Amazon.com SWOT Company Analysis Report

Amazon.com SWOT Company Analysis Report

 

Amazon.com Inc

Strategic Evaluation

Swot analysis

Strengths

·         Brand recognition and vast choice – Amazon became the first "place" to purchase books, CDs and DVDs for many consumers in developed markets. Thanks to a more comprehensive offer than any of its rivals in its key media product categories, Amazon still has relatively few direct competitors within internet retailing.

·         Strong sales growth – relying on the rapid rise in popularity of internet retailing, combined with expanding product coverage and growth through new geographic markets, Amazon's net sales strongly grew in 2005 and 2006.

·         Strategy based on long-term objectives – Amazon is ready to commit to significant investments in order to improve site functionality and offer a wider range of products, which will benefit its long-term objectives.

·         Consumer satisfaction – Amazon manages to retain loyal consumers, which is highlighted by a sharp rise in average annual spending per customer, combined with a strong and steady rise in the number of active customers, from less than 47 million in 2004 to over 64 million in 2006.

Weaknesses

·         Search function still not optimal – navigating through the results of a product search can prove to be daunting as numerous results often appear, including several for each identical book or album, while the displayed results sometimes miss relevant items. Hence, on some product searches, Google's site has been found to be more effective in finding a specific product page on Amazon's site than searching directly through Amazon's site.

·         Strong dependence on North American market – although Amazon has successfully diversified its presence beyond North America, Canada and the US still remain its largest markets and together accounted for over 55% of global sales in 2006.

·         Lower level of profit in 2006 – after strong profit recorded in 2004, Amazon's results were lacklustre in 2005, and net profits declined further in 2006, as the company's expensive investment programme in content and technology had a negative impact on margins.

Opportunities

·         Move into download – the decision to offer music download will provide Amazon with opportunities for growth and to enlarge its customer base, while enabling the company to offset the saturation and decline of the market for physical products.

·         Wider product offer and site improvement – Amazon has significant untapped growth potential in other product areas such as clothing and footwear and large furniture. The company's websites can also become more entertaining, more customer-centric and better tailored to individual specifications in order to increase usage and retain strong customer loyalty.

·         Growth in the Chinese market – Amazon's Chinese subsidiary Joyo has seen exponential growth, and has potential for major expansion as a greater number of Chinese consumers will become regular internet users.

Threats

·         Music and film downloads – the growth of this industry leads to a corresponding fall in demand for physical CDs and DVDs, which remains Amazon's core business. The company is a late entrant in offering download services and will struggle to catch up with leading operators such as iTunes.

·         Social-networking sites – these sites increasingly appeal to teenagers and young adults, who are more likely to log in frequently to these sites offering free downloadable content than to order products from Amazon.

·         Greater competition – competition within internet retailing is becoming more important, as most established bricks and mortar players, for example, Barnes & Noble, HMV and Virgin, expand rapidly their presence in this channel. Beyond internet retailing, competitors include auction sites such as eBay, price comparison sites and even search engine sites, especially Google, which is often the first port of call for consumers looking to buy items.

·         Losing competitive advantage – Amazon is losing its competitive advantage over some of its rivals which keep innovating and expanding, most notably eBay, on an international scale. In Japan, the dynamic company Rakuten, whose sales exceeded ¥800 billion (US$6.9 billion) in 2006, offers a platform giving consumers the opportunity to buy up to 10 million items from 20,000 retailers.

·         Pressure from shareholders – Amazon posted lacklustre profits at the end of 2006, and has not been able to win full trust from its shareholders as well as from Wall Street analysts and investors, who often consider that the company's investments are not focused enough and jeopardise its margins.

Prospects for Amazon in Retailing

Core business

Internet retailing remains dynamic

·         While the global retail market is expected to grow by only 15% over the 2006-2011 period, internet retailing sales are expected to increase by 108% over the same period, following another strong year in 2006, with a rise of 22% from 2005. Amazon has no presence in other retailing channels than internet retailing.

·         Growth in internet retailing is expected to remain high in developed markets, where internet usage among the adult population is expected to come close to 100%, and where most consumers, including elderly "silver surfers", are increasingly confident about buying online.

