UPDATED CONTEXT:-

Amazon.com, Inc. (Amazon), one of the largest global online retailers, decided to enter the offline retail

industry in December 2016 by launching its first Amazon Go store in Seattle, offering a technologically

innovative way of shopping that allowed customers to make purchases without a cashier.2

The launch was

the first time that Amazon really entered the traditional retail industry. Earlier, in May 2016, the company

had entered food, diaper, and housekeeping product manufacturing with its Amazon Elements brand.3

Nevertheless, these products were only available online for American Prime Members. Founded in 1994 as

an online bookstore, the company had become an e-commerce giant, leading digital sales of books and

electronic products. It revolutionized the way consumers purchased products, while also becoming a trusted

source of product information for potential buyers. However, the company was not profitable until 2001,

while it was still experiencing some financial difficulties.4

As of the third quarter of 2016, it was the fourth

most valuable public company in the United States.5

In 2015, it surpassed Wal-Mart Stores, Inc. (Walmart)

as the most valuable online retail company in the United States.

Could Amazon reproduce its online success in the traditional offline retail segment? Could its current

competitive advantages be replicated in offline retailing? Did this diversification make sense, considering

Amazon's existing key resources and capabilities, the presence of established traditional retailers like

Walmart, and the market trend that was increasingly moving toward online stores?

HISTORY

The Beginnings: 1994-1997

On July 5, 1994, Jeff Bezos, a 30-year-old engineer graduating from Princeton University, left his job as

vice-president at D.E. Shaw & Co., a global investment firm based in New York, to make an online

bookstore based in Seattle. He saw the future of selling products online and thus first sold books, videos,

computer hardware and software, and compact discs. He chose to sell books because of the high worldwide

demand, low price per piece, and high number of titles. His aim was to provide more varieties of books

online than were available in a physical store. Amazon's main competitors were Barnes & Noble Do Not Copy or Post Booksellers Inc., the largest retail bookseller, and other local booksellers in the United States. The comp was named Amazon.com in the year after it was created. Through a partnership with Ingram Book Group

LLC, Amazon could access books at wholesale prices and sell them online at cheaper prices than physical

bookstores. Within its first two months, Amazon's online sales covered more than 45 countries with sales

revenue of US$20,0006

per week. In June 1997, it went public and entered the Nasdaq stock exchange at

an initial price of $18 per share, raising $54 million.

Global Expansion and Laborious Financial Results: 1998-2004

In 1998, Amazon began to expand internationally, first by entering the United Kingdom and Germany, and

then moving to Europe and Asia, including France, Japan, and China. The company included different

languages on its websites to serve these international markets. Bezos was not expecting to make any profits

during the first four or five years of the business. Shareholders were not satisfied with the company because

it was not profitable and not growing fast enough. However, this business model, with slow but efficient

growth, saved Amazon from suffering too much from the 2001 dot-com bubble, and the company realized

its first profits in 2001. Nevertheless, its profit was only $5 million from revenues of over $1 billion. Since

2001, the company had significantly diversified its products, from books to computers, electronics, clothes,

and beauty products.

Diversification, Early Steps in the Service Industry, and Own-Brand Products: 2005-2010

Amazon continued to extend its services through AmazonFresh, a grocery service, and Amazon Music, an

online music store. The company increased its product offerings through the Fulfilment by Amazon

program, where products were stored in Amazon's fulfilment centres and then quickly picked, packed, and

shipped to customers. It also created Amazon Prime to provide a two-day shipping service in the United

States for only $79 a year. It launched Amazon Web Services Inc., which offered inexpensive, reliable, and

scalable cloud computing services, including Amazon Mechanical Turk, a crowdsourcing Internet

marketplace that enabled individuals and businesses to coordinate the use of human intelligence. This

period also marked the beginning of Amazon's own-brand products, including the 2007 launch of the

Amazon Kindle, one of the very first e-books readers, three years before the launch of Apple Inc's iBooks.

