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Internet retailer Amazon claims to offer "Earth's Biggest Selection", a mammoth range of products which now goes far beyond books and music to include anything from automobile parts to groceries and from clothing to household furniture. The business is firmly established as the #1 internet retailer worldwide (though it faces increasingly strong competition from Chinese rivals operating mainly in Asia). No other company has done so much to establish the reliability and functionality of e-commerce. But Amazon also historically suffered from low profit margins, and rival companies tended to outpace it in earnings growth. That laggard performance appeared to change in 2007, helped along by the launch of the Kindle electronic reader. Huge subsequent investment in infrastructure and technology prompted another slump in profitability in the 2010s. However, the evolution of the Kindle device and its various offshoots, and the rapid evolution of the Prime membership club has seen the emergence of a new role for Amazon as an entertainment broadcaster and creator. At the same time, the group has made a renewed commitment to increasing its profit, not just its revenues, and the result has been a stellar increase in its stock valuation. It has also diversified aggressively, not least through a deal in 2017 to acquire bricks and mortar organic grocery retailer Whole Foods Market for almost $14bn.
Who handles advertising? Click here for agency account assignments from adbrands.net. The group has not traditionally been a big spender on marketing in the past, choosing instead to rely on word of mouth, sponsored search and above all its extensive affiliate service Amazon Associates. Since the launch of Kindle, that strategy has altered, with the result that advertising spend gas soared over the past decade. The group declared advertising and other promotional expenses of $8.2bn in 2018. In the US, Kantar (in Advertising Age) measured expenditure of $921m for 2016, out of an estimated total of $2.6bn.
Interbrand's Best Global Brands survey ranked Amazon as the world's #8 brand in 2016, with an estimated brand value of $50.3bn. Millward Brown's Brandz survey ranked it as the world's #7 brand, with an estimated value of $99.0bn. Both surveys use different measurement criteria.
Amazon is one of the world's best-known internet brands, a pioneer in e-commerce and fully justified in its claim to be the Earth's Biggest Store. It seeks to be the world's most "customer-centric" company, with a strategy underpinned by four principles: customer obsession rather than competitor focus; passion for invention; a commitment to operational excellence; and long-term thinking.
Yet in retail it competes with literally hundreds of competitors, from offline giants such as Walmart to web-only specialists who range in size from big to minuscule sole traders. Amazon has been able to harness a substantial quantity of the latter traffic by channelling it through its own portal in return for a fee, but the congestion has inevitably eaten away at the group's profit margin on high volume products. Amazon's main USP is its own huge range of retail segments, but when shopping comparison and online ordering are so easy there is only limited benefit for buyers in making all purchases under the same roof.
As a result, improving its profit margin has remained Amazon's biggest challenge, even as its profitability has steadily risen. The group finally appeared to have reached a tipping point in 2007 as profits finally began to grow to reflect the company's now huge sales. However, that upturn didn't last long. Between 2011 and 2014 there were significant declines in profitability, reflecting huge investments in digital and physical infrastructure. Those investments finally began to pay dividends in 2016, with a huge jump in profitability. Ironically, the biggest contributor is not Amazon's main trade of retail, but the vast collection of servers that underpin its cloud computing division.
At the beginning of 2017, Amazon operated eleven main portal sites in the US, Canada and Mexico; the UK, France, Germany, Italy and Spain; India, Japan and China, all retailing literally millions of products. There are also local sites in Australia, Brazil and the Netherlands selling only Kindle and digital books. The international portals generally offer a more conservative range, but the US store sells goods in hundreds of literally categories including sports and outdoor products, clothing, jewellery and household furniture and accessories, alongside the core lines of books, music, movies, games and electronics.
Amazon has also extended its service into groceries, offering an extensive range of more than 10,000 non-perishable items through its main site for delivery within the US, as well as fresh grocery items in selected markets. In 2015, trade magazine Supermarket News ranked it as the biggest online grocer in the US with sales estimated at $1.9bn, including around $180m in fresh produce. This service has been gradually rolled out to some international markets. Since that fresh delivery offering required the creation of a time-sensitive delivery network, that same platform has also been used for the launch of home deliveries of cooked meals from local restaurants. The group also began testing check-out free stores for Prime subscription customers, with purchases automatically debited from their account.
