Analysis of one of the leading retail companies in the world.
Company Paper Analysis: Amazon.com, Inc.
Introduction
Amazon.com is one of the leading e-commerce organizations operating on a transnational scale. In the United States, it is the leading online retailer dealing with a wide range of consumer products. Founded in 1994 as an online book store, its founder Jeff Bezos, who as 2019 holds the record of the richest man in the world sought to make the company grow in leaps in bounds over the years. Currently, Amazon.com, Inc. owns five other companies and about 40 subsidiary companies and even produces its own products such as Amazon Kindle. The organization controls 20% of the global market share in retail. Therefore, the organization can be termed as one of the most successful in a technological age, curving its niche in the retail segment.
Company Background
Amazon.com, Inc. was founded in 1994 as an online book store by Jeff Bezos. Within a few months after being founded, the company expanded its operations into the 50 states in the country (Wittekind, 2012). After going public in 1997, the company ventured into selling videos and music which was also the time it started operating internationally. By 2000, the company was dealing with consumer electronics, games, video games, toys, software, home appliances and improvements among other items (Wittekind, 2012). In 2002, the company ventured into facilitating internet traffic, website popularity for developers and marketers. In 2006, the company ventured into clouding computing which serves as a data storage via the internet (Wittekind, 2012). In 2017, the company bought Whole Foods Market franchise after buying Kiva systems in 2012. The progress has made Amazon.com, Inc. one of the sustainable companies in the world, especially in the e-commerce industry (Escoda, 2018).
Objectives, Goals, and Strategies
The management of Amazon.com, Inc. plans to become the leading client-driven company by having the most elaborate clientele sets which include content developers, customers, vendors and enterprises (Mennen, 2010). In this case, the organization is esteemed in giving value to their customers, by having top quality services to them. The management of the organization has laid emphasis is based in the reduced costs of operations, product differences, increased convenience, quality products and customization of products to meet client’s need (Wittekind, 2012). Since its conception, the company has taken initiatives to ensure creativity is one of the aspects which draws clients to them, by having customer friendly products. In this case, it is the value in which it holds its clients which gives it a competitive advantage over other competitors. By stressing on the need of the clients, the organization has attained a market superiority against its competitors. Central to the structure of the business model is the emphasis on product prices, selection, convince and service (Wittekind, 2012). Also, by being keen on innovation, the organization is focused on improving e-commerce trade and understanding their customers more.
The main competitors of Amazon.com, Inc. include Barnes and Nobles (BN) which is an online book retailer, which has expanded its services to consumer goods. A third-party non-book retailing organization, e-Bay offers a transnational competition mainly in the United States and Europe (Mennen, 2010). Internationally, the company faced stiff competition from fast-rising Asian based online retail store Alibaba, and Africa’s rising Jumia online retail store. However, Amazon controls much of the online retail market share than any other e-commerce organization in the world (Escoda, 2018). There are several aspects which Amazon.com, Inc. holds a higher competitive advantage over other players in the industry.
i. One-click shopping: The company prides in providing an increased customer experience in their online store by reducing the time spend while shopping. In this case, the organization gives a single click shopping experience which is convenient to most of the customers (Nabyla, 2014). This reduces a load of transactions for clients on the website, making it more shopper friendly. Before the deployment of such a venture, the company did a feasibility study to determine the impact of single-click shopping.
ii. Company provides adequate product information which can be viewed online. In this case, every product information is accessible to the clients, where they know the details of the product they would be purchasing (Nabyla, 2014). In terms of books, the company provides purchase circles, where it gives details of the book a client is interested in, and alternatives to the same.
iii. To their prescribed customers, Amazon.com, Inc. provides email alerts and notification on new products, newly published books from preferred authors, and favorable discounts (Nabyla, 2014).
iv. The other feature which makes Amazon.com, Inc. have a higher competitive advantage is the creation of a wish list to their clients. In this case, the company designs of recommended list of products which the client should consider buying the future (Nabyla, 2014).
It is therefore evident that the organization is focused on honoring the seven Cs to create value. These include Convenience, Content, Community, Connectivity, Communication, Customer care, and Customization (Mennen, 2010). It has collaborated with other online entities such as Block and Mortar store for the more online platform in showcasing their products. Its also joined with other online stores to increase online shopping and reach more clients (Escoda, 2018). Despite this growth and diversification, the organization has still kept and improved its customer fulfillment and quality shopping experience.
