Collected Thoughts on Amazon

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Miscellanous / Thursday

When it comes to Amazon, there is so much to cover. On one end, you have the convenience that is hard to resist – yes, even for those who complain about low wages in warehouses on Facebook. On the other end, it seems that there is no opposition on the playing field. With my own work this summer and engaging with business operations on a deeper level, I’ve been pushed to think more about the company. Combined with the fact that I can’t seem to not talk about it with anyone who I think might have an insight, it seemed like a good time to put some thoughts in writing.

The skeleton of my thinking has been formed by writers like Eugene Wei (early employee at Amazon), Ben Thompson over at Stratechery, and Brent Beshore of Adventur.es. My conversations have provided the flesh and filled in gaps. My experiences with smaller companies that are in a frenemy tango with Amazon have given life to this structure.

I’m going to tackle three things in this post: shipping and customer expectations, Amazon and Healthcare, and vulnerabilities. They all go hand in hand, but feel free to skim around.

Of course, there is a lot I leave out – particularly things about low wages and destruction of indie brands. This is deliberate because that’s not a strategic way to think about things. Instead of complaining on Facebook or writing the next article on The Intercept, it’s much more productive to think about the strengths and weaknesses of the company. That’s what this post is going to be about.

Two-day Shipping

Talking to Amazon customers, one of the biggest advantages that Amazon has is two-day shipping. Almost 60% of all US households have a Prime subscription. Eugene Wei has this take on why this is so important:

People hate paying for shipping. They despise it. It may sound banal, even self-evident, but understanding that was, I’m convinced, so critical to much of how we unlocked growth at Amazon over the years.

People don’t just hate paying for shipping, they hate it to literally an irrational degree. We know this because our first attempt to address this was to show, in the shopping cart and checkout process, that even after paying shipping, customers were saving money over driving to their local bookstore to buy a book because, at the time, most Amazon customers did not have to pay sales tax. That wasn’t even factoring in the cost of getting to the store, the depreciation costs on the car, and the value of their time.

Having a Prime subscription takes all these shipping costs and bundles them all in a yearly charge. Now, you might think that people would continue to mind this, but something very interesting happens. Here’s Eugene again:

It turns out that you can have people pre-pay for shipping through a program like Prime and they’re incredibly happy to make the trade.

As mentioned above, people are bad at valuing their time and this prepaid shipping cost gets rid of the friction of convincing the person to pay for shipping multiple times a year. It also makes them purchase more frequently from Amazon, after all they’ve paid for Prime! You gotta get the bang for your buck.

Of course, most small retailers cannot offer this type of loyalty program. They typically cannot get to volumes that brings in benefits from economies of scale. This is only possible a person is shopping with you multiple times a month, at the very least.

This is also why small companies profits are being eaten up by Amazon. I could order a Moleskine notebook from their website, but that would take 7 business days to get to my house when Amazon ships them to my local Whole Foods locker the same day. Of course when I buy it on Amazon, Moleskine gets a much smaller cut than if I bought directly from them.

This, in my mind, is the biggest hurdle for companies. How do you provide the same convenience without the scale? Let’s hold that thought for a while.

Amazon and Healthcare

Moving on to more recent news, there was a big announcement between Amazon, Berkshire Hathaway, and J.P. Morgan about a joint healthcare venture. Behind all the noise and the billions wiped off companies in the next hour after the announcement, there is a simple idea – these three companies want to provide better insurance for their employees.

Side Note: The reason why employers are part of the healthcare stakeholders is because after World War 2, there was a shortage of skilled workers because of the high casualties. Wages were going up, so the government put in wage ceilings to keep wages under control. So employers started to entice candidates using benefits including you guessed it, healthcare coverage. Since then, employers have become entrenched in this process.

But Amazon has wider ambitions and this approach is not uncommon when they are entering a new industry. Ben Thompson calls it: Amazon is their own first customer. More from him around the time of the announcement:

1) Amazon builds out “interfaces” for its employees (as well as those of Berkshire Hathaway and J.P. Morgan Chase — I’ll just refer to Amazon from here on out), both digital and physical, to access basic healthcare needs; these sit in front of pharmacy benefit managers (PBMs), insurance administrators, wholesale distributors and pharmacies.