In the most startling development to-date of this groceries retail strategy, Amazon announced the acquisition of Whole Foods Market in June 2017 for $13.7bn, its biggest-ever deal by quite a margin. The organic foods specialist had been considered a potential target for several months, but most observers expected a buyer from private equity or within the existing supermarket sector. Despite a downturn in performance, Whole Foods is a substantial business, one of America's top ten grocery retailers, with around 460 outlets. The purchase will increase Amazon's grocery delivery network by at least five times, and will give it access to a national refrigerated distribution system it currently lacks. The deal was approved in August 2017, and Amazon moved quickly to consolidate its control of the business, merging loyalty programs, slashing prices and offering each brands products in the other's retail channels.
The company has also taken steps to widen its global footprint. It will launch a full service in Australia towards the end of 2017, and also agreed the acquisition of Dubai-based Souq.com for around $650m. This is the biggest online retailer in the Middle East, delivering to the six Arab Gulf states and Egypt.
Customer service is high on Amazon's list of priorities and it has introduced numerous initiatives to make online purchasing simpler, safer, cheaper and more rewarding. These include suggestions of other related products, streamlined "one-click" checkouts, text-searching within books, gift registries and so on. Perhaps the most significant service has been Amazon Prime, first introduced in 2005. This initially offered users free two-day shipping on all items in exchange for a fixed-rate annual membership (increased in the US in 2014 from $79 to $99, and again in 2018 to $119). However it has been gradually extended to reward customers with other, increasingly benefical offers. Prime members also now have free streaming of selected movies, TV and music content, as well as access to selected exclusive products. This has allowed the group to build up a massive global membership. Amazon released figures for Prime membership for the first time in 2016: a customerbase of 65m individuals, paying a combined subscription fee of $6.4bn. Feeding off the mass of customer shopping information that Prime provides, Amazon is also beginning to establish a significant position in online advertising, with the ability to target marketing very directly at customers according to their personal preferences.
Though much of the company's growth has been purely organic, it has also acquired or created several specialised shopping channels. In 2006 the group acquired online women's fashion retailer Shopbop, and subsequently spun off a standalone shoes, bags and accessories site, Endless. (The latter was merged back into the main Amazon site in 2012). In 2009, it agreed to acquire another online shoes and accessories retailer, Zappos, for around $1.1bn in stock and debt. That was followed a year later by online baby products retailer Diapers.com, acquired for $545m. This is the largest of what are now several specialist stores grouped under the umbrella of satellite company Quidsi. Others include Soap.com (personal and household care), Wag.com (petfood), BeautyBar.com (cosmetics and personal care) and Casa.com (home goods).
These specialised stores have also encouraged Amazon to push ever more aggressively into private label products. The first such market was home and garden products, and this was followed by babycare products and other lines. However, the most aggressive push into private label has been in fashion. Amazon quietly introduced at least seven own-brands by the beginning of 2016: Franklin & Freeman, Franklin Tailored, James & Erin, Lark & Ro, North Eleven, Scout Ro and Society New York. These span sectors as diverse as men's formal wear to women's casual and even children's clothing. Other labels have followed, making the store an ever more serious threat to traditional physical clothing retailers.
However, media - books, music, movies, games - remains Amazon's core product range, even if it now generates only around a fifth of sales. A music download service was first under development in 2006 but was subsequently dropped because of the dominance of Apple in this sector. It was back on the agenda in 2007 as a result of the shift by music copyright owners towards downloads without the copy-protection technology that restricted the number of times tracks can be copied, or the players on which they could be stored. AmazonMP3 launched in September that year, and it was the first retailer to offer rights-free download from all four major music groups.
Movie database imdb.com was acquired in 2004, primarily to support the sale of DVDs through the main Amazon channel. A movie download service first launched in the US in September 2006 as Amazon Unbox, and the group also introduced a DVD rental service in the UK and Germany. That service was sold in 2008 to independent British rental service LoveFilm in return for a large minority shareholding. Three years later, Amazon bought the business back for an undisclosed sum and later rebranded it as Amazon Prime. In 2013, the group announced plans to launch its own set-top dongle to allow users top stream content directly to their TVs, now the Fire TV device.