·         However, as the maturity of this channel grows, annual increases are gradually slowing down. However, due to the growing value of internet retailing sales, increases in actual terms remain significant, so that major store-based retailers will seek to increase their presence through internet retailing, thus leading to stronger competition.

North America growth slowing, overseas expansion to increase

·         Amazon is the leading internet retailer in North America, with a share exceeding 7%, comfortably ahead of second ranked Dell with almost 5%. The company is the leader both in Canada and in the US.

·         In 2006, Amazon sales in the US continued to perform strongly, growing by 19%, driven by new product categories and by the strong performance of consumer electronics, as well as by the rise of third party sales. These favourable factors are likely to continue over the forecast period.

·         The company will continue to be heavily dependent on the US market, which accounted for over 50% of its global sales in 2006. Although there is potential for major growth in the US, where internet retailing sales are expected to double in constant value terms between 2006 and 2011, the company's dependence on sales in North America is expected to decline over the period, due to the faster expansion of its other subsidiaries.

Strong Western European presence

·         Internet retailing sales in Western Europe grew by 21% in 2006, and are expected to increase by 116% over the 2006-2011 period, with a double-digit compound annual growth rate (CAGR) forecast for both consumer electronics and media products. This will provide Amazon with significant growth opportunities, as it seeks to develop rapidly its presence overseas, and its Western European sales are expected to strongly increase, driven by a wider product assortment.

·         Amazon is the second largest player among internet retailers behind Germany-based Otto in Western Europe, with a near 7% share in 2006, and recorded strong growth in 2005 and 2006 in its two main markets, Germany and the UK. Amazon recorded faster sales growth in Germany than in the UK in 2005 and 2006, so that Germany overtook the UK as the second largest market for the company in 2006. Amazon's appeal to German consumers was strengthened by its competitive prices, free shipping offers and the extension of its product range in 2006, to include sports goods.

·         In Western European markets other than the UK and Ireland, most notably France and Germany, Amazon has an unrivalled choice of books in English and is the default choice for many consumers. This contributed to its success, as illustrated by the 170,000 pre-orders for the seventh and last of the Harry Potter series of books through the German site Amazon.de two weeks before its release date.

·         However, Amazon's main challenger in Western Europe, Otto, has seen faster growth in 2005 and 2006, as a result of dynamism in its home market, Germany, where it has one of the most visited websites. Otto's share in Germany was driven up by an improvement of its website allowing greater interaction with customers, as well as by the inclusion of other brand sites, such as Adidas and Mexx, into the main otto.de site. The company also performed well in Austria and Belgium, and has a presence in other European markets.

·         Another main challenger for Amazon is France-based PPR, whose main brand is Fnac. In France, Amazon's position as the fourth largest internet retailer was threatened by the greater dynamism of rival PPR's fnac.fr website, and the company also operates in several markets in Southern Europe, where Amazon does not have a presence.

·         Although Amazon offers consumers worldwide the possibility to order items from its main global website amazon.com, there exists potential to open more dedicated sites in various Western Europe markets, for example, in Switzerland, where internet retailing is a mature channel. As the company is already present in Austria, France and Germany, it could operate websites in French and German for the Swiss market with little investment.

·         In Ireland, consumers can order directly from amazon.co.uk, but Amazon also established a partnership with the shopireland.ie site, which enables to browse items from the amazon.co.uk site with prices displayed in euros instead of Sterling. The company is likely to establish other similar partnerships with local retailers in order to reach more consumers without investing directly in each market.

Asia-Pacific sales dominated by Japan

·         Internet retailing sales in Asia-Pacific grew by almost 18% in 2006 in current US dollar terms, and are expected to increase by 102% over the 2006-2011 period.

·         Asia-Pacific accounted for almost 13% of Amazon's global sales in 2006, a proportion which the group will seek to increase, as its sales in China are expected to triple in 2007, albeit from a low base. Amazon was the leading player with a near 4% share in 2006, mostly as a result of its strong leadership in Japan, which accounted for 55% of all sales in Asia-Pacific in 2006, and where it held a 6% share in 2006. The high level of maturity and the strong competition within internet retailing in Japan, with most retailers innovating to capture a greater audience, will make it difficult for Amazon to increase its share significantly, although in actual terms the company has potential to increase sales significantly.

