Amazing Amazon – A working paper for NAMs…?
By Brian Moore, Global Retail Consultant and CEO of EMR-NAMNEWS

With a 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 reality, fast.

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 traditional times.

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 KamBlog).

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 company output.

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 try…?
 

KamTips: The Amazon 2011 Annual Report - A reality wakeup call…

The Amazon 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 relevance.

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’.

‘We first 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 Competition.

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 level).

P17 Selected consolidated financial data: Best to focus on consolidated financial statements (but note CAGR 26% for four years of global financial crisis, see NamCalc).

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 & International).

P26 Category split, geographically: Media, Electronics and other general merchandise, and ‘Other’.

P27 Operating expenses including Gross Margins of 22.3% (like UK major Mults).

P28 Marketing & Media: methods for generating business.

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 innovation.

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 calculations.

P57-62 Legal proceedings: Details of on-going cases/issues.

P68 Segment analysis: More detail on geographical & category split.

P74 Quarterly Results 2012 (unaudited).

P78 Stock price performance graph: Which really says it all!!

NB. For explanation of financial jargon and basis of calculations, see KamWords, and NamCalc.

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