Condensed Amazon SWOT Analysis
- Largest online retailer
- Diverse product line
- Multiple services offered to consumers
- Efficient distribution chain and logistics
- Patent infringement issues
- Frequent technical outages of Amazon’s web hosting
- Low margin business
- Growing e-commerce and e-reader market
- Growing emphasis on digital advertising businesses
- Growing interest in cloud computing
- Intense competition for e-commerce and e-reader markets
- Risk of Foreign exchange fluctuations
Worldwide sales at Amazon soared by 43% in the first quarter of 2018 to $51 billion, with profits rising to $1.6 billion. It is a far cry from the business launched by Jeff Bezos in 1995 as a book-selling website.
Detailed Amazon SWOT Analysis
1. Low cost structure, the largest merchandise selection and a huge number of third party sellers
Amazon is the largest online retailer in the world. In 2019, the company earned US$141.247 billion from online sales of its own merchandise and an additional US$53.762 billion from the commissions of the third party sellers’ sales in its online stores. In total, the company’s online retail operations brought in a massive US$195.009 billion in revenues – more than the next few largest online retailers earned combined.
Amazon’s extraordinary online growth has allowed the company to become the 2nd largest retailer in the world, only behind Wal-Mart, when compared to other brick and mortar companies.
Source: Amazon financial reports and Digital Commerce 360
Note that Amazon has grown much faster than the entire U.S. e-commerce market, meaning that the company has actually increased its market share by taking it from the competitors.
What is the key to such success? According to the Amazon’s report, the online store’s success lies in its low cost structure, the largest merchandise selection and a huge number of third party sellers.
Figure 2. Jeff Bezos “napkin sketch” outlining Amazon’s strategy
Source: Seeking Alpha
A low-cost structure leads to lower prices, which combined with a huge range of products, results in a better customer experience. Satisfied customers invariably return to the Amazon websites, creating ever-growing traffic, which subsequently attracts 3rd party sellers to Amazon’s marketplace. All of these factors lead to faster business growth for Amazon.
Amazon follows a cost leadership strategy, but so do many other online and offline retailers. Why then does Amazon outperform them?
- Low cost structure. By mainly selling online, Amazon doesn’t incur huge costs related to running physical retail outlets. Online marketplaces also potentially allow for selling more units without any increase in marginal costs.Amazon constantly invests in both additional fulfillment centers and to existing centers to enable a reduction in order fulfillment times and shipping costs. These time and cost savings result in lower prices that are passed on to consumers.
- Selection. According to ScrapeHero, Amazon sells around 120 million of various products in its Amazon.com Marketplace. In comparison, Walmart offers only 43 million SKU’s in its online shop, or just 36% of the number of products that Amazon offers. This vast difference in range is the reason why online customers are more likely to visit Amazon.com rather than Walmart’s e-shop.
- Third party sellers. Amazon’s business model includes accommodating third party sellers who are able to offer their own merchandise on Amazon’s sites and whose products therefore compete against Amazon’s. At the beginning, third party sellers were mainly attracted to the Amazon Marketplace because of the high traffic to its stores. Now the main drivers are such programs as ‘Fulfilled by Amazon’ and Prime. Third party sellers often offer products that are not available through Amazon’s retail division.In 2018, third party sellers accounted for 58% of all the products sold through the company’s online stores. Amazon’s third party sales grossed US$160 billion in 2018, while eBay’s merchants sales only grossed US$95 billion in the same period.
Low prices, huge product range and the vast number of third party sellers are all key factors in improving the Amazon customer experience and in driving more traffic to their sites. Few companies can compete with Amazon in any of these areas.
2. Synergies between Marketplace, Amazon Web Services, Prime and subscription services
Amazon is involved in 4 key businesses:
- Amazon Marketplace
- Amazon Web Services (AWS)
- Amazon Prime
- Subscription Services
All four Amazon offerings support each other and create benefits that would not be achieved if the businesses operated independently.
Source: Strategic Management Insight
AWS was introduced in 2006 when Amazon realized it could sell its servers’ excess capacity to other enterprises. For Amazon as an online retailer, the key place to sell its goods is its website.
To run an e-commerce website with millions of visitors each day the company had to invest heavily in its server infrastructure. These investments and the resulting server capacity have helped AWS to grow. In return, AWS provides two important elements for its sites:
- Speed. Page load speed is crucial for Amazon. Every 100ms of delay costs the company tens or hundreds of millions due to the lost customers. AWS helps to speed up the website’s load time, so that Amazon is able to serve each customer as quickly as possible. Subscription services also benefit from this. The content and especially, the video content is served very fast to the subscribers, increasing their satisfaction with the service.
- Capacity. During the peak times of Cyber Monday (the Monday after the Thanksgiving holiday in the U.S), Black Friday (the Friday after the Thanksgiving holiday), and in the several weeks leading up to Christmas, Amazon receives an overwhelming number of visitors to its sites. AWS’s huge capacity, which is not needed during the rest of the year, is employed during these peak times to help Amazon cope with the increased number of visitors.
In 2005, Amazon introduced the Amazon Prime subscription service, which offers access to Prime Videos, Prime Music, free two-day delivery, same day delivery and many other benefits for a flat annual fee.
As of December 2019, there are 112 million Amazon Prime members worldwide. Prime users buy more merchandise and spend more on each item than regular users. Marketplace helps to attract new visitors to Prime through its Fulfillment by Amazon program (FBA).
The FBA program allows third party sellers to place their products in Amazon’s warehouses, where Amazon takes responsibility for all logistics, customer service, order fulfillment and returns. This enables more products to become eligible for Amazon Prime, which is the key for the program to flourish.
In addition, packaging and shipping costs are reduced when two or more items are shipped. As a result, Prime becomes more profitable and Amazon customer satisfaction increases.
Prime members also get an access to the Amazon’s prime content and subscription services. Amazon marketplace customers who are signing up for the Prime membership for faster deliveries and bigger discounts are more likely to consume the Amazon’s prime content and will get locked to the Amazon’s Prime membership even more.
On the other hand, people who become Prime members due to the Amazon’s Prime content, will spend more on Amazon Marketplace due to the Prime membership benefits. Prime membership creates multiple benefits for every Amazon service and the company itself.
Synergies between Amazon’s Marketplace, AWS, Prime and subscription services are hardly quantifiable, but they provide some of the strongest competitive advantages any company could have.
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