Financial Health: Revenue and Asset Investment
The source of revenue for Amazon, Inc is from the sale of services and items to clients. The organization offers everything from consumer goods to internet services such as cloud computing. It was among the first organization to run an online store and up to date, the venture remains one of its primary sources of income accounting to 60% of its net revenue. It is one of the companies which have maintained double-digit growth in revenue for the past two decades. In 2015the company had a net $107 billion, a 17% increase to $135 billion in 2016, 21% increase to $177 billion in 2017 and 31% increase in 2018 to $232 billion in revenue (10-K report, 2018). This was a continuous increase which catapulted its founder Jeff Bezos to be the richest person in the world according to Forbes. Therefore, it can be determined that the company is growing at an average of 25% which makes it suitable for investment.
The company’s investment in worthy assets has been critical influences on the lucrative growth of Amazon.com, Inc. the company has divided its revenue streams into six major categories as of 2018; physical stores, online stores, subscription services, Amazon Web Services and Third-Party sales services (Escoda, 2018). Third party services include shipping fees, commission transactions, fulfillment fees on third seller services. As an indication of the company’s fast-growing business, the company has ventured in other dominated regions and surpassed other long-serving players in that industry (Escoda, 2018).
As of 2017, the advertising revenue from Amazon was at $1. 65 billion which surpasses the ones being held by Twitter, ($ 1.21 billion) and the one for Snapchat at $645 billion (10-K report, 2019). According to the eMarketer, Amazon.com, Inc. is forecasted to increase to $4. 61 billion by the end of the 2019 fiscal year (Perrin, 2019). It is a 65% annual growth rate in revenue drawn from the advertisement. This would put a distant third from the duopolised segment by Google ($ 42 billion) and Facebook ($23 billion) (Perrin, 2019). Currently, the two hold 58% of the advertising market share. It is projected that by 2020, Amazon, Inc. will only be able to control 7% of the advertising market share (Perrin, 2019). However, the venture has increased the company’s revenue making it one of the successful companies.
Apart from online sales and digital advertisement, cloud computing was instrumental in increased net revenue of the company. The 13-year-old cloud computing services have been profitable for the last decade. The Amazon Cloud Services allows clients to store information for a fee (Dua, 2019). In this case, as of 2018, the company controlled 35% of the total cloud market share. According to Business Insider, this is more than more double than its closest competitor Synergy Group. the other competitors in the cloud computing include Microsoft, Corp, and Alphabet, Inc. Amazon.com, Inc. in 2018 revenue was $26 billion, which was a 47% increase from 2017(Dua, 2019).
The company has enjoyed stable and increased financial might, which led the management to consider in venturing into physical stores. In 2017, Amazon.com, Inc. succeeded in buying Whole Foods Market which deals with organic grocery. A $13.7 billion investment into physical store led to the introduction of new products, and the elimination of rivals due to pricing wars (Escoda, 2018). However, the company has secured access to many physical stores in the United States, fronting its idea of venturing into physical retail on other products, especially consumer goods. Spectators have billed the move as a way of Amazon.com, Inc. venturing into other businesses such as apparel or pharmaceutical distributions (Nabyla, 2014). This is after entering into a buy out with PillPack, which is an online pharmacy base for $753 million. Currently, the company is experimenting with Amazon Go, which are urban convenience stores, which would morph into retail pop-up stores around the world (Escoda, 2018).
Economic Performance
The shares of Amazon.com, Inc. has increased over the past seven years which is palatable to any investor who wishes to cast an investment into the Amazon.com stocks. This is due to the reduced prices of their products which changes approximately 2.5 million times in a day (Agate, Mehta, & Detroja, 2018) This is an indication that every product price listed on Amazon.com changes its price on an average of 10 times in a day. This business model has helped the company to earn a 25% increase in its net revenue collection to increased traffic into the websites and subscriptions (Agashe, Mehta, & Detroja, 2018). However, some consumers are annoyed when the price of a product is reduced just about the minute; they buy it.
Amazon.com, Inc. enjoys a Price-Earning (P/E) ratio of 138 which is the second highest among the FAANG stocks as of October 2018 (10-K report, 2018). The Price to Sales stood at a palatable 4.06 which is the lowest in the stock listings and offers a more reasonable of the Amazon stocks. Amazon stocks have been on a steady rise since 2015 where they stood at $300, however, as of February 2019, the price was $1640. The price of the stocks was congruent with the stable company sales which were at a multiple of 1 to 3 (Tobey, 2019). Spectators have billed the share price of Amazon.com, Inc. to grow to approximately $6000 per share the next decade. This is determined from the average rate of sales growth of the company (Tobey, 2019).