However, books still remain the core of the Amazon concept, even if they provide only a small part of total revenues. In 2005, Amazon acquired US company BookSurge, which provides print-on-demand services and sells foreign language and out-of-print titles. This subsequently became part of CreateSpace, a full custom-publishing service which makes also produces DVDs and CDs on-demand. In 2007, Amazon also acquired Brilliance, which had claimed to be the largest independent US publisher of audiobooks, for an undisclosed sum. Early the following year it snapped up internet-based audiobook distributor Audible for around $280m. In 2013, the group acquired the book recommendation social network GoodReads.com for an undisclosed sum. It has around 16m members worldwide.
However the most important development by far was the launch of Kindle in November 2007. The company's long-term vision for the original Kindle was to become the iPod of the printed word: "Every book, ever printed, in any language, all available in less than 60 seconds". During 2010, the Kindle became Amazon's single biggest-selling product, and Kindle books outsold ordinary paperbacks in the US for the year as a whole. By early 2011, they had begun to outsell both paperbacks and hardbacks combined. Several additional versions of the Kindle have also been released since 2007, including lower-cost models partly funded by advertising.
The power of Kindle - which has eclipsed all other rival ereaders, such as Barnes & Noble's Nook - has given Amazon immense power within the digital publishing environment. Apple sought to muscle into this marketplace with its own deal with the book industry, offering better terms to publishers. A bitter war over pricing came to a head in 2014, with Amazon threatening to delist publishers. That conflict was eventually resolved with new agreed terms, but tensions remain.
The growth of Kindle prompted significant rivalry with Apple, which also had his sights set on the book market and attempted to undercut Amazon's terms with publishers with only limited success. That competition accelerated with the launch of Apple's iPad tablet. In 2011, Amazon responded with its own colour touchscreen tablet, the Kindle Fire, offering streamed music, movie and TV entertainment as well as books at a list price well below Apple's iPad. An HD version of Kindle Fire launched in 4Q 2012, at the same time as the Kindle Fire was introduced for the first time into other markets including the UK. Much of the heat has gone out of the tablet market since then, but Apple's Kindle and Kindle Fire remain major participants despite their comparatively fringe position primarily as media screens rather than portable computers. For 2016 as a whole, Amazon was the #3 tablet manufacturer worldwide behind Apple and Samsung. Shipments doubled to an estimated 12.1m devices, equivalent to 6.9% share. A rare misfire in this sector was the launch of the Amazon Fire smartphone, widely regarded as a dismal failure.
Amazon Dash is the name of a set of sponsored shopping buttons that customers could use to re-order specific brands on their accounts. However, perhaps the most successful new device from the Amazon stable has been the Echo, a connected home information and shopping device and music player. This finally made powerful use of the Alexa search system acquired by the group several years earlier, now reborn as an AI-powered digital personal assistant that can be asked to perform a variety of tasks from playing a particular piece of music to ordering shopping or other functions. It was first made available to Prime customers in the US in 2015, and was subsequently rolled out to other customers in the US and then international markets in 2016. A new version unveiled in 2017 has a camera and digital screen that can be used for video phone calls and other services. According to a third-party research report, there were Amazon Echo devices in 10.7m US households by Spring 2017. It had around 71% share of the market, compared to 24% for Alphabet Inc's rival Google Home device.
To feed its growing range of devices and services, the group has also turned its hand to content ownership, launching a filmed entertainment studio to commission programming for exclusive availability via its own network. In Jan 2015, its online-only series Transparent was named Best Comedy Series at the prestigious Golden Globes Awards, and its star Jeffrey Tambor Best Comedy Actor, beating all competition from traditional broadcast network. Further awards have followed for this and other series. Also in 2015, Amazon signed the former presenters of globally celebrated BBC motoring show Top Gear to create a new series exclusively for Prime customers. The total budget for three series over three years was reported to be in the region of £160m. In 2017 Amazon was the first streamed service to win an Oscar, for the independent movie Manchester By The Sea, which it co-produced.
