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Amazon – Fast Becoming the eCommerce Giant to Beat

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By: Larry Darrell
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Founded in 1994 by Jeff Bezos, Amazon (AMZN) successfully rode the dotcom wave and then, well-timed capitalization of market trends and a flexible business model ensured that the company grew rapidly in the last decade. Like the river it is named after, the company has branched out and as the largest retailer, it has now ventured into almost every product segment. It offers almost every product under the sun, backing up its claim to offer 'Earth's Biggest Selection’, with products ranging from electronics and software to apparel as well as hardlines.

When Amazon's CEO Bezos was asked to describe the company in a recent interview by CBS, his reply centered around Amazon’s focus on innovation and on being a customer centric company. The company is in a strong position, with more than 200 million active customers, and its presence in high-growth areas and with a sophisticated distribution system.

Amazon does have the showing to back up Bezos’ statements. The company offers cloud services through Amazon Web Services (AWS), making it a leader in Infrastructure as a Service (IaaS) and Platform as a Service (PaaS), with a 28% market share as of the second quarter (2Q) of fiscal year 2013 (FY13) according to Synergy Research Group. Analysts estimate that the company earns approximately $3 billion annually from AWS, and in an industry expected to grow at a CAGR (compound annual growth rate) of 23.5% over FY13-17 and worldwide spending on public IT cloud services of more than $107 billion by 2017, Amazon has tremendous growth potential. Things are already looking up, as the company recently won a ruling against IBM and got a $600 million contract with the CIA involving cloud services.

Apart from enterprise computing services, Amazon offers grocery delivery in two cities under its subsidiary, AmazonFresh. The service is currently for Seattle and Los Angeles only, and delivers groceries on the same day. During the fall of 2013, the company launched Amazon Fashion, which sells items like clothes, shoes and jewelry, and has started a payment system for internet retailers – Amazon Payments – to compete with PayPal, owned by eBay Inc. (EBAY). Furthermore, the company has started producing its own original content for streaming, and Bezos has said that the company is working on next generation devices in its Lab126 in California.

Amazon has been able to build its empire through a smooth distribution system, which is so efficient that the warehouses (called fulfillment centers) can now store twice as many products compared to five years ago. Currently, the company has 96 fulfillment centers worldwide, some of them stretching up to 1.2 million square feet with millions of products stacked. The layout of these warehouses is arranged in a ‘chaotic storage’ manner, meaning that a book might be placed beside a box of cereals, to use warehouse space optimally.

It’s a good thing that this space is used well, for the company operates at very thin margins since Bezos believes that low prices ensure customer loyalty. His belief is so strong that the company does not sell its Kindle tablets at a profit. The company had meager operating margins of little over 1% in 2012, and it posted losses in the same year despite a three-year revenue CAGR of 35.6%. Even so, the company's stock has soared more than 870% in the last five years.

Analysts continue to argue whether Amazon’s current strategy and business model is sustainable. The retailer has made headlines by announcing that it is working on a delivery service using unmanned drones. Amazon will be able to deliver packages weighing up to five pounds within 30 minutes using octocopters. With these drones capable of covering a ten miles radius from the distribution center, the company will be able to cater to a huge chunk of the urban population. However, the project is still in the R&D phase and will take a couple of years to complete, and that too if the Federal Aviation Administration (FAA) approves it. Not only is the service risky, but approval from the FAA could set a precedent for many others to use drones for deliveries. Earlier this year, Dominoes tested its DomiCopter for delivering pizzas but the commercial use of these drones is not viable for the next few years.

Regardless of how realistic the drone distribution strategy is, we at Bidness Etc believe that Amazon holds immense potential to grow and can branch into dozens of new ventures. Looking at the success of the company in retail, selling tablets, cloud services, and original content for streaming, the low operating margins are not a concern for now, and the once-upon-a-time bookstore will fast becoming the the ecommerce giant to beat.

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