RESEARCH TRIANGLE PARK – As big, growing ever bigger and as mighty as Amazon is, the internet giant still has its weaknesses, a new report says.
Amazon will face a big threat soon as Walmart launches a service to rival Amazon Prime. But Amazon continues to expand its global footprint in the Triangle with distribution centers and a forthcoming store at Crabtree Valley Mall.
So what’s the future look like for Amazon?
Don Davis, editor at large for the website Digital Commerce 360, focuses on both sides – positive and negative – in the analysis.
Here are three areas where he says Amazon appears “vulnerable:”
- Its just-in-time inventory strategy faltered in the pandemic: Amazon’s obsession with efficiency includes keeping just enough inventory in its warehouses to meet likely demand. But when the COVID-19 outbreak hit and Amazon had to prioritize high-demand items, it stopped accepting deliveries of nonessential products. Thus, many customers could not find what they want or experienced lengthy delivery delays. The result: Only 64% of online consumers responding to an annual RBC Capital Markets survey said they were “extremely” or “very” satisfied with Amazon in June 2020, versus 73% in 2019, 72% in 2018 and 82% in 2017.
- Politicians and regulators are taking aim at Amazon: Federal and state regulators in the U.S., as well as their peers in Canada and the European Union are investigating whether Amazon takes advantage of third-party sellers on its marketplaces. France is considering a moratorium on the construction of new ecommerce warehouses, which would slow down Amazon’s expansion plans. In India, the government has taken steps to protect local retailers from foreign giants like Amazon and Walmart.
- Amazon’s retail operations are barely profitable: Amazon reports big profits each quarter but most of them come from its Amazon Web Services cloud-computing unit, which accounted for 63.3% of Amazon’s earnings in 2019, up from 58.7% in 2018, and at least two-thirds of profits in every year from 2015-17. Most of the rest of Amazon’s profits come from advertising. That means if it were forced to divest itself of AWS or its marketplace business—which helps attract advertisers—it might not have the profits to offer generous free and fast shipping options, among other perks Prime members love.
As for strengths, he cites these three “among many:”
- Online retail dominance: Sales on Amazon.com accounted for 37.5% of U.S. online retail sales in 2019, up from 7.7% in 2010, capping a remarkable decade of expansion. Amazon also accounted for 59.5% of U.S. ecommerce growth in 2019. Furthermore, Amazon is the leading online retailer in Western Europe and one of the top two ecommerce players in Japan, along with Rakuten Ichiba.
- Amazon Prime keeps shoppers coming back: Membership in Amazon Prime keeps growing, reaching 118 million U.S. consumers in March 2020, up from 103 million a year earlier, according to Consumer Intelligence Research Partners. A survey by RBC Capital Markets found 83% of Prime members shop on Amazon at least twice a month and 59% spend at least $800 annually with Amazon.
- Investors are very bullish on Amazon: Amazon is No. 2 in stock market valuation behind Apple Inc. at more than $1.6 trillion. Its ratio of stock price to earnings is 128, more than four times the average of nearly 30 for all Standard & Poors 500 stocks, an indication of investors’ confidence in Amazon’s future. The high price of Amazon’s shares gives it valuable capital with which to acquire other companies and compensate employees without paying high salaries.
Read the full analysis online.
