourselves in terms of the metrics most
indicative of our market leadership: customer and
revenue growth, the degree to which our customers
continue to purchase from us on a repeat basis, and the
strength of our brand. We have invested and will
continue to invest aggressively to expand and leverage
our customer base, brand, and infrastructure as we move
to establish an enduring franchise’.
P1 Index of the Annual Report.
P2 For details of Consumers, Sellers,
Enterprises (Web Services), Creators and
P5-14 Risk analysis: 10 pages dealing with
risk-management, including growth rate and operating
results fluctuations, constraints on geographical
expansion, need for optimisation of fulfilment centres
(focus on service
P17 Selected consolidated financial data:
Best to focus on consolidated financial
statements (but note CAGR 26% for four years of global
financial crisis, see
P18 Management financial focus on
long term, sustainable
growth in free cash flow per share, including details.
Reduction of our variable costs per
unit and work to leverage our fixed costs. Because of
our model we are able to turn our inventory quickly and
have a cash-generating operating cycle.
P24 Geographical performance (US &
P26 Category split, geographically:
Media, Electronics and other general merchandise, and
P27 Operating expenses including Gross
Margins of 22.3% (like UK major Mults).
P28 Marketing & Media: methods for
P30 Forward view for 2012.
P36 Cash Flows: Needs to be seen.
P37 P&L: Basis for calculating net margin
of 2.2% before tax, good, given rate of growth and
P37 Balance Sheet: Basis for calculating
ROCE 9.06%, Stockturn 8.4
times per annum, par
for a wholesaling-like model.
P40 onwards Notes to the Accounts:
Explaining the derivation of all figures and
Details of on-going cases/issues.
More detail on geographical & category split.
Quarterly Results 2012
P78 Stock price performance graph:
Which really says it all!!
NB. For explanation of financial jargon and basis of
A summary of Amazon’s development
is available in a
free 38-slide set from Herriot Watt University at
slideshare.net published in 2010 (see
here). Key points include development
of the business model, category and geographical
evolution, beside a
page of links and references. Googling ‘Amazon business
model’ will supply any additional requirements for those
who still need convincing….
Date published: June 2012