Amazon’s strategy of relentless expansion is looking risky as it finds itself fighting fierce battles on all sides.
In the last nine months alone, the company that launched as a book seller has made three forays into hardware, with a TV streaming box, the Fire smartphone, and its Square-killer, Local Register. Amazon also launched a local services marketplace, an unlimited e-book subscription service, Amazon Pantry for grocery delivery (and an accompanying bar-code scanner), its own in-house delivery system for same-day and grocery services, and a music-streaming offering, while also continuing its experimentation with drones and pouring millions into its original video content.
Plus, it owns Zappos, Diapers.com, and IMDB — and that’s just the start.
CEO Jeff Bezos’s strategy has been to forgo profits and endure slim margins while prioritizing expansion and customer experience. Amazon ruthlessly snuffs out competition with low prices and takes a hard line in negotiations with companies that want to be partners. This has led to Amazon taking vastly more ecommerce sales than anyone else — an expected $91 billion in sales this year, more than the next dozen largest e-tailers combined.
But when the company said it expects to lose a whopping $410 million to $810 million in Q3, investors panicked, and the stock tanked more than 10%. Overall this year, it’s down nearly 20%.
Scott Tilghman, from B. Riley & Co., said that although the firm is used to Amazon’s slim profits or even losses, it downgraded its estimates because “we are finding no end to the company’s spending this time around.”
Now, it’s important to note that it’s not like Amazon can’t make money. It’s that it chooses not to make money. As Evans puts it Amazon has someone at the company whose job it is to make sure that net income gets to zero.
Amazon takes nearly every dollar of cash that it generates and pumps it right back into the company, which you can see represented here by the growth in capital expenditures:
Amazon’s willingness to reinvest its money makes it an intimidating company. It’s run like a startup, not a 20 year old mainstream company.
“We won’t invest in a company unless they can tell us why they won’t get steamrolled by Amazon,” Jordan once told Fast Company.
But recently, it feels like something has changed. As Amazon expands into more verticals, its sheer number of competitors has exploded, and they’re attacking Amazon in ways that are both big and small. Amazon remains a strong company, but it suddenly seems at risk of stretching itself too thin, exposing itself to too many competitors.
The startups that could disrupt Amazon
For instance, Andreessen Horowitz just invested $44 million in Instacart, a grocery delivery service. Instacart hires people to drive their own cars to grocery stores to pick up stuff that users order through their smartphone. This is a direct competitor to AmazonFresh, which also delivers groceries, but in fewer markets around the country than Instacart does.
The Instacart example is telling, partly because the company exists almost entirely because of our smartphones and the desire for instant gratification.
Mobile apps are changing shopping (mobile commerce grew three times faster than e-commerce year-over-year overall in Q2). But, until its recent release of the Fire phone, Amazon had done hardly anything to make its mobile experience distinct from its desktop experience. It basically just ported its website into an app. With the Fire phone, Amazon went hard in the opposite direction. Part of the reason why the Fire phone hasn’t done well, is that it feels like the phone exists mainly as a portal to the Amazon ecosystem.
Besides providing a better gateway to instant gratification, many e-commerce apps also offer a more personalized shopping experience. Amazon may be the “everything store,” but it isn’t great at pointing you towards things you weren’t specifically looking for.
As Kevin Roose put it in a recent New York Magazine piece, Amazon has issues with “discovery.” Startups like Spring, Fancy, and One Kings Lane, to name a few, are all beautifying the e-commerce process while giving customers new ways to browse.
Lee Hnetinka, founder and CEO of New York City-based startup WunWun thinks his company undercuts Amazon in several different ways. WunWun is a delivery service app that lets customers purchase goods from local stores and then delivers them within an hour for free, and Hnetinka says that operating without warehouses and inventory makes it much more nimble than Amazon.
A WunWun courier on a delivery run.
“We’re also empowering merchants,” Hnetinka told Business Insider “We’re empowering them to compete with Amazon.” Although he says that he doesn’t “wake up everyday thinking about how [WunWun] can kill Amazon,” he’s not afraid of the competition.
The other reason the Instacart story is important is that it only competes with Amazon because Amazon is doing everything now. If Apple is famous for its focus, Amazon should be famous for its lack of focus.
Another thing that makes this this period of competition different than the others is that Amazon itself has trained its newest competitors.
For instance, Flipkart, an India-based e-commerce company built by two Amazon alumni, just raised $1 billion. After they announced their raise, Amazon said it would go spend $2 billion in India.
Then there’s Jet, a soon-to-be-launched e-commerce startup from Marc Lore. Lore knows Amazon’s brutal tactics as well as anyone. Prior to starting Jet, he co-founded Quidsi, which was the parent company of Diapers.com. In 2010, BusinessWeek called Diapers.com “What Amazon Fears Most.”
Diapers.com was shipping hundreds of millions of Diapers annually, making a dent in Amazon’s business. To compete, Amazon went nuclear on Diapers.com, drastically lowering prices forcing Quidsi to sell to Amazon for $540 million.
When he announced his new company, Lore said, “At Jet we will make use of the latest advancements in technology to create a new shopping experience that will empower customers like never before. Jet will bring unprecedented transparency and efficiencies to the overall e-commerce market, and as a result, will transform the customer experience in a way that, until now, has not been possible.”
Lore raised $55 million for his new venture, and although he doesn’t specifically call out Amazon, his ambitions are clearly big.
The giant companies that want to disrupt Amazon
Amazon isn’t under attack from just startups, though. There are big companies with deep pockets ready to challenge Amazon, too.
Chinese e-commerce giant, Alibaba is about to IPO. It’s hoping to raise $21 billion in the biggest IPO in history, giving Alibaba billions in cash to try to crack into the U.S. market.
Then, there’s Google, which has ramped up its inclusion of paid product listings. These listings show products right in Google searches. Amazon-Google is one of the most underreported, but important, rivalries in tech.
Google makes its money when people do commercial searches for products. As Amazon grows in power and ubiquity, consumers are going straight to Amazon.com to do searches for stuff instead of Google. To fight back, Google has tried to improve its shopping results. As these results improve, Amazon is hurt.