Amazon. com is a Fortune 500 company that has revolutionized the retail industry. In recent years, Amazon has faced increased competition in the highly competitive online retail space as competitors invested heavily in their online storefronts and infrastructure. Positioned in a highly fragmented industry, Amazon must find solutions that can sustain its long term profitability and maintain its market share. To that end, Amazon should grow the Amazon Prime membership base and expand on its media and mobile offerings.
While Amazon faces many issues in a rapidly changing economic, political and global environment, this paper will focus on how Amazon can increase loyalty among its customers and continue to differentiate itself in the largest retail market, the United States. The U. S. market accounts for over 56% of Amazon’s total revenue and also serves as a home base for Amazon to test the responsiveness of its technological innovations.
To further differentiate Amazon from its competitors, Amazon needs to build a sustainable, personalized relationship with its customers in order to drive future profit and growth by significantly expanding the Amazon Prime membership base. Amazon also needs to assign additional resources to further develop its mobile and media offerings to better connect with its consumers and to lower the barrier of transactions.
Through gaining additional Prime members and having a more robust offering of mobile and media products, Amazon can not only maintain but grow its market share in an expanding market and increase its profitability through greater revenues. 1. Company Overview Amazon. com is a major player in the ecommerce industry. Amazon was founded to be the Earth’s most customer-centric company and strives to be a virtual one stop shop where customers can find and discover virtually anything they want to buy online.
Amazon’s focus on the customer and the customer experience has led to a number of innovations in the ecommerce industry, including customer-based reviews, personalized homepages, and 1-Click Shopping. Founded in 1995, Amazon started as an online book store. The founder, Jeff Bezos, believed that only the internet could offer customers the convenience of browsing millions of books, something a traditional book store could not.
From its initial success in selling books, Amazon quickly added additional product categories and today sells a wide range of goods from wine to electronics. Amazon has also expanded internationally and ships product all around the globe. Recently, the company has evolved from a pure retailer to a developer and manufacturer of its own products. In 2007, Amazon launched the company’s first physical consumer product, the Kindle e-book reader. Since then, Amazon has released a number of versions of the Kindle, some of which compete directly in the tablet computer market.
Through all of these changes and expansion, Amazon remains committed to the customer and focuses on keeping prices low, carrying a vast selection of products, and making online shopping as convenient as possible. 2. Industry Analysis While the ecommerce industry is currently dominated by Amazon, there are key current trends that present risks to Amazon’s dominance (Exhibit 6): namely, fierce rivalry in the industry, growing sophistication of competitors and competitors with greater access to resources.
Among the different forces affecting the ecommerce industry, fierce rivalry is one of the stronger forces (Exhibit 1). Fragmentation in the industry is high, with the four leading competitors comprising only 44% of total market share (Exhibit 2). Estimating the Herfindahl-Hirschman Index for the ecommerce industry using only five competitors yields a result of 878, well below the 1,500 HHI required for an industry to go from being labeled unconcentrated to moderately concentrated (Exhibit 2). With the U. S. commerce market set to increase at 9% CAGR through 2016 representing growth of 62% between 2011 and 2015, competition is understandably fierce (Exhibit 3). This year has seen several aggressive moves among competitors, including Target’s banishment of Amazon products, such as the Kindle ereader, from its shelves in May. Wal-Mart followed suit in September. In November of this year, Target also announced the launch of six collections that would be offered exclusively online at Target. com, an initiative designed specifically to draw consumers to its online shopping experience.
In concert with high rivalry in the industry, the ecommerce industry has seen large brick-and-mortar retailers making moves to catch up with Amazon. Amazon came to dominate the ecommerce industry through technology, innovation, a laser focus on customer experience and efficient operations. The company had a first mover advantage, but today, as traditional retailers look at growth in the ecommerce market and see it beginning to chip away at traditional retail’s share of the overall market (Exhibit 3), these companies are making moves to further increase their own sophistication.
In October, Best Buy brought in former Expedia president, Scott Durschlag, to head its ecommerce business and to “boost its online transformation. ” In 2011, Wal-Mart acquired Koomix, hoping to apply “artificial intelligence to commerce. ” It also hired the well-regarded Silicon Valley engineer who was instrumental in the development of eBay’s infrastructure as its Chief Technological Officer. Wal-Mart and eBay both announced this fall that they would commence offering same day delivery.
These recent moves, aimed at delivering better customer experiences and increasing Amazon competitors’ share of the market, present no small risk to Amazon. Increased attention and support for ecommerce development at large traditional retailers means that vast competitor resources will be focused on efforts to penetrate the ecommerce market. Companies like Wal-Mart, Target and Apple have operating cash flows and maintain cash reserves significantly higher than Amazon (Exhibit 4).
Furthermore, these companies and others can leverage the power of their brick-and-mortar stores as almost ready-made distribution networks. Wal-Mart has 4,253 stores, Target has 1,767, and Staples, another large online player, has 1,572, and these stores are spread throughout the country (Exhibit 5). Even Apple, with only 250 retail stores, has almost eight times Amazon’s 32 fulfillment centers. All of these issues — fierce competition, growing sophistication among players and competitor access to vast resources — present a potential risk of Amazon losing its differentiating factors.