Innovating and Diversifying at a Faster Pace: 2011-2017

The company kept innovating to improve its products and services. It launched Amazon Locker, a parcel

delivery service that allowed buyers to pick up purchases at secure, self-service kiosks, and Amazon Prime

Air, a cargo airline and drone-based delivery system. In February 2017, the company announced that it

would invest $1.5 billion to build an air cargo hub to support the increasing size of its fleet.7

Amazon also

entered new segments with its Kindle Fire and Fire HD, which competed with Apple's iPad.

Amazon acquired several companies, including GoodReads, an online social networking site for sharing

books and reviews, and LoveFilm, a DVD-by-mail and streaming video-on-demand provider that competed

with Netflix in Europe. It acquired Kiva Systems to develop robots that efficiently moved products in

warehouses, thereby shortening delivery times.

The company launched Amazon Video Direct to compete with YouTube,8

and it also developed and operated

Amazon Video, an Internet video-on-demand service where customers could buy, rent, and instantly watch Do Not Copy or Post digital movies and TV shows. Amazon opened its first physical bookstore, Amaz products at the same prices as those available in the online stores. These strategic moves allowed Amazon to

become a global online retail giant. By 2015, its market capitalization surpassed that of Walmart.

AMAZON'S DEVELOPMENT

Headquartered in Seattle, Amazon was one of the big four global digital companies: Google, Apple Inc.,

Facebook Inc., and Amazon. It had worldwide operations, with websites serving markets in 14 countries in

North America, Europe, and Asia, and shipping services in 75 countries.9

Its business was expanding

rapidly. The number of full-time and part-time Amazon employees increased 47 per cent in one year to

reach 268,900 in 2016.10 This was 23 times more employees than its online competitor EBay and twice as

many as Apple, but it was less than 12 per cent of the employees of its offline competitor Walmart. Amazon

announced a plan to hire 100,000 full-time employees in the United States from January 2017 to mid-2018,

potentially becoming one of the largest technology employers in the country.11

Amazon offered a wide range of products on its website, including books, apparel, and even food. As of

February 2017, Amazon.com had 48 categories of productsboth new and usedthat were created and

sold both by Amazon itself and by other companies. Most products were in the digital and multimedia

sectors. The company had diversified a lot over the years but mainly within online businesses.

The company's revenues from online retail sales largely surpassed those of its competitors: in 2015, its

online retail sales were 5.5 times greater than those of Walmart, making it the leader in the online retail

market12 (see Exhibit 1). Amazon made $71.84 billion in online retail sales between November 2014 and

November 2015. This was more than the combined online sales of Apple, Walmart, Sears, Roebuck &

company, The Gap Inc., Costco Wholesale Coporation, Target Corporation, The Kohl's Corporation, Best

Buy Co., and The Home Depot Inc.13 In the second quarter of 2016, Amazon hit a record profit for the third

straight quarter$857 million ($1.78 per share) on revenue of $30.4 billion.14 This record far surpassed

analysts' estimates of profits per share of $1.11 and revenues of $29.5 billion. In 2016, its online retail sales

accounted for half of all online retail sales in the United States.15 According to Amazon's chief financial

officer, Brian Olsavsky, these positive financial figures were a result of "working very hard on efficiency"

and "benefits of operating at scale."16

For years, as Amazon's online retail sales and profits increased continually, the company kept on investing

in research and development (R&D) to improve its offers and to develop new market sectors. In 2016,

Amazon decided to enter food and consumable goods manufacturing through Amazon Elements, available

only online for American Prime Members, and offline retailing through Amazon Go in Seattle, the first

brick-and-mortar convenience food store that employed mobile e-commerce, machine learning, and

computer vision to allow customers to make purchases without a cashier.17

However, Amazon's performance in the third quarter of 2016, especially in terms of profits, was lower than

expected, and this caused its stock price to decrease by 7 per cent. While its revenues were as expected, at

$32.7 billion, its profits were $252 million, which was much lower than in the second quarter.18 Earnings

per share were only $0.52below the estimated $0.78. Still, as of the third quarter of 2016, Amazon was

the fourth most valuable public company in the United States.

