Amazon, Cyber Monday and the flywheel of doom
By Brad Stone
I oversee tech coverage at Bloomberg and am taking over the Monday edition of the Fully Charged newsletter, to complement installments by Eric Newcomer and our global reporting team every Wednesday and Friday. Tell your friends and colleagues to sign up here.
The annual shopping frenzy known as Cyber Monday has me reflecting today on the relative performance of two of the largest retailers in the U.S. In 2003, the shopping juggernaut Wal-Mart Stores notched $250 billion in net sales for the first time. This year, many analysts believe Amazon.com is likely to approach or achieve the same lofty benchmark. (Amazon doesn’t release the total value of products sold on its site, so analysts estimate it by adding the products sold by Amazon itself with the total sales of merchants on Amazon’s third party marketplace.)
So what’s the big deal? In 2003, Wal-Mart was growing at a rate of 12 percent a year. That subsequently dropped to 10 percent during each of the next two years and was then gripped by the forces that afflict most large companies, falling to around 8 percent in 2007 and hovering at around 4 percent today.
This is unprecedented — we have never seen a retail business at this size growing at this rate.
Amazon, however, is picking up steam. Worldwide unit sales growth, a good proxy for overall sales, grew 21 percent year-over-year in the third quarter of 2014, 26 percent in the same period in 2015 and 28 percent this year. This is unprecedented — we have never seen a retail business at this size growing at this rate.
It’s easy to see why. Amazon has leeway from shareholders to invest its free cash flow back into its business. One way it does this is by building more warehouses closer to population centers and by enticing vendors to make their products available to members of its $99-a-year Prime program, who tend to double or triple their spending on the site after they join.
The retail juggernauts of the past tended to get more chaotic and unwieldy when they hit these high altitudes.
Putting a larger variety of products into Prime attracts more Prime members and vice versa, resulting in ever-increasing sales, which Amazon dutifully converts into even more fulfillment centers, faster shipping and lower prices. This is the flywheel of doom for rival merchants. As it grows, Amazon is getting better and better at doing its job. The retail juggernauts of the past tended to get more chaotic and unwieldy when they hit these high altitudes.
This is the stark reality facing the retail world this holiday season. It’s why Macy’s is looking to sell off real estate holdings and why Wal-Mart acquired wobbly upstart Jet.com over the summer for a whopping $3.3 billion. The brain trust in Bentonville purchased a seasoned leadership team with long experience combating Jeff Bezos.
It’s difficult to find many weak points in Amazon’s armor. Counterfeit products and fake reviews are a growing concern, a topic we tackle on the latest Decrypted podcast and in Spencer Soper’s accompanying story. Amazon has also struggled in the past two years to keep up with ever-growing peak holiday sales. This year it hired 120,000 temporary workers and recently started letting sellers add their products to Prime without storing them in Amazon’s warehouses, which should mitigate Amazon’s capacity issues. This year, the company has dealt with a serious labor issue in its supply chain, perhaps a portent of things to come.
Could the bottomless money pit of free video be to Amazon what Russia was to Napoleon?
If rivals have any hope at all in slowing or stopping the flywheel of doom, they might pin their sights on Amazon’s massive investments in video– an estimated $2 billion to $3 billion last year in a market dominated by Netflix. With typical Bezos bravura, Amazon is doubling down by expanding its video service to 200 countries, even though Prime Video generates no direct revenue for the company. Could the bottomless money pit of free video be to Amazon what Russia was to Napoleon?
Even as I type that, I doubt it. Have you watched the soulful and hilarious second season of the Amazon Original series Red Oaks? I highly recommend it for everyone other than Amazon’s competitors.
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