The profitability of a company is one of the prime factors which investors consider before pouring their money into an enterprise. Though the company had an increased sale by a 34% margin, it had a loss of $622 million. In this free cash flow decreased from $10.1 million to $ 7.3 million, meaning that the company was investing more into new ventures (10-K report, 2018). In overseas transactions, the company is still losing millions, yet maintaining a sustained economic growth overall. It became the second company in the United States to have its market valuation surpass the enviable $1 trillion mark. This was after in September 2018, the company shares rising to an all-time high of $2050 making the company cross the $1 trillion valuations (Dua, 2019).
The biggest challenge Amazon.com, Inc. faces is keeping competitors at bay such as eBay and Walmart in the U.S and Alibaba on an international scale (Ritala, Golnam, & Wegmann, 2014). Competitors are keen on gaining into the company’s e-commerce market share, to make a profit in the technological age. The other challenge is balancing investments and profits. This is an aspect which has irked many Amazon.com, Inc. investors where the company’s cash flow is limited due to the many investments the company is venturing in (Ritala, Golnam, & Wegmann, 2014). Though it is great to invest, it can be a red flag to investors because they need to see good returns on their investments.
Recommendations and Conclusion
It would be advisable for a person to invest in Amazon.com, Inc. and buy their stocks. One reason is that there is a steady surge of operating income of Amazon.com. With an average growth of an average of 25% as of 2018, the company’s profitability is very surreal and palatable for investment. The improvement of economies of scale within the organizations North American online commerce trade makes its operating income to be strong and stable. The second reason is that the growth story of Amazon.com, Inc. is intact. Managing a 20-year, double digit growth, acquisition of physical stores, and development of Amazon Web Services means the management of the company is shrewd and prudent. Its growth and development are expected to grow because of increased online shopping by millennials. Market survey indicates that 79% of millennials are engaged in online buying which is convenient and easy. The third reason is that the valuation of the company is good. The company’s earnings per share have been on a steady rise, whereas of 2018, they rose from $2.39 to cap at $14.10 at the end of the year (10-K report, 2018). Analysts have speculated that the company’s earnings per share will have an average growth of about 35% for the next five years.
To conclude, Amazon, Inc. is one of the best companies to invest. This is because it has maintained steady economic growth, formidable economic performance and has a stout competitive advantage. Therefore, an investor is assured of steady returns to their desirable investment. However, to ensure the brand’s continuity, the company should ensure that it offers its products more competitive prices than their peers in the industry. Also, prudent expansion is necessary to ensure that investors money is not lost through unproductive investments whether homegrown or overseas.
References
The 10-K report, (2018). Amazon.com. retrieved from https://www.sec.gov/Archives/edgar/data/1018724/000101872419000004/amzn-20181231x10k.htm
Agashe, A., Mehta, N., & Detroja, P. (2019). Amazon changes prices on its products about every 10 minutes — here's how and why they do it. Retrieved from https://www.businessinsider.com/amazon-price-changes-2018-8?IR=T
Dua, T. (2019). Digital now makes up the majority of marketers' ad spending, and Amazon is poised to win big as it eats into Google's share. Retrieved from https://www.businessinsider.com/digital-advertising-is-bigger-than-ever-and-amazon-is-growing-fast-report-2019-2?IR=T
Escoda, R. (2018). Management Case Study Amazon. Analysis and Decision Making. GRIN Verlag.
Mennen, M. (2010). Global Corporate Strategy-A Critical Analysis and Evaluation of Amazon. com. GRIN Verlag.
Nabyla, D. (2014). Developing Strategic Business Models and Competitive Advantage in the Digital Sector. IGI Global
Perrin, N. (2019). Amazon Is Now the No. 3 Digital Ad Platform in the US. Retrieved from https://www.emarketer.com/content/amazon-is-now-the-no-3-digital-ad-platform-in-the-us
Ritala, P., Golnam, A., & Wegmann, A. (2014). Coopetition-based business models: The case of Amazon. com. Industrial Marketing Management, 43(2), 236-249.
Tobey, J. (2019). FAANG Popularity Is Back, But the Stocks Are Not. Retrieved from https://www.forbes.com/sites/johntobey/2019/03/06/faang-popularity-is-back-but-the-stocks-are-not/#54ae00d1689a
Wittekind, E. (2012). Amazon.com: The Company and Its Founder. ABDO
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