Inevitably, Amazon has also made its platforms and its technical skill available to toehr companies. Most of Amazon's portals also serve as a gateway for other retailers, enabling ordinary individuals, small traders and even rival merchants to sell to Amazon customers in return for fees or a commission on each transaction. Companies such as Target in the US; Waterstones and Marks & Spencer in the UK, and even fashion retailer Lacoste, took their first steps into e-commerce by using the Amazon platform. This encouraged the company to extend its range of services into other areas. In 2006, it launched a sideline, Amazon Mechanical Turk, which specialised in what it calls "Artificial Artificial Intelligence". In effect, it is a system which allows ordinary internet users to take on small paid jobs on behalf of software developers or corporate researchers.
However the most dramatic development has been the growth of its third-party cloud computing operation. Amazon Web Services rents out web storage space, hosting and other services to corporate customers under services with names likes Amazon Elastic Compute Cloud and Amazon Simple Storage Service. In 2011 it launched a consumer-oriented service, Cloud Drive, which lets subscribers store their digital music and other content remotely on Amazon's servers so it can be accessed from Android mobiles and other devices. Cloud services have become one of the most competitive areas for technology companies, and Amazon vies fiercely with Google, IBM and other companies for large corporate or institutional customers. In 2013, for example, it beat IBM to a prestigious $600m contract with the CIA. For 2017, revenues from the AWS division jumped by 43% to $17.5bn.
In 2007, Amazon lost its position temporarily as the world's biggest online business to Google, although revenues rose by an impressive 39% to $14.8bn. Performance was almost as strong in 2008. Despite the downturn suffered by many bricks and mortar retailers, Amazon reported a 29% in sales to $19.2bn. The following two years were just as strong. Another 28% surge pushed revenues for 2009 to $24.5bn, allowing the group to take back the #1 spot from Google. Revenues for 2010 and 2011 both jumped by 40% or more to reach $48.1bn.
However, the high cost of launching and maintaining its Kindle Fire tablet weighed heavily on Amazon's profits. So did huge investment in both physical and digital storage and delivery systems. Having broken through the $1bn barrier for the first time in 2010, net income slumped by 45% in 2011 to $631m. In 2012, the group reported a small net loss of $39m, despite another surge in revenues to $61.09bn.
In 2012, Amazon was one of several US companies which came under investigation from a British parliamentary committee over allegations that it had deliberately sought to avoid paying tax in the UK by locating its legal subsidiaries in other European markets. In that process it was revealed that Amazon UK had generated sales of £3.35bn in 2011, of which £2.91bn were from the main Amazon.co.uk business and £441m from other subsidiaries such as Lovefilm. Pretax profits were £74m, but that amount was stated after a management fee of £151m to the group's main European operating company, located in tax-free Luxembourg.
There was further growth in 2013, with revenues rising by 22% to $74.45bn. The company was also back in the black with net income of $274m, and the group cheered investors further by announcing plans to raise the annual subscription fee for its premium Prime shipping and streaming service. However, the group still makes a huge loss on shipping charges.
Another 20% surge in 2014 resulted in revenues of just under $88.99bn. However the huge investment in infrastructure resulted in a net loss of $241m, the second loss in three years. Having learned from the negative backlash to 2014's net loss, Amazon was careful to maintain its profitability during 2015. A strong final quarter, despite exchange rate losses, caused revenues to top $100bn for the first time at $107.0bn. On the bottom line, the previous year's loss turned into a record $596m profit.
Those investments in infrastructure finally paid a significant divided in 2016, when net income more than quadrupled to $2.37bn, more than the company's entire previous profits combined. Revenues jumped 27% to $135.99bn. A key contributor was the company's cloud computing division where revenues soared by 50% (compared to 25% in its retail operations) to $12.22bn. Profits more than doubled to $3.11bn, significantly higher than the $2.36bn earned from North American retail but on a fraction of the revenues.
North America retail accounted for 59% of revenues, and all profits. International operations generated increased losses of $1.28bn. However, revenues from North America and international both grew at similar rates, after many years in which international had lagged far behind. Both jumped by around a quarter in 2016 to $80bn and $44bn respectively. Key local markets are Germany (sales of $11.9bn in 2014), the UK ($8.3bn) and Japan ($7.9bn).
