customer loyalty and seem to drive
long-term sales growth.
Bezos’ interest in groceries goes
back a decade, when he launched Amazon Fresh. Why? Volume. The annual
grocery business in the U.S. alone was
worth some $1.3 trillion in 2016, with
Walmart (which has 4,500 stores)
having the largest market share at
7 Amazon and Whole Foods together would have a market share
of about 3.5%.
11 Amazon has figured
out how to sell perishable and nonperishable groceries via the Web. It
is not clear the company has figured
out how to do this at a profit. Amazon
can learn from Whole Foods how to
sell groceries to upscale customers,
but this market is shrinking.
Many customers are the same, however, so Amazon can try cross-market-ing. About 62% of Whole Foods customers are Amazon Prime members.
Perhaps Amazon can convert the 38%
tronic goods to digital content (music
and videos) to clothing. Amazon now
sells some two million items.
4 A decade
ago it also launched Amazon Web Services (AWS) to sell excess computing
and storage capacity from its massive
data centers. In addition, Bezos experimented with his own products such
as the successful Kindle tablet for e-books, the failed Fire smartphone, and
the intriguing Echo/Alexa digital assistant and speaker device. More recently,
Amazon opened a bookstore in Seattle
to complement the online store, and it
is experimenting with new technology
(Amazon Go) that eliminates cashiers.
Until now, Amazon’s pieces fit
together pretty well. Now the company is moving deeper into the low-margin grocery business. We have to
Amazon’s financials are not particu-
larly strong compared to other leading
technology companies and Internet
platforms, and mix products and ser-
vices with varying profit rates. In 2016,
sales of products accounted for 70% of
2 Sales of services
(mostly from selling third-party goods
on Amazon Marketplace, revenues
from AWS, some allocations from
Amazon Prime membership fees, and
some advertising) accounted for the
other 30%. AWS produced only $12.2
billion or 9% of revenues (compared to
5% in 2014) but a whopping $3.1 billion
(74%) of operating profits. By contrast,
Amazon lost $1.3 billion on overseas
sales of $44 billion, nearly one-third
of revenues. It is also estimated that
Amazon loses up to $2 billion per year
on Prime Memberships.
6 With 70- to
80-million members, Prime generated
$6.8 billion in 2016 revenue.
5 Prime of-
fers free shipping, a lot of free digital
content, and other benefits for a $99
annual fee or less in some cases. The
free services are costly but encourage