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Commentary: Amazon is thriving in a time of COVID-19
The e-commerce giant has stuck religiously to its founding dogma outlined by Jeff Bezos in 1997, says the Financial Times' John Thornhill.
FILE PHOTO: A worker in a face mask walks by trucks parked at an Amazon facility as the global coronavirus outbreak continued in Bethpage on Long Island in New York, U.S., March 17, 2020. REUTERS/Andrew Kelly/File Photo
LONDON: It is hard to spot sure-fire corporate winners in the latest economic catastrophe. Amazon looks like one.
The giant e-commerce platform, which is benefiting from the closure of so many brick-and-mortar stores, has seen its global sales surge to US$11,000 a second and is scrambling to hire 175,000 employees to cope with the extra demand.
Metaphorically speaking, it helps to sell chopsticks when the world wants to eat noodles.
In spite of the stock market collapse, Amazon shares have climbed 30 per cent this year, boosting the company’s market value to US$1.2 trillion.
What is Amazon doing right – and wrong – in crisis times?
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EARTH’S MOST CUSTOMER-CENTRIC COMPANY
Arguably, the most exceptional thing about Amazon is its corporate culture.
Even though it has grown into a massive multinational with close to 1 million employees, it sticks religiously to the founding dogma outlined by Jeff Bezos in 1997 when he took his internet company public.
In his first shareholder letter, reprinted in every annual report since, Mr Bezos laid out Amazon’s mission: Obsess about the customer; innovate like crazy and learn from your inevitable failures; invest big to secure market leadership; prioritise long-term capital growth over short-term profit; hire the smartest employees and reward them like owners; and maintain a sense of urgency, a start-up “Day 1” mentality.
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To say all this is simple. But, as many corporate managers know, there is nothing harder than delivering the simple every hour of every day.
The “earth’s most customer-centric company”, as Amazon likes to call itself, now offers “free shipping” on more than 100 million items to its paying Amazon Prime members.
Its delivery operations have come under extreme strain in the latest crisis, causing delays and consumer and vendor frustration, but it is proving adaptable, as its hiring spree shows.
“Even in these circumstances, it remains Day 1,” Mr Bezos wrote in his latest shareholder letter.
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A DIFFERENT CAPITAL GAME
Mr Bezos was one of the first to understand the dynamics of the digital economy and has built the company accordingly. The Internet enables suppliers to interact directly with consumers at massive scale, disintermediating most distributors.
The billions of transactions Amazon processes every year give it unique insight into consumer demand. It now boasts 110 million Prime members in the US. It employs 150 PhD economists to analyse consumer data and market dynamics.
True to his original word, Mr Bezos has played a different capital game to most of his listed competitors. Amazon is still run as a start-up that prioritises long-term reach over short-term return and does not pay a dividend.
Last year, Amazon spent US$35.9 billion on technology and content, very loosely defined as research and development. The comparisons are inexact, but to give a sense of scale the UK public and private sectors spent a total of US$46.4 billion on R&D in 2018.
Amazon uses its financial war chest to attack any sector where it thinks it can gain market dominance, whether it is books, entertainment, cloud computing, digital assistants or, increasingly, healthcare.
It makes costly mistakes (it blew hundreds of millions of dollars on the failed Fire Phone, for example) but learns from its failings.
It has diversified into complementary business streams. Its cloud computing arm, Amazon Web Services, and Amazon Marketplace enable third parties to access its technology and e-commerce platform.
In the most profitable parts of its business, it is running the casino rather than slapping down its own chips.
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RISKS TO AMAZON’S BUSINESS
Like every business, Amazon has been hit by the global slump in consumer demand and the difficulties of running a complex supply chain in an emergency. Those consumers who have switched to alternative e-commerce platforms may never return.
The longer-term strategic risks to Amazon are spelt out in its annual report. Roughly summarised, Amazon most fears smarter competition.
It worries about key person dependency. What happens if Mr Bezos were hit by a space rocket?
It is concerned that scale brings unmanageable complexity. It highlights the dangers of more aggressive tax treatment and a regulatory backlash.
After all, if the company has built a position as a systemically important utility, why should it not be regulated like one?
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But perhaps the biggest threat is the one it least acknowledges. In spite of all of its technological efficiency, the business critically depends on an army of low-paid service workers.
In spite of temporarily lifting minimum employee pay globally by US$2 an hour, it faces employee unrest about unsafe working conditions. Its business model will suffer if the pendulum swings back from capital to labour after the crisis.
If history is predictive, it is certain that a competitor will one day displace Amazon. Yet, for the moment, it is hard to see who that competitor will be.
The one certainty is that any Amazon slayer will have to improve on the company’s not-so-secret sauce.
Start with the user need and work backwards. Innovate fast and scale up on success. Forgo short-term profits to build long-term market dominance.
Rinse and repeat, relentlessly.
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