Amazon’s push into new sectors worries rivals and regulatorshttps://en.majalla.com/node/285751/science-technologyamazon%E2%80%99s-push-new-sectors-worries-rivals-and-regulators
Amazon’s push into new sectors worries rivals and regulators
The e-commerce giant is eyeing fresh frontiers, from groceries and pharmaceuticals to lending and logistics
Amazon
The e-commerce giant founded Amazon Style, a physical store that opened in Los Angeles, with the aim of breaking into the more traditional aspect of the business.
Amazon’s push into new sectors worries rivals and regulators
After a decade of optimism tied to e-commerce, an economic depression hit the United States in the year 2000, ending what had been referred to as the Roaring Nineties — a label which paid tribute to the infamous Roaring Twenties.
Amazon was one of the few early players in the e-commerce sector to survive the demise of the boom, although not unscathed. While investors fled from the sector and, for a time, Amazon’s stock plummeted, the e-commerce giant was able to weather the storm and went on to climb to new heights.
The nature of its business model is what made the difference: the company charges for the items it sells immediately and keeps minimal inventory to fill orders instantly. Amazon expanded its retail offerings during the first decade of the 2000s to include toys and sporting goods, alongside books and music, which is what the company first sold when it launched.
Other established competitors such as Barnes & Noble, Toys ‘R’ Us and Sports Authority were unable to compete with Amazon’s speed in delivery and low prices. In the past few years, Amazon has renewed its efforts to diversify its offerings, eyeing sectors beyond retail.
Currently, it commands a strong presence in supply chain logistics and data collection. In 2021, the company achieved revenues of about $469 billion, while net profits reached $33 billion. According to the latest figures from 2022, the company recorded a net income of $2.9 billion in the third quarter of the year. It is reported to have around 1-1.5 million employees globally, with almost 1 million in the US alone.
But layoffs announced in January are expected to reduce its headcount by 18,000 people at the end of 2023, more than the 10,000 expected which was leaked by insiders of the company. These cost-cutting measures reflect global economic uncertainty, especially as inflation rates continue to rise, not least for reasons related to Russia's war on Ukraine.
Stock plummet
Such conditions, alongside concern over potentially stricter regulation, left the stock market valuations of Amazon, and other big names in the technology sector, exposed. As of the end of December 2022, Amazon’s stock plummeted by 50%. In November, it became the first company ever to witness a decline of $1 trillion in its market capitalisation, when the aggregate value of all its shares fell to $879 billion, down from a peak of $1.88 trillion in July 2021.
As for its expansionist ambitions, Amazon is buying physical grocery stores and leveraging its technology to simplify the delivery of essentials. Its assembly lines use visual AI technology to sort ripe items from unripe ones.
The company has also bought a network of online pharmacy services and is now getting licensed across the US to launch its own Amazon Pharmacy brand.
Furthermore, it is using the data it collects to break into the finance sector, providing loans to merchants using its Amazon Marketplace platform at interest rates lower than those offered by traditional banks, based on metrics derived from the forward-looking data the company collects.
Covid rebound
It goes without saying that lockdowns during the Covid-19 pandemic led to an e-commerce surge, and Amazon was at the forefront of this trend.
The company's profits jumped in the third quarter of 2020 to $6.3 billion — up 200% compared to the same period in the previous year. The leap gave it the spending power to break into new sectors, even as the lifting of lockdown measures meant its net income in the third quarter of 2021 decreased to $3.2 billion dollars.
Lockdowns during the Covid-19 pandemic led to an e-commerce surge, and Amazon profits jumped in the third quarter of 2020 to $6.3 billion — up 200% compared to the same period in the previous year. The leap gave it the spending power to break into new sectors.
According to CB Insights, a US company that specialises in market and business information, Amazon has already broken into five new sectors: pharmaceuticals, small business lending, logistics, groceries, and payments.
Pharmaceuticals
Amazon began its foray into the pharmaceutical market in 1999 when it bought 40 per cent of Drugstore.com, which was still in its infancy at the time. Amazon then froze its activities in that sector until 2016 when it started obtaining licenses in the US to sell pharmaceutical products.
Two years later, it bought the online pharmacy PillPack, which has licenses to sell pharmaceuticals online in all 50 states, for $750 million. In August 2022, Amazon bought 1Life Healthcare, the owner of One Medical, which specialises in selling prescription-based drugs, in both stores and online, for $3.9 billion.
Amitabh Chandra, a professor of public policy and health care at Harvard Business School, told the Harvard Gazette that Amazon may be hoping to benefit from its experience in improving supply chains in the pharmaceutical sector, which, he said, are "a mess."
He also flagged the possibility that patient data belonging to acquired companies could be exploited. He added that Amazon's lack of experience in running a medical business may prove problematic.
After purchasing 1Life Healthcare, Amazon launched Amazon Clinic, but The Economist pointed out the company's poor track record in this field, as it had previously established two short-lived health care services for its employees and some of its non-employee clients.
The publication also said that Amazon's push into the health care arena, inspired other large companies to do the same, prompting US regulators to carefully review the implications that this trend could have on fair competition in the sector.
Lending and financial services
Amazon entered the small business lending sector in 2011 by offering finance to companies selling goods via its Amazon Marketplace platform. Amazon Lending saw an opportunity amid the lack of confidence within the financial sector that lingered after the 2008 financial crisis.
Over the next decade, it doubled in size, lending to two million small enterprises by 2021.
As third-party sellers grew to provide a larger proportion of the sales on Amazon Marketplace — from 3% to 56% in 20 years, according to CB Insights — it is likely that this trend encouraged the company to lend, and it did so in partnership with two prominent banks, Goldman Sachs and Bank of America.
Nonetheless, the American Prospect magazine has warned of the danger of Amazon's approach to financing its smaller partners.
The company offers loans in return for guarantees in the form of goods and equipment, and even money that the partners of these partners owe to them. The case is often that these goods and equipment are sent to Amazon stores before the loan is even approved, which places borrowers at the mercy of the company.
Amazon Lending is also shrouded in secrecy, as very little information is available about its dealings. While those borrowing from the company rely on its network to sell their products, they are likely to have a weaker negotiating position with Amazon.
Logistics services
Amazon is constantly seeking to shorten the time required to deliver orders — especially in the US. To do so, it wants to cut its reliance on other companies in the logistics sector, such as UPS, FedEx, and the US Postal Service (USPS).
It is investing more in its own network, tripling its logistics infrastructure in the US between 2014 and 2018, before boosting it by an estimated 50 per cent in 2020. The motivation behind this expansion was the huge costs incurred by the company for shipping incoming orders, which amounted to $53 billion in the first three quarters of 2021.
It is famous for its ambitions to make deliveries by drone and is developing unmanned surface vehicles while it also buys up warehouses in strategic areas. This policy worries other companies specialising in delivery services, including those that do business with Amazon as well as those still emerging in the sector.
Grocery revolution
Amazon has big ambitions in the grocery market. They date back to 1998 when the company began investing in emerging companies to sell food and essentials online. Many of them went bankrupt and Amazon lost money. But it gained experience and kept trying to compete in the $800 billion market in the US.
A decade later, Amazon attracted and recruited some executives from other companies in the online grocery stores business and placed them in prominent positions. This gave Amazon an advantageous position during the pandemic, when lockdowns sparked an online grocery shopping surge.
Today, its Amazon Fresh project offers free delivery of groceries from its warehouses, and those of its partner Whole Foods, in just two hours.
Today, its Amazon Fresh project offers free delivery of groceries from its warehouses, and those of its partner Whole Foods, in just two hours. Amazon's entry to the grocery sector obviously threatens other smaller grocery delivery services and supermarkets.
However, US news channel CNBC noted that the project has not yet achieved the results it hoped for, and it quotes Jake Dollarhide, the CEO of Amazon investor Longbow Asset Management Company, as saying: "The grocery sector [in the company] is still more like a costly hobby."
Payment services
Amazon Pay allows third-party merchants to sell their products on their own websites using the company's payment technology. It also runs Amazon Cash, which allows customers to deposit money with the company for pre-payment style services.
It also issues its own debit and credit cards. The goal of this is to reduce transaction fees incurred whenever a customer buys from Amazon with their bank card.
Although such fees are better known for their impact on small companies, Amazon is well known for trying to cut costs in every possible way. Therefore, Amazon's move into finance worries specialist payment companies, such as PayPal, Visa and MasterCard.
New frontiers
Analysis from CB Insights also finds that Amazon is on the cusp of breaking into seven other sectors, which the data firm lists as: insurance, luxury goods and services, physical retail, smart homes, home and garden care, media and entertainment, and handmade goods.
In 2017, Amazon invested in the Indian insurance company ACKO, which provides coverage for cars and bicycles, and soon encouraged it to adopt health insurance during the pandemic. It also launched Amazon Protect a year ago, an insurance service that operates in the United Kingdom covering accidents and thefts based on products purchased from the company.
In 2020, Amazon launched its Luxury Stores initiative, which aimed to attract luxury brands. It featured big names including Oscar de la Renta, Elie Saab, and Roland Mouret. It also founded Amazon Style, a physical store that opened in Los Angeles, with the aim of breaking into the more traditional aspect of the business.
It was Amazon's smart speaker, branded as Echo, that prompted the company to turn its attention to home products in 2014. The speaker was hugely successful, accounting for 69% of the smart speaker market share.
It was Amazon's smart speaker, branded as Echo, that prompted the company to turn its attention to home products in 2014.
Since then, its vision has expanded. In 2014, it set up Plant Store, which opened the company up to the garden market at a time when the sector was in severe decline. But Amazon was confident, given its success in logistics and distribution. By 2018, Amazon had partnered with Lennar, one of the largest construction companies in the US, to build smart homes powered by its Alexa Voice Service.
The $211 billion video games market has also grabbed the e-commerce giant's attention. The company is partnering with companies in the sector and provides subscriptions to many video game services. Amazon is also becoming a major player in film and TV, planning to invest more than $1 billion in producing 12 to 15 films annually for cinema release.
In 2015, it launched Handmade, a virtual store to sell handicraft products, hoping to penetrate the market estimated at $680 billion. Since then, the number of participating artisans has grown almost eight-fold and are spread over 80 countries.
Amazon's evolution
Amazon is an American multinational technology company that focuses on e-commerce, cloud computing, online advertising, digital broadcasting, and artificial intelligence. It is one of the five largest American companies operating in the field of information technology, alongside Google's parent company Alphabet, Microsoft, Apple and Meta, the owner of Facebook.
Jeff Bezos, Founder & Ceo Of Amazon.Com, Poses For Portrait January 1, 1997 In Seattle, Wa.
Jeff Bezos founded the company in his Washington state garage in 1994 as an online bookstore, before steadily expanding into what he called "The Everything Store".
Amazon has earned its reputation as a disruptive company through continuous technological innovation and heavily reinvests its profits into capital projects.
Bezos chose the name because it begins with the first letter of the alphabet, and because it is the name of one of the largest rivers in the world located in South America.
The company's strong streams of revenue helped make Bezos one of the richest men in the world, with a fortune of $111 billion. When he was the CEO of the company, he rarely lobbied Washington politicians and only appeared before Congress when he was threatened with a subpoena.
His successor, Andy Jassy, has taken a different approach since Bezos stepped back from day-to-day management in 2022 to devote himself to innovation within the company.
Andy Jassy, chief executive officer of Amazon.Com Inc., speaks during the Bloomberg Technology Summit in San Francisco, California, US, on Wednesday, June 8, 2022.
He has visited Congress and the White House at least three times. Jassy, who joined the company in 1997 and built its cloud computing business, Amazon Web Services, is close to Bezos and is unlikely to overhaul the company's culture and methods.
Like many giant tech firms, Amazon is facing legal troubles and scrutiny from regulators including a recent lawsuit filed by British civil society organisations accusing the company of favouring its own products on its websites.
They are seeking compensation of up to $1 billion.
Meanwhile, the European Commission accepted a settlement offered by Amazon over antitrust concerns related to its use of non-public data harvested from companies using its Marketplace platform.
