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The Great Worry About Amazon

At the onset of the pandemic, I found myself hurtling across Wisconsin, desperately trying to get back to Canada. At the time, wanting to avoid airports, I elected to drive cross country to visit prospective clients. I made the false assumption that I'd have time to reflect and ponder complex issues, while somehow enjoying the scenery. During that week, after President Trump's March 11 TV appearance, all that consumed me was getting home before the border shutting down.

Once I crossed the Canada-U.S. border, my concerns shifted towards family, friends, and employees. All the while, Mercatus was experiencing a 600% surge in transactions, and I couldn't help but wonder, are physical grocery stores going to close? Where will I buy food? I snapped out of it, and after about a week at home, something subconsciously started to occur. I realized that I had taken the least resistant path and consolidated our household food budget into one food retailer, Sobeys.

On top of that, I started to use Amazon for everything else. Convenient and Safe. I used Amazon to augment my home office, purchase fitness gear, face masks, and stacks of books to cover me during downtime.

The coronavirus has had a positive effect on grocery retail and decimated other retail verticals. For March, Kroger reported an increase of 30% for the same identical-store sales. The boom in grocery wasn't only for brick-and-mortar operators. Grocery eCommerce sales continue to experience unprecedented growth. In a recent report published by Brick Meets Click/Mercatus, online grocery sales reached $7.2B for July. An increase of $600M from the previous month. While some were gaining, so did Amazon. As of early July, Amazon's stock increased by more than 60% and now trading at around $3,000 per share. It bottomed out at around $1,600 in mid-March as the stock market plunged amid widespread business shutdowns due to the coronavirus pandemic. And regardless of its success, Amazon is in hot water.

The whole issue reached a crescendo in early June, with a mindless tweet from Elon Musk calling for Amazon's break up. Musk was coming to the aid of Alex Berenson, a former NYT reporter, who had complained about Amazon rejecting his book. Who knows if Musk's tweet helped resolve the situation, but Amazon did quickly settle with Berenson. Musk's comment that monopolies are wrong isn't new. Back in early March, Sen. Elizabeth Warren put forward a bold proposal to break up big tech. companies, which include Facebook, Google, Apple, and Amazon. Sen. Warren claims that these companies have too much market power and bully smaller organizations. So who's to blame? Amazon or the rest of us, who do not innovate and take a creative approach to what we do. I don't fear the Amazon of today, but I do fear the Amazon of tomorrow. Let me explain.

Let's start by taking stock of Amazon's business units. They operate in four market segments, eCommerce, cloud computing, consumer electronics, and retail (Whole Foods Market).

Amazon reported revenue of $75.5B for the first quarter of 2020, a net sales increase of 26%, compared with $59.7B in the first quarter of 2019. With over 208m unique U.S. monthly visitors to amazon.com and 44% of U.S. eCommerce market share, up 40% from 2018.

As for AWS (cloud computing), revenue in the first quarter was $10.2 billion, up from $7.7 billion in the same period of 2019. Operating income for the division was $3.1 billion. That is up year over year from $2.2 billion. While AWS is not Amazon’s largest unit, it is the fastest-growing. Furthermore, the AWS operating margin of 30% is massive compared to the other divisions of Amazon.

The size of the global cloud computing market is over $260 billion, and it is expected to grow by 10% to 30% over the next five years. AWS is the top company in cloud market share, which is why the division is so valuable.

At the end of 2019, Amazon was the leading vendor in the global speaker market, having a market share of 28.3% in the fourth quarter. In the third quarter of that same year, Amazon controlled 61% of the U.S. smart display market. During that period, there were about 9.6 million intelligent display users in the United States. Amazon does not break down its numbers for its own branded consumer electronics devices, but for example, some suggest that Amazon Fire TV tops 34 million users worldwide.

The last reported revenue numbers for Whole Food Market, acquired in 2017 for $13.7B, were $16B in 2017 up from $15.72B in the previous year. I have reported extensively in the media that Amazon's reasons for acquiring Whole Foods Market were to learn grocery retail and secure customer data to better model purchasing behaviors and patterns.

Combined or separate, the revenue performance of these four business units is impressive. The likelihood of any corporation catching-up is highly unlikely, and if one could, only a few would attempt.

Now that you have a better sense of Amazon's core business units. Lets quickly run through some of Amazon's acquisitions and device launches since 1998. I think you'll start to see a correlation.

  • Leep Technologies, '99, amount undisclosed
  • Prime Video released '06
  • Kindle released '07
  • Audible, '08, $300M
  • Kindle Fire released '11
  • Amazon Echo released '14
  • Amazon Fire Phone released '14
  • Fire TV Stick release '14
  • Whole Foods Market, '17, $13.7B
  • Blink, '17, $99M
  • Ring, '18, $839M
  • PillPak, '18, $753M
  • Echo Auto, released '18
  • Eero, '19, $97M
  • Zoox, '20, $1.2B

I believe that every acquisition that Amazon makes is in constant support of its four business units. These acquisitions and product launches appear to be innocent on their own. But what if by chance, you could bring together the raw data generated by the total of these solutions. You could instinctively influence purchasing patterns across all channels. The inferred data that could be generated by a combination of a few of these solutions could have widespread consequences. Knowing the content we consume combined with the food we eat, and the medication we take gives Amazon unprecedented power. A capability to quietly influence the masses that not even governments posses. A missing piece to the puzzle is Amazon owning a telecommunications company, which would give them rich location data.

Now you know why I fear the Amazon of tomorrow and the weaponization of their raw data.

What do you think? How do other retailers fight against this?

Click on the link to send me an email.









Sylvain Perrier

Sylvain Perrier


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