This poorer performance resulted largely from increased investments in improving existing offers and

developing new offers. Such investments were expected to increase as Amazon entered offline retail

segments, which required at least buying physical stores. As Olsavsky said, "We are in a period of

advancing up our investments in the second half of 2016, even more so than in prior years."19 Do Not Copy or Post

In May 2016,

This document is authorized for educator review use only by Iqra Shah, HE OTHER until Mar 2022. Copying or posting is an infringeme o raise more capital, Bezos sold over one million of his sharesthe largest amount he had ever madefor

$671 million. In August 2016, he sold another record one million shares for $756.7 million, reducing his

shares in Amazon to 16.9 per cent (see Exhibit 2).

AMAZON'S COMPETITIVE ADVANTAGES

Amazon's success was not only due to its first-mover advantage but also came from a combination of

competitive advantages related to marketing, supply chain, innovation, and customer-centricity.

Brand Awareness and Innovative Marketing

Amazon's marketing strategy relied on its strong brand awareness. As Bezos said, "Brand names are more

important online than they are in the physical world."20 In another interview, he noted the importance of

communicating the story of Amazon's brand: "You can have the best technology, you can have the best

business model, but if the storytelling isn't amazing, it won't matter . . . Nobody will watch."21

The company implemented innovative marketing to receive free press coverage and to increase good customer

perception of its products and services. Its community banana stands gave away about 4,500 free bananas

daily to Seattle inhabitants to create more links with customers and improve its brand image. Since bananas

were also the most popular item sold by Amazon's rival, Walmart, some analysts thought this campaign could

be seen as a way of attacking Walmart by showing that Amazon also sold good-quality fresh items.22

Amazon chose to advertise its first unexpected offline retail venture, Amazon Go, through video teasing,

which successfully created a buzz among the general public. Amazon did not really need to spend a lot of

money to advertise this brand-new offline offer, as media outlets were already talking about this innovative

retail marketing approach. Amazon's competitors also started to react to the resulting widespread public

awareness by creating their own videos, which generated even more visibility for Amazon Go.

In 2015, Amazon spent $2.8 billion on digital marketing, an increase of 40 per cent from the year before.23

The company also established partnerships with digital celebrities to promote its products.24 However, these

marketing activities were not the only reason for Amazon's success, and Amazon focused less on offline

advertising than digital brands like Apple and Samsung. As Bezos said, "In the old world, you devoted 30

per cent of your time to building a great service and 70 per cent of your time to shouting about it. In the

new world, that inverts."25

Efficient Supply Chain Management to make a Convenient Shopping Experience

As an online retailer, Amazon revolutionized the way customers shopped for products through its efficient

supply chain management, which made a wider range of products available and delivered those products faster

than its competitors. The company's global presence and available worldwide shipments allowed customers

to easily buy almost anything from any country from Amazon. Unlike Walmart, Amazon did not need a

physical shop; it just needed a warehouse to store products. It also had products delivered directly from the

producer to the customer. Its fast delivery came from the strategic location of its warehouses, the high levels

of available product inventory, its fast order management, and its partnerships with delivery companies. For

example, in Japan, Amazon partnered with Yamato Holdings Co., Ltd., allowing buyers to receive products

within a day of their orders.26 This very efficient delivery also came from its investments in robotics. From the beginning of its business, Amazon sold many products at highly competitive prices, usually

cheaper than those of offline competitors. Bezos even said, "There are two kinds of companies, those that

work to try to charge more and those that work to charge less. We will be the second."27 This ability to

reduce prices came from the high economies of scale Amazon could generate on some products because of

their high turnover. Unlike offline retailers, Amazon did not pay expensive rent for physical shops but

efficiently managed warehouses at strategic locations to maximize its inventory turnover. Its strategy to sell

more at a low price meant the company's margins were usually lower than those of competitors, and this

was one reason why it was not profitable for many years.

