skip to Main Content

The Amazon Implosion

 


 

We hope you’ll enjoy the posting below on the “Amazon Implosion.” It was written by our good friend, Bill LaPierre, whose contact information is provided below.

TheAmazon Implosion

I make no pretense at being able to predict the future or foretell what will happen in just the coming months. However, I believe that taking a long view of history can provide insight into future events, as the historical view often leads to different conclusions than popular beliefs. For example, I believe, based on historical precedent that Amazon will implode within the next 20 years.  That timeframe may seem like a long way off, but consider that Amazon is just now turning 20 years old.

There is an army of analysts that make their professional living studying Amazon. But I have heard few of them comment on one important aspect of Amazon’s growth – what happens when it ends?

Very briefly, let’s acknowledge that Amazon is a juggernaut, which grew 24% last year alone, on sales of $75 billion. How many of you even grew by 10%? Let’s also acknowledge that Amazon is eating every marketer’s lunch, and is responsible for many companies either going out of business, or drastically reducing their size in an effort to stay profitable. Staples and Radio Shack both announced recently large numbers of store closings due to significant web competition (read Amazon).

There is an end to their growth. Let’s face it – the United States is grossly oversaturated with retail space. What we see happening with retailers like Radio Shack has less to do with Amazon and more to do with their simply having too many stores. I have a Radio Shack less than five miles away in my neighboring rural NH town of 5,000 people. How can they afford to keep that open?

As a percentage of net sales, Amazon is barely profitable. Its huge sales growth is going toward funding infrastructure, namely warehouses around the country. These new warehouses are strategically located to enable the company to ship to more customers in one day. They may even be building that air force of drones Jeff Bezos mentioned on 60 Minutes last November. Cool stuff.

Eventually, they will reach a saturation point for warehouses. They have already reached a saturation point for being able to deliver packages as evidenced by the UPS and FedEx failures last Christmas (which did not just impact them, but all catalogers shipping for Christmas delivery).

Now that they have everyone’s appetite whet for 2-day delivery of just about everything, for the reasonable annual fee of $79, they raised the price to $99 on their Prime. You know from your own experience with average order, that when you raise your prices, response rate goes down. However, raising the price on Prime gives Amazon the flexibility to control their growth, potentially lessening the need for more warehouses.

Although it has not happened yet, raising the base price of products would have to be next. There is a certain amount of market share they will grab from the further shrinkage of marginal retail locations. They will grab additional market share from you – the catalog industry – by virtue of the fact that unless you have something truly unique and exclusive, you drive more business their way each time you mail your catalog.

But, there is still a large percentage of the population that shops retail, and will continue to do, especially if retailers get their act together and make shopping a fun experience again. (This is from a guy that hates retail shopping).

So once Amazon grabs the entire low-hanging market share, they will hit a brick wall in growth. There will be no more catalogs left to indirectly drive business their way. At the same time that happens, the USPS will be a tiny shell of its present self, and Amazon will start paying a much higher package delivery rate. Revenue will have to come from raising their base product prices, which will put them on a competitive par with other on-line companies. Response rates will fall even more, and profitability will crash.

I see two additional danger signs on the horizon for Amazon. First, I expect they will become a target of animosity. The average American consumer likes the “little guy”. Consumers like eBay because they think of it as the embodiment of a true marketplace – millions of little mom and pop sellers selling on a giant electronic flea market. (Which is actually far from the truth – most of eBay’s sellers are large companies, not small mom & pop shops). On the other hand, consumers could very easily start to see Amazon as the giant bad guy, the company that killed retailers and catalogs (remember, this is ten years from now, not next week). They will come under greater federal scrutiny, especially the first time there is a drone accident. Then they become no different in the consumer’s mind than the Ford Pinto.

Second, is the historical precedent of their survival. It is rare for service companies that grow so quickly to survive. Coca Cola has been around for 100+ years because they have a product that no one has ever copied. Sure, Packard and Studebaker had products, and now they are gone, but they were never market leaders like Amazon. What happened to Pan Am, TWA, Bell Telephone, Western Union, and Block Buster? They were companies with services that were replaced by technologies, but were also companies that got too big too fast and could not stay nimble.

Back in the mid-1980s, Quaker Oats started a specialty retail division. One of their acquisitions was Brookstone, which they only kept for 3 years and sold back to  Brookstone management. I joined Brookstone 3 years later, and was amazed to find absolutely no reference anywhere at the headquarters of the company’s prior ownership by Quaker Oats. I finally asked the Brookstone CEO about it, wondering if maybe there had been some kind of purge. He laughed and said that Quaker Oats had taken a very hands-off management approach, but he had learned one thing from Quaker Oats. The CEO of Quaker had shared with him one sage piece of advice – “it’s always the last warehouse that gets you”.  Translated, that means that when times are good, you build one more warehouse to hold next year’s expected harvest, which doesn’t always come. That last warehouse becomes your Achilles’ heel. The same phenomenon will fell Amazon. They have built a giant infrastructure which is infinitesimally marginally profitable.

One last thought – the death of Amazon will be related to all the rising costs previously mentioned, but also because Amazon has boxed itself into a corner. Amazon is not “shopping” – it is ordering. Someone else – probably a company not yet even envisioned or penciled out on the proverbial restaurant napkin – will figure out how to combine a true shopping experience with the convenience of Amazon. Then Amazon will implode. I predict this will all happen in 20 years. If I’m I wrong in 2034, I’ll send you a $5 Amazon gift card.

If you are not already signed up for emails from this blog, click here.

by Bill LaPierre

VP – Business Intelligence and Analytics

Datamann – 800-451-4263 x235

blapierre@datamann.com

       

Back To Top
%d bloggers like this: