Amazon’s new retail business model: customers win, competitors lose, and sellers pay to play

Originally published in CEOWorld February 12 2022

Retail is, conceptually, pretty simple. A retailer buys in stock, marks it up, and sells it to a customer. When executed well, the retailer makes money – enough to pay for business operations, a profit, and the items that didn’t sell. That model goes back at least 3,000 years, and it’s still the dominant model today.

Of course, there are variations. Sam’s Club and Costco, for example, charge a modest annual fee, which adds to revenue. Big retailers have learned they can charge (a lot) for prime placement within the store. In some industries, retailers have imposed sale or return policies – publishers know they have to offer booksellers the option to return unsold books if they want those orders to keep flowing. Still, the basics are still pretty simple: overwhelmingly, revenues come from sales.

Amazon is different. It has developed a new retail model, where revenues from sales are only one of four important revenue streams. TAs a result, revenues from customers are a much lower percentage of total Amazon Retail revenues, which in turn allows Amazon to charge those customers lower prices. ­ Obviously, this is a huge advantage.

How does this work?

Continue reading “Amazon’s new retail business model: customers win, competitors lose, and sellers pay to play”

Amazon Sidewalk is Threat – But to Whom?

Amazon’s new neighborhood wifi network (called Sidewalk) launched this week. It’s been castigated as  threat to users by privacy hawks, and hailed by Amazon as an inexpensive way to extend security services out to the the edge of a property and even beyond.

In a new article for CEO World, I argue that the immediate impacts will be less troubling than critics fear, and less effective than Amazon hopes. But the long term value of building an entirely new and potentially ubiquitous global network without laying an inch of fiber or investing in any edge devices is enormous, and I expect Amazon to fully exploit this opportunity.

See the full article at  CEO World 

How Rockwell and Other Companies Can Take on Amazon and Win

If you are in a business segment with significant revenues, Amazon is coming for you sooner or later. That’s the truth behind Jeff Bezos’s famous statement: “your margin in my opportunity.” Even long-time B2B winners like Rockwell must face that new reality.

But all is not lost. In an oped for the Milwaukee Journal Sentinel, I show how it’s possible to learn from Amazon to defend existing businesses in ways that Amazon cannot match.

See the full article here

 

The Gold Rush is On

The Marketplace Gold Rush is on! According to Marketplace Pulse, $4 billion has now been raised in private finds to purchase companies that have built successful products on the Amazon Marketplace. That’s a staggering amount for what businesses that could quickly dissolve in the face of new competitors or indeed Amazon’s own entry into a product category.

Source: Marketplace Pulse

These figures do however say, loud and clear, that there is money – lots of money – to be made on the Amazon Marketplace. Continue reading “The Gold Rush is On”

Amazon’s PR offensive on worker training rolls on

Amazon got  a lot of positive buzz for its Amazon Technical Academy announcement. But before we all start leaping up and down, let’s unpack the announcement.

  • “Hundreds of Amazon employees have enrolled in Amazon Technical Academy since its launch in 2017.” Well, “hundreds” of enrollees over 3+ years is not exactly blowing the doors off. Amazon has 1.2 million employees.
  • How many complete the course? Oops, Amazon doesn’t tell us. Given that these kinds of programs typically have low graduation rates, I would be amazed if even 50% graduate.
  • Graduates to get software development jobs at Amazon, and their salaries do approximately double. Further, this is tuition-free, and Amazon offers a stipend to cover living expenses. All this is clearly admirable)
  • “$12 million invested in 2020” is not exactly busting Amazon’s staffing budget

If Amazon told us actual numbers of enrollees and graduates, I’d be happy to applaud. In the meantime, I’ll hold my fire, and suggest that this is a lot of PR over not much yet.

More on Bessemer

The recent unionization campaign at the Bessemer Alabama  warehouse has generated tremendous pushback from Amazon – tons of propaganda inside and outside the warehouse, efforts to eliminate voting by mail, even getting the Post office to add a postbox in the parking lot. And of course hiring well-known union busters to work on its behalf.

I’ve written elsewhere that even if the union wins in Bessemer, it’s a very long road, involving years of trench warfare, to unionize the rest of the warehouses. I hope the unions are successful in the long march toward a unionized Amazon, although for many reasons I don’t think they will be.

But there is one point I want to add. Amazon claims that “Our employees know the truth—starting wages of $15 or more, health care from day one, and a safe and inclusive workplace.” It does pay relatively well, and fulltime workers get health care benefits immediately (the much touted 401k and education benefits are more of a mixed bag). A spokesperson notes that it was the second best company in the world to work for, according to a Forbes (survey though that presumably mixes white- and blue-collar workers, and the methodology is a bit shaky anyway). It claims its warehouses are a great place to work.

But Amazon could easily prove that it;s a great employer for warehouse workers, simply by revealing the numbers that show labor turnover: how many workers last a year in the warehouse? What’s the average or median job stay? What’s the average turnover rate by warehouse? How well does it treat older workers, or disabled workers? it’s all in the numbers.

