What makes the Amazon value chain so formidable

Amazon is now one of largest companies in the world. It is one of the best-known brands, one of the most trusted companies, and has grown to a market capitalization above $600 bn at the beginning of 2018 with sales of $136 bn for the last full audited year, 2016. It is the largest e-commerce retailer and despite its size, still one of the fastest growing.

As an e-commerce retailer it has learned to manage in real time the information on every single product its sells, each customer its sells to, and optimize each transaction. To do so, using its ability to raise capital, it has built a strong infrastructure which it also sells to third parties, and which can open the door to many other markets. This infrastructure can be segmented into the following 5 main capability buckets.

-       Omnichannel sites. They include Amazon.com, but also Zappos, Souq.com, Amazon Restaurant among others. A list is at the very bottom of the Amazon.com first page. The sites offer a wide and continuously increasing range of products and services. The number of products on display is currently well above 500m and is continuing to increase. As it enters new markets, Amazon can publish well over 100,000 new products on its sites in a day. Amazon manages each of the products at the item level, with sophisticated automated real-time optimization of product selection, information, price, customer reviews and fulfillment for each transaction with each identified customer. Today, an estimated 40% of the sites sales are from 3rd parties offering the products from their own inventory. Amazon is also developing its own brands, and has now an estimated 53 ranging from Amazon Essentials, Lark & Ro, Buttoned Down to Stone and Beam, its latest furniture brand. Some of the sites have started experimenting with bricks and mortars.

-       Amazon Web Services or AWS. AWS is the largest global provider of IT cloud services. It provides a scalable IT infrastructure to many global corporations and organizations, including companies like Netflix, Apple, the CIA, but also, thanks to its pricing and flexibility, many innovative start-ups. With AWS, Amazon provides a very large and strong IT muscle to a significant number of very diverse organizations, and it is rapidly expanding its services from scalable IT infrastructure to artificial intelligence. AWS gives Amazon the ability to manage a huge amount of data in real time at the lowest level of aggregation, and to keep innovating on the latest technologies as this infrastructure is generating significant revenues ($12bn year ended 31st Dec 2016), and a large share of the profits (74% of operating profits according to its 2016 annual report).

-       Amazon Fulfillment. Amazon created a network of giant warehouses and more specialized structures, giving it control of an integrated end to end supply chain going from factory to the final customer. The combination of integrated real-time information and container to pallet to item handling capability enables it to predict and fulfill demand quickly and efficiently, offering in densely populated areas restaurant deliveries under one hour, fresh food deliveries in a few hours, hard and dry good deliveries within the day, and less frequent items in a few days. From a cash flow point of view, its efficiency means that Amazon on average receives the payment from the customer before it needs to pay its vendor. Amazon is optimizing its network in North America, and is still investing significantly in Europe and Asia. It is currently acquiring planes, trains and trucks to further integrate, and has the capacity to move many different types of goods, ranging from luxury and drugs to off-size with great efficiency.

-       Devices. Amazon keeps innovating to establish a strong connection with each of its many customers, propose to each relevant products and make transactions really easy and painless. This began with the Amazon site, which used customer product searches and past transactions to propose similar and complementary products. The site also worked hard to make transactions as frictionless as possible with a simpler customer journey which led to ‘One Click’. In 2005, Amazon introduced the Prime service, giving customers incentives to keep transacting through lower delivery costs and access to some exclusive or cheaper products and free services. This continued with devices. The introduction of the Kindle in 2011 enabled delivery of digital books but also provided additional data on reading habits and interests. The Fire tablet, Amazon TV and the mobile phone appeared in 2014, and the combination of Echo and Alexa launched late 2014. Alexa is now expected to move on many other platforms. Linked to AWS, devices provide many customer touch points and a significant amount of customer context, enabling Amazon to improve its prediction of what customers are going to need and when they may look for it. This is leading some analysts to predict the arrival of ‘clickless transactions’, where Amazon delivers products customers need without the need to order. Amazon is making some of its tools available to third parties, and is now rumoured to be selling data to large branded companies.

-       Content. Amazon has developed or acquired many other capabilities which can fit into some of the previous buckets. They include robotics, drones, sourcing. Content creation and distribution is an increasingly important activity which is different. Amazon started in books publishing, giving writers the ability to publish and access readers directly. It has since expanded into TV content – the Grand Tour series is for example produced with the original cast of Top Gear, and films, and is continuing to invest to create original content. Original content is a source of revenue, but also is invested in to attract and retain customers.

The scale and capability of this infrastructure, which the company uses and makes available to third parties, means that Amazon will be difficult to catch up with in North America and Europe. It also enables the company to enter and disrupt new markets. Amazon has announced its arrival in drugs distribution and healthcare and there are expectations it might move into banking and restaurants in 2018.

In China, Alibaba and Tencent are creating comparable infrastructure. And other companies are rising to the challenge, with Google and Walmart allying, and others like Sephora and Home Depot moving to strong omnichannel models covering part of these capabilities. The capability of these companies will require every other player in the markets they touch to evolve to meet the level of information, availability, speed, convenience, trust and price they provide to the customer. It will also require them to cultivate their uniqueness through exclusive products, exceptional experiences and distinctive service.