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Amazon’S Growing Economies Of Scale: A Widening Moat

Summary

Offering more products results in more opportunities to deliver multiple products at a time to individual customers, thereby lowering average delivery cost per item and accelerating customer relationship development.

More products increases number of Amazon.com website visits per customer.

More products results in more interactions with customers, leading to increasing customer mindshare.

More customer interaction spanning a wide range of products leads to greater big data-enabled understanding of individual customer needs, habits, and preferences.

Increasingly frequent deliveries to individual customers, combined with deep understanding of each customer, creates profitable direct marketing opportunities.

Amazon’s Grand Strategy

Amazon’s offer to acquire Whole Foods confirms its commitment to a strategy that may well lead to its snowballing dominance of virtually any economic sector whose products are suitable for delivery to customers’ front doors.

In contrast to most publicly traded businesses, which tend to be much more focused upon achieving next quarter’s earnings than on earnings five or ten years hence, Amazon has unapologetically maintained a long term perspective.

Consequently, it is well along in creating a monopoly that antitrust legislation never envisioned; that is, a monopoly on vital channels of consumer interaction and data gathering, as well as on a business model conducive to the low cost delivery of physical goods (rather than a monopoly focused on a specific product or service).

How Online Grocery Delivery Fits In

The online grocery delivery business is currently an uneconomical proposition throughout most of the U.S., largely due to high delivery costs. Spreading these costs over deliveries that include non-grocery items, however, could significantly improve the economics of delivering groceries to consumers’ front doors. Moreover, to the extent that this service brings new customers into the Amazon orbit, its losses are likely to be offset by sales of other Amazon products.

This multi-product business model may be viewed as a corollary to the so called financial services supermarket model. In the financial services world, correlations have been noted between client retention and number of services provided. Other things being equal, the odds in favor of keeping an investment client improve dramatically if an advisor also provides that client with insurance services.   

Making Amazon.com a “Must View” Site

Another business model in play here works for the same reason that the airline offering the most flights from, for example, Boston to New York is likely to get a disproportionately large share of the passenger traffic on that route. 40 or so years ago, the Eastern shuttle used to fly this route every hour on the hour, at a $25 price with on board ticketing. Though I made this trip many times, I never even bothered to check on what Eastern’s competitors were offering.

Similarly, if Amazon’s website is able to offer a growing selection of products, conveniently delivered at competitive prices, it will become a “must view” site for increasing numbers of online shoppers, whatever their needs might be.  

The tendency of these shoppers to make Amazon.com their “go to” online shopping site may also, over time, become an ingrained habit, creating a moat that competitors will find increasingly hard to bridge.

Creating Competitive Advantage through Data Gathering and Analytics

Being able to provide large numbers of customers with a diverse selection of products also places Amazon in a positon to gather and analyze huge amounts of data that can be used not only to target these customers with promotions for products they are known to need, but also to do it in ways and at times appropriate for each individual customer’s habits and preferences.

A Stable of Trojan Horses

The boxes in which Amazon products are delivered may well become Trojan horses for delivering precisely targeted advertising messages featuring products available through Amazon (i.e. coupons and other inserts). In addition, Amazon Studio’s video offerings offer a unique opportunity for vertical integration of product placement activities, through cameos by Alexa and other Amazon-marketed products.

Furthermore, both Amazon-produced and other movies available through Amazon will serve to augment the company’s cache of consumer data, inasmuch as valuable marketing inferences may be drawn from movie purchasers’ viewing histories.   

Peering further into the future, one might easily imagine TV and smartphone screens with augmented reality settings. This could enable viewers of Amazon’s visual content to pause the action and conveniently purchase items available through Amazon that appear on their screens.

Amazon’s Growth Prospects

Large swaths of the world’s $22 trillion in 2016 retail sales are vulnerable (or eventually will be) to capture by Amazon. Even if only 5% of global retail sales were viable targets for Amazon, that amount would be over eight times the company’s 2016 sales of $136 billion.

Note also that Amazon has significant growth opportunities via its non-retail businesses such as Amazon Web Services (a $10 billion business growing 28% annually), Amazon Studios, and Amazon Robotics.