Amazon already knows all these numbers. If they were good, if they bolstered Amazon’s case, I have no doubt that Amazon would distribute them far and wide. But it doesn’t do that, so we can’t answer any of those questions. We do know that in 2017-2018 Amazon fired 684 out of about 2,000 workers at a Baltimore warehouse (revealed thanks to filing in a lawsuit). No doubt many more workers left voluntarily during the year, given the massive physical demands of the workplace.

So if Amazon really wants to convince us that its warehouses are a great place to work, it can easily do so: just provide the data. We can connect the dots. The fact that Amazon won’t do so is very strong evidence that its claims are more PR than physical reality.

Over to you, Amazon.

Into the Future: Amazon and the Coming Rise of Personal Healthcare

For 100 years, retailers have segmented the broad marketplace into groups – soccer moms, or Millennials, or New Yorkers, or readers…  pretty much every retailer uses target segments like those.  But Amazon has never been interested. Instead, it wants a segment of one: you. It gathers information about what you look at, what you buy, your browsing habits. To that it adds information from your purchases – address and credit cards on file – as well as your Amazon address book to find those close to you. It is also the second biggest tracker on the web, after Google, so it follows your activity far beyond the Amazon ecosystem. And it can access the standard sets of information that can easily be sucked in from outside: your credit score, your home ownership, criminal complaints and records…. Amazon  probably knows more about you than any other entity on the planet, including your mother and your spouse. and now, it’s moving into healthcare. Continue reading “Into the Future: Amazon and the Coming Rise of Personal Healthcare”

More on Amazon’s P&L

Amazon’s recent 10k filing allows an update to the analysis published in Behemoth, Amazon Rising. Unsurprisingly, as we know, revenues boomed during the pandemic, and that was true for all segments except physical stores. However, trends that existed pre-pandemic have accelerated: Amazon’s first party retail operations lost a staggering $42 billion in 2020, red ink that was covered by the explosive growth of profits in other segments:

We must therefore understand Amazon’s profitable segments in an entirely new light. it turns out that AWS is the smallest contributor to Amazon’s operating income among the big four profitable segments:

This helps to explain why Amazon has been squeezing sellers, pushing Prime internationally in particular, and above all turning Amazon.com into a giant ad.

This post uses the most recent Amazon 10k filing to update the detailed analysis (including a full description of my methodology) in Behemoth, Chapter 9.

Growing losses in Amazon Retail

Amazon’s most recent 10k filing with the SEC confirmed – accelerated – existing trends. While Amazon works hard to obfuscate results for its major segments, a careful analysis shows that Amazon Retail’s losses have accelerated every year since 2014, and reached the staggering total of $43 billion in 2020: that’s a negative operating margin of 21.8 percent, up from 20.7 percent in 2019, while retail revenues grew by $56 billion.

Source: Amazon 10k reports; author calculation. A detailed discussion of the methodology used is in chapter 9 of Behemoth, Amazon Rising: Power and Seduction in the Age of Amazon

Why is the ocean of red ink growing? There are a few obvious reasons:

  1. Too many supply chains to manage. By 2016, Amazon has 13 millions for sale through its retail division. That number has undoubtedly grown since then. Managing supply chains for many millions of items is beyond challenging.
  2. Extension into the wrong retail segments. Challenging IKEA on price is a fool’s errand. In too many segments, Amazon faces well established competitors with a better understanding of their business.
  3. The Marketplace challenge. Amazon’s Marketplace has attracted 2 million sellers. Many specialize in a handful of SKU’s, which they understand completely, and where they can compete effectively against the great white whale that is Amazon Retail.
  4. Chinese manufacturers. By opening the direct pathway between Chinese manufacturers and American consumers, Amazon has in effect disintermediated itself.

In my next post, I’ll explain how Amazon can shrink the red ink quickly and efficiently.

  1. Failed automation? Amazon has over the past few years tried to automate the product buyer function, replacing industry buyers through the “Hands off the wheel” initiative. There is no sign that this is being successful. In the contrary.

Behemoth released!

Just a note to say that my book Behemoth, Amazon Rising: Power and Seduction in the Age of Amazon has been released in paperback and as an ebook. I hope you’ll give it a look, and if you buy it, do make sure to leave reviews at Amazon and/or Goodreads (the modern currency of the book world). It’s available at most bookstores and of course Amazon. You can find more links on my book page.

I’m doing a launch event as a roundtable at GWU with three other experts on Amazon at 12pm on Wednesday March 3rd. I’ll be speaking around 12,30 if you have limited time. Details here. To register, just send an email to gwipp@nullgwu.edu. They will send you the zoom link. The other speakers at least are very knowledgeable and entertaining.

Behemoth has had some initially favorable press, and I hope you can help spread the word, as I’m looking for more opportunities to reach out. Anyway, happy to talk more about it and to connect more generally – I’m now emerging from the long dark tunnel of authorship…