Growth opportunities

Greater range of physical products and downloads

·         Amazon could benefit from widening further the range of products on offer at its websites, to include fresh food, clothes and accessories, as well as bulky items such as large furniture.

·         Beyond physical products, downloading films, music files and possibly software offer significant product areas in which the company can venture. E-books are also likely to become increasingly popular over the coming years, and provided that Amazon takes the opportunity to be an early entrant, the company could benefit from offering these products.

Growth in emerging markets

·         In China, Amazon expects to continue benefiting from a rapid increase in the number of consumers purchasing online. In order to take advantage of the rising penetration of mobile phones in the country, Amazon's website in China, Joyo.com, introduced in Beijing in 2007 a mobile shopping service allowing shoppers to make purchases by sending SMS to the website. This service is initially available in the Beijing area and could cover other areas in China by the end of 2007.

·         Potential new markets for Amazon in Asia-Pacific include Taiwan. After a successful market entry in China, the company could use its knowledge of the market and adapt its Chinese website to enter the Taiwanese market with minimal investment. In addition, the company could enter South Korea, where internet retailing is already well developed, although it would need to invest in creating a completely new website in Korean.

·         As Amazon has already developed a site in Spanish, it would represent a major opportunity for growth for the company to enter the Latin American markets, especially Mexico. Although consumers in Mexico can order through the US website, the company would significantly increase its customer base by opening a Mexican subsidiary and investing in warehouse capacity. Other large markets where the expected buoyancy of internet retailing, combined with a large population, would offer strong potential for growth for Amazon include Brazil and Russia.

New gadgets create changes in demand

·         Newer product categories within consumer electronics have underpinned sales of Amazon, which offers a wide choice of such items at low prices. This includes especially MP3 accessories and digital picture frames, set to be one of the hottest gadgets for Christmas 2007.

·         Over the 2006-2011 period, consumer electronics manufacturers will continue to launch a plethora of new products to sustain demand and to offset the unavoidable price deflation of more mature product categories such as digital cameras and MP3 players. Amazon is likely to benefit from this trend, as a well-known retailer of consumer electronics.

·         Amazon's strategy to increase sales of consumer electronics faces strong competition from specialist durable goods retailers such as Best Buy in the US and Home Retail's Argos chain in the UK.

Limited potential

Limited geographic expansion

·         In small markets where English is not the native tongue, the cost of creating and maintaining a single website in the local language is too high to be profitable for Amazon. Hence, even in some markets where internet retailing is well developed, such as the Netherlands and Nordic countries, Amazon's potential is limited and it will not be able to gain a significant share.

·         Although Amazon could bypass the need to develop language-specific websites for these countries by taking over a local player and keeping its brand and its website, the company is unlikely to make such a move as it would be contrary to its strategy to use a global brand name.

Internet retailing drives prices down

·         The rising popularity of internet retailing enables consumers to compare prices more easily, and is putting strong downward pressure on prices, especially in developed markets with a high internet penetration rate. This particularly affects Amazon, which is positioned at the lower end of the price scale for audio-visual goods.

Greater competition from grocery retailers

·         Faced with limited growth potential from their core grocery products offer, leading international hypermarket operators, most notably Carrefour, Tesco and Wal-Mart, increasingly focus on selling non-food items including media products and consumer electronics, both in-store and through internet retailing. This creates additional competition for Amazon, as consumers are likely to purchase these products more routinely as part of their trip to a hypermarket.

·         In addition, discounters such as Aldi and Lidl also offer consumer electronics at knocked-down prices, including computers, in Germany and in the UK, and this trend is likely to intensify.

Is store-based retailing an option?

·         One major weakness of internet retailing against bricks and mortar stores is the lack of entertainment for consumers, who enjoy browsing and go to stores for special events such as gigs and book or record signings. However, as Amazon's business model is entirely based on internet retailing, a potential move towards store-based retailing is unlikely, unless the company were to buy another chain with high street outlets and decide to keep a handful of flagship stores open.