2) Amazon starts building out infrastructure for those healthcare suppliers, requiring them to serve Amazon’s employees using a standard interface.

Simply put, by being their own first (and often biggest) customer, Amazon can justify high capital investments into a new area. And once they have a good enough product, they can roll it out to others.
So they’ve got a strategy to enter new industries which seems invincible. But even Achilles had his heel.

Vulnerabilities

I am a believer in complementary strengths and weaknesses. What leads to your success in one thing is what makes you weak in another. Contrary to what your Instagram feed tells you every day, no one has it all.

So what’s Amazon’s Achilles’ heel? Coming back to Eugene:

While Amazon is great at being the site of first resort to fulfill customer demands for products, it is less capable when it comes to generating desire ex nihilo, the kind of persuasion typically associated more with a tech company like Apple or any number of luxury retailers.

Ok, so because it doesn’t sell one particular type of product (you can buy everything from an Omega Speedmaster to a Timex), Amazon’s not great at branding and discovery.

What else? Listening to a recent episode of the Reply All podcast, The Magic Store, here’s a part that struck out to me:

Elizabeth Dwoskin, the reporter from the Washington Post, told me what happened, which is, you know, Amazon is starting to face competition from Alibaba, which is basically the like, Amazon in China and other international sellers like Amazon. And in order to try and remain competitive, they made the decision to allow international sellers on Amazon.

ELIZABETH: It used to be that foreign sellers would have to go through a reseller. They couldn’t sell directly on Amazon, just list directly on Amazon, and now they can [ALEX: Huh.]. So if you’re the manufacturer in China, you can just–in Shenzhen–you can just list directly on Amazon. Remember that some of these companies were probably just manufacturers, they didn’t have their own brand identity.

ALEX: Right.

ALEX: Suddenly, sellers in other countries, especially China, who have access to electronics that are being produced there, they don’t need to go to resellers in the United States anymore. They cut out the middleman. [SRUTHI: Mhm] They can just sell whatever products, no matter how good or how terrible they are [SRUTHI: Yeah] directly on Amazon.

Okay, so they’re having quality issues now that they’ve opened the floodgates to international sellers who will almost always beat the original companies on pricing.

What else? The last one comes from Bezos himself. In his 2018 letter to Amazon shareholders, he talked about the “divinely discontent” users:

One thing I love about customers is that they are divinely discontent. Their expectations are never static – they go up. It’s human nature. We didn’t ascend from our hunter-gatherer days by being satisfied. People have a voracious appetite for a better way, and yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’. I see that cycle of improvement happening at a faster rate than ever before. It may be because customers have such easy access to more information than ever before – in only a few seconds and with a couple taps on their phones, customers can read reviews, compare prices from multiple retailers, see whether something’s in stock, find out how fast it will ship or be available for pick-up, and more. These examples are from retail, but I sense that the same customer empowerment phenomenon is happening broadly across everything we do at Amazon and most other industries as well. You cannot rest on your laurels in this world. Customers won’t have it.

This is a profound idea and it applies to Amazon above others. Why? Because they’re the one who have fueled expectations. The bigger you are, the harder you fall. And people love to watch Goliaths fall. Combine this with the previous point that most don’t “covet” things from Amazon. If things outside their control (trade wars, broader infrastructure issues, etc.) go wrong, they’re not going to have sympathetic customers. Yes, the sunk cost effect of a Prime subscription could last for the year, but that’s not good enough for their current valuation.

Of course, it’s difficult to bet against Jeff Bezos. The fact that he understands this problem is the first step. But recognizing the problem on the CEO level is one thing, executing it on the streets is another.


Thanks for indulging me on that one – hopefully you got something out of it.

2 Comments

  1. Pingback: Logistics: Unsexy but critical – A Summer of Learning

  2. Pingback: Best of the blog – A Summer of Learning

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