For 2017, there were fears by the beginning of 4Q that Amazon might report a year-on-year decline in profits as a result of investment in new infrastructure. In the end, though, strong performance for the holiday shopping season combined with a one-off tax gain of $789m to lift full year earnings by 28% to $3.03bn. Revenues for 4Q surged by 38% to over $60bn, well above expectations, lifting the full year total to $177.87bn, a year-on-year increase of 31%. Products accounted for two-thirds of sales, and services including cloud computing and advertising for the remaining third.
North America retail still accounted for 60% of revenues (or $106bn) in 2017, and all profits, while losses from international operations more than doubled to over $3.0bn. Key local markets are Germany (sales of $11.9bn in 2014), the UK ($8.3bn) and Japan ($7.9bn).
For the final quarter of 2018, Amazon recorded a 3rd consecutive record quarterly profit, up 63% year-on-year to $3bn, on sales which rose 20% to over $72bn. Full year revenues were up almost a third to $232.9bn while net income more than tripled to $10.1bn.
Founder Jeff Bezos remains chairman & CEO of Amazon, and owns around 25% of the group's shares. In a separate personal transaction, he agreed to acquire the storied Washington Post newspaper company in 2013 for $250m.
In the early 1990s, investment banker Jeff Bezos saw the possibilities of selling products to a mass market via the new and expanding internet, which seemed to offer a sales channel unfettered by the physical logistics involved in operating a retail outlet and managing inventory. He selected books as his commodity because they were comparatively fashion-free and offered a high profit margin per copy. He moved from New York to Seattle in 1994 to be near a big wholesale supplier, and launched Amazon.com the following July.
Even in those dark days of the internet, the site took off quite quickly, and by the end of the year, Amazon was selling more than 100 books a day. Embracing the communal nature of the web, the site encouraged buyers to submit reviews of the books they had purchased. While this surprised and angered some suppliers, it greatly enhanced Amazon's relationship with its customers. By the end of 1996, sales had risen to almost $16m, before rocketing to more than $140m a year later, encouraging the company to adopt the tag "Earth's Biggest Bookstore". The company floated in 1997, and in 1998 broadened its range with the addition of CDs and videos. Also that year, responding to plans by German group Bertelsmann to establish a rival book service in Europe, Amazon acquired two smaller rivals - Bookpages in the UK and ABC Bucherdienst in Germany - which rebranded as local versions of Amazon.
In 1999, toys, electronics, software, video games and home improvement joined the mix. That year sales raced through the billion-dollar barrier to hit $1.6bn, and Time magazine selected Bezos as its Person of the Year. The company also established outposts in France and Japan for the first time. But within just a year, Amazon was already beginning to attract detractors, who warned that the business was spreading itself too thinly. Investments in other online services such as pharmacy drugstore.com, delivery service kozmo.com and pet supplies outlet pets.com all proved write-offs. As if to cement Amazon's tarnished reputation, the group reported a massive $1.4bn loss for 2000.
Bezos launched a major restructuring in 2001, laying off 15% of its work force. The company also muscled into the territory of rival eBay, introducing person to person transactions via its ZShops third-party stores and auction services, as well as taking over the online operations of other companies struggling with their own e-commerce service, such as Target and Toys "R" Us. Those moves soon began to deliver results, and the group delivered its first modest quarterly profit at the end of 2001, and again in 2002. A year later the company reported its first two consecutive quarters of profit at the end of the year. In 2004, it established its seventh online portal with the acquisition of China's leading internet retailer, Joyo.com.
In early 2006 it began developing a music download service to compete directly with Apple's iTunes. According to press reports, the company was considering a subscription plan model broadly similar to that offered by mobile phone operators: users would subscribe to a dedicated Amazon download service and receive a custom-made music player as part of the offer, pre-loaded with a selection of promoted tracks which can then be swapped or updated online. By mid-year it became apparent that Amazon had abandoned the music service in face of the continuing dominance of Apple, but was instead preparing to launch a video download service. This arrived in September under the name Unbox.
Last full revision 19th May 2017
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