The power of wandering: Key takeaways from Jeff Bezos’ latest shareholder letter
In 2017 I published a post summarizing the key learnings from Jeff Bezos after reading each of his annual shareholder letters. Key themes on the company’s philosophy include a focus on the customer, long-term thinking, and constantly raising the bar. Earlier today, Bezos released his 22nd annual letter. In this letter, Bezos discusses how much of Amazon’s success has been driven by the combination of building and wandering. Below I have summarized the key takeaways:
“Third-party sellers are kicking our first-party butt”
To begin the letter, Bezos shares a list of percentages which reflects the share of physical gross merchandise sales sold on Amazon by independent third-party sellers as opposed to Amazon’s own first-party sales. This ratio has grown from 3% to 58% and is reflected in the chart below. Amazon’s first-party business grew to $117 billion in 2018, up from $1.6 billion in 1999, representing a CAGR of 25%. At the same time, third-party sales have grown from $0.1 billion to $160 billion, representing a CAGR of 52%, over 2x that of Amazon’s first-party sales and much faster than on eBay.
To help explain this phenomenon, Bezos explains that they’ve helped independent sellers compete against their own first-party business by offering them “the very best selling tools we could imagine and build.” These tools include helping manage inventory, process payments, track shipments, and sell internationally. Of great importance, however, are two key programs: Fulfillment by Amazon and the Prime membership program. Today it is tough to appreciate how radical those two offerings were when they first launched. Both of them presented significant financial risk but were pushed forward with “intuition and heart, and nourished with optimism”.
Intuition, curiosity, and the power of wandering
Amazon has always strived to create a culture of “builders” — people who are curious, like to invent, and are “fresh” with a beginner’s mind even when they’re experts. A builder’s mentality helps Amazon approach hard to solve problems with a humble conviction that success can come through iteration: invent, launch, relaunch, rinse, repeat. Builders know that the path to success is anything but straight.
Bezos notes that often in business you know the end goal and therefore it is easy to execute and to be efficient. The opposite of this is what he calls wandering. Wandering in business is not efficient, but Bezos notes that it is also not random. Wandering is guided by gut, intuition, and a deep conviction that the prize at the end is worth being messy to find your way there. Wandering is an essential counter-balance to efficiency. The most non-linear discoveries (the outsized discoveries) require wandering.
Much of what has been built at Amazon has been from listening to customers: asking them what they want, listening carefully and then figuring out a plan to provide it thoughtfully and quickly. Bezos explains that no business can thrive without a deep obsession for its customers… but he notes that this is not enough. The biggest needle-movers for a company come from products customers don’t know to ask for. It is Amazon’s responsibility to invent on their behalf.
AWS itself is an example of this — nobody asked for it and today it is a $30 billion run-rate business. The world was ready and hungry for AWS but didn’t know it. Amazon had a hunch, followed its curiosity, took risks, and began building and iterating. Many inventions within AWS followed this pattern. They took years of listening to customers and wandering — experimentation, iteration, and refinement, as well as valuable insights from customers. Launching products like DynamoDB and SageMaker wouldn’t have been possible without a culture of curiosity and a willingness to try new things on behalf of customers.
Imagining the Impossible
Amazon still represents a low single-digit percentage of the retail market. 90% of retail still remains offline, in brick-and-mortar stores. With Amazon Go, Bezos and his team had a clear vision to get rid of the worst thing about physical retail: checkout lines. They have re-imagined a store where you can walk in, pick up what you want and leave.
Bezos admits that it hasn’t been easy to launch its stores. They had to design and build their own proprietary cameras and shelves and invent new computer vision algorithms. The investment, however, has been worth it. Many customers describe the experience of shopping at Amazon Go as “magical.” Amazon now has 10 stores in Chicago, San Francisco, and Seattle.
Failure needs to scale too
As a company scales, so too must the size of your failed experiments. Bezos notes that if the size of your failures isn’t growing, you won’t be able to invent at a size that can move the needle. For Amazon, this might mean multi-billion dollar failures. While this might scare off investors, Amazon doesn’t intend to do this cavalierly. The reward is that “a single winning bet can more than cover the cost of many losers.”
Bezos provides the Fire phone as an example of a failure, which launched at the same time as the Echo. The company was able to take its learnings and accelerate its efforts to build Echo and Alexa. The idea had its origins in two areas the company had been building and wandering for years: machine learning and the cloud. No customers were asking for the Echo. This was the definition of wandering. Since the launch, Amazon has sold over 100 million Alexa-enabled devices. In 2018, Amazon improved Alexa’s ability to understand and answer questions by more than 20%, while adding billions of facts to make Alexa smarter than ever. Today, there are over 150 different products available with Alexa built-in and there is more to come.
No customer was asking for Echo. This was definitely us wandering. Market research doesn’t help. If you had gone to a customer in 2013 and said “Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you can talk to and ask questions, that also turns on your lights and plays music?” I guarantee you they’d have looked at you strangely and said “No, thank you.”
Investing in your employees
As Bezos noted in his first shareholder letter over 20 years ago, Amazon’s focus is on hiring and retaining versatile and talented owners who can think like owners. Achieving this requires investing in employees. Amazon raised its minimum wage to $15-an-hour for all full-time, part-time, temporary, and seasonal employees. The wage hike affected more than 250,000 Amazon employees and over 100,000 seasonal employees. Bezos poses a challenge to its top retail competitors (cough, cough — Walmart) to match Amazon’s employee benefits and its minimum wage.
At Amazon, every day is day one
Bezos closes by doing something he’s done in every letter since 1997 — he reprints his original shareholder letter and attaches it to the end of his note. To this day, Amazon remains a “day one” company… listening and wandering on its customers’ behalf.
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