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Decoding Amazon

Updated: 4 hours ago

Back in 1997 when a reporter asked Jeff Bezos about his motivation for starting Amazon.com, Jeff Bezos famously said, “I came across a startling statistic that web usage was growing at 2300% a year and I decided I would try to find a business plan that made sense in the context of that growth. And I picked books as the 1st best product to sell online…” and this tells us everything about Bezos and Amazon.

'97-Jeff-Bezos wasn't a passionate reader or a bookseller or a writer. He was just a smart man waiting for an opportunity to knock. And as it is evident from the interview itself, he wasn’t going to stop at selling books. As he found out, books were just the easiest way to enter a market and once he had the people’s attention, he could sell them anything. (Fact check: as per BBC, Amazon owns 42% of the paperback books market and 89% of the e-books market in the USA). That’s it. Jeff Bezos’ mission has always been to create “The Everything Store”. But the Bigger questions are, what has been Amazon’s game plan? What’s coming next? And what does it mean in the India context?


It’s game plan

It seems that everything Amazon does revolves around 2 goals of the company: User Convenience and Forever lowest prices. One of the biggest recipes of success for Amazon has been the large network of warehouses or fulfillment centres, as they like to call it, that they have built over all these years. Today, Amazon has over 150 million square feet of warehousing space across the Globe (5% in India) which is the equivalent of 3,000 football fields!

How does it help?

  1. It helps Amazon to fulfill its primary goal of User convenience. How: By having more fulfillment centres, Amazon can reduce the time it takes to deliver products, thereby making online shopping an as-close-as-possible-substitute to offline shopping along with the added convenience.

  2. More warehouse space allows Amazon to store more goods. Which is basic commerce at play. A larger inventory reduces unit costs of procurement and storage and allows Amazon to sell many more units at lower prices which helps them meet their second goal: Forever lowest prices.

  3. Digging deeper: Having such a huge network of assets allows Amazon to create effective barriers to entry for new players. If you for example, decided to compete with Amazon starting today, you’d first need a decent network of warehouses to match their delivery speed which basically means HEAVY capital investment.

Of course, the above is combined with:

  1. relentless customer centric decision making,

  2. meticulously selected human talent pool,

  3. precious AI powered data and metrics system and

  4. Ban on PowerPoint presentations

that play more on a day-to-day basis.


So what’s next?

After achieving massive growth online, one would think that there’s nothing stopping Amazon now. Right? Wrong! It turns out, Amazon’s online only model had a dull spot. The entire retail industry was valued at $5 trillion back in 2017 and the E-commerce industry owned a mere 10% of it. This showed that while Amazon clearly dominated the online space, it was still owning a very tiny piece of the entire industry.


Ushering the era of multi-channel sales:

So in 2015, Amazon shocked the public as it opened its first offline bookstore. You’re going from a dot com address to brick-n-mortar?? But this time it was going to be different. With this move Bezos told us (and we're telling you) that the right way forward is probably a combination of both online and offline offering, thereby controlling the entire customer journey from research to purchase. Let's admit it, offline shopping is impossible to replace. At the same time, online shopping does add a huge bit to consumer convenience. But the right blend of both allows the consumers the power of choice. The power of CHOICE!!


Now you won’t be as surprised that in 2017, Amazon bought Whole Foods Market (Offline grocery chain) for a whopping $13.4Bn, giving them access to 460 offline stores spread across the US, UK, and Canada overnight. (Why? ‘Cause grocery purchase is a high frequency activity. This schedule of frequent interaction with customers allows a high recall value for Amazon as a brand).

Going further: In 2018, Amazon opened its first Amazon Go store, a cashier less convenience store which uses machine learning and sensors to track purchases made by consumers. It also opened the first Amazon 4-star store where it displays and sells all the products that have an at least 4-star rating at Amazon.com.

Fast forward: As of April 2021, Amazon now runs 24 bookstores, 505 Whole Foods market stores, 22 Amazon Go Stores, 30 Amazon 4-Star stores and 12 Amazon Fresh Supermarket stores in the USA. Sweet-retail-mamba!!

How it helps?

  1. It helps Amazon tap the larger 90% of the retail industry. If Amazon thinks it's good in selling products, there’s no reason why it should not try to disrupt the larger industry as well.

  2. It gives a feeling of omni-presence of its brand.

  3. Digging deeper: The offline stores also act as micro warehouses for its online arm, thereby complementing its online business. Products at offline stores can be used to satisfy the local delivery demands, bringing down the logistics cost that would have been incurred otherwise and allows faster rotation of inventory in these offline stores.


The Indian gameplay

Brief Recap: Flipkart pioneered E-Commerce in India in 2007--Amazon entered the race in 2012--By 2020, Amazon had pumped in $6.5Bn+ in the Indian unit and according to Forrester Research, both Flipkart and Amazon had appx. 31% market share each.

By now you know what Amazon is going to do next. Come on repeat after me: Amazon has a strong foothold in the E-commerce space of India. Now it will stalk the retail chains that are doing bad business, buy them out for good cash and then pounce to disrupt the offline retail industry for good. How very predictable Amazon!

But where, when and how?

Where 1: Testing waters: In Sep'17, Amazon picked up a 5% stake in Shoppers Stop for an estimated ₹ 180 crore.

Where 2: Something is cooking: In Dec'19, Amazon bought a 49% stake in Future Coupons for ₹1,431 crore. Future Coupons owned 7.3% of Future Retail that operates 1500+ retail stores in the country, including 290 stores of Big Bazaar. The deal also included a call option for Amazon to acquire the promoter’s shareholding in Future Retail (a little over 20%), exercisable between the 3rd and 10th years.

Where 3: Now we’re talking: In Nov’20, Amazon shelled out ₹ 4,200 crore to buy 49% stake in Aditya Birla Group’s More chain of stores. After Big Bazaar, Reliance Retail and DMart, More is the 4th largest supermarket chain in the country operating close to 600 stores.

Where 4: Going deeper: After starting online sale of medicines in Aug’20, Amazon is now eyeing a $100Mn (₹ 700Cr) investment in Apollo Pharmacy. This will give Amazon access to 3,700 offline stores that Apollo has across the country.


In all the above deals Amazon plans to use the offline stores as micro warehouses for their online orders. But you already know that. You’re wise now. So, the next time you hear Amazon grabbing stakes in a retail giant, you’ll see it coming from miles away.


With great aggression comes great competition:

Amazon has signaled the sound of war and has entered the battleground. On the other side is its worthy contender, India’s very own ‘sell-everything’ man Mukesh Ambani and his business behemoth Reliance Industries. But before you allow an ‘Oh-Yeah!’ remark, don’t forget that Amazon comes from the land ruled by Walmart.

So now you know why Reliance is so keen on locking horns with Amazon over the Future group transactions. (In Aug’20 Reliance struck a deal to buy all of the Future Group for $3.4 billion). ‘Cause Amazon was never passionate about selling books or groceries or medicines. What it’s really passionate about is selling. And if it wants to, it can sell you everything!

 

This article is a part of the June'21 edition of our Startup Newsletter. Here's the complete publication:


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