Customer-Centricity and Innovation

Bezos's strategy had always been to focus on customer needs. He said, "We've had three big ideas at

Amazon that we've stuck with for 18 years, and they're the reason we're successful: Put the customer first.

Invent. And be patient."28 Since the beginning of online business, Amazon kept innovating to create the

best possible user experience. The company emphasized the ease of use of its websites. It also reduced

product delivery time, proposing even same-day deliveries in some cities. This customer-centric approach

allowed the company to be more innovative. As Bezos said, "If you're competitor-focused, you have to

wait until there is a competitor doing something. Being customer-focused allows you to be more

pioneering."29 The company increased the number of products it offered over the years to satisfy customer

needs, particularly through partnerships with prominent players such as retailer Toys "R" Us Inc.

AMAZON'S PRIVATE LABELS AND OFFLINE RETAIL OFFERS

Amazon had already launched a bookstore in a university in Seattle, which offered over 6,000 book titles,

and it planned to open a second one in San Diego. Although Amazon did not have much experience in the

traditional manufacturing and retail business, it decided in 2016 to enter grocery product manufacturing

and brick-and-mortar food retailing. This decision went against the general trend of business models

followed by many competitors, which were increasingly moving from offline physical stores to online

stores. However, Bezos did not see this decision as a risk. Instead, he saw it as a normal evolution of

business, and said, "What's dangerous is not to evolve."30

New Brands

After developing many electronic devices under its own brand, Amazon decided to enter the higher-margin

grocery and household goods sectors. In May 2016, the company announced the launch of three brands

available for purchase online on its websites: Happy Belly (which offered grocery products including milk,

coffee, cereals, and pasta), Wickedly Prime (which offered ready-to-eat prepared foods), and Mama Bear

(which offered baby products including baby food, cleaning wipes, and diapers).31 Amazon thus not only

sold grocery and household products online but also produced them through private labels, allowing the

company to have potentially higher margins.32 On its websites, the company explained that this move was

driven by its customer-centric capabilities. 33 According to Amazon, the product offerings would be

improved based on the clients' feedback. It wanted to make and promote brands that would be seen by

customers as more trustworthy than others.

While Amazon Elements products had been available only in the United States and only to Amazon Prime

members, a small segment of Amazon's entire customer base, Amazon contracted with multiple Do Not Copy or Post manufacturers to produce this new range of products. These manufacturers included TreeHouse Foods which was also manufacturing similar goods for other retailers. This development could be seen as an

attempt by Amazon to catch up and compete even more with other retailers such as Walmart and Target,

which had had their own product brands for years.

Because Amazon's brand awareness was so high, it could develop these new offers easily without having

to spend millions of dollars on advertising and other marketing activities. Amazon could adapt its product

offers to meet consumer demands by utilizing its enormous customer databases. However, as Amazon had

not been a traditional retailer before, this strategic move might be seen as risky. Indeed, this was not the

first time that Amazon had tried to produce baby products. In 2014, the company had launched its own

diapers on its websites, but removed them from Amazon.com only few weeks after the launch due to

manufacturing defects and negative customer feedback.34 Nevertheless, Bezos was not the kind to give up

easily after one failure. He said, "If you're not stubborn, you'll give up on experiments too soon. And if

you're not flexible, you'll pound your head against the wall and you won't see a different solution to a

problem you're trying to solve."35

These new Amazon-branded products could also create tensions with suppliers who were currently

presenting their products on Amazon.com, potentially putting Amazon in an even tougher position to

negotiate with them.36 Should Amazon's own brands be showcased on its websites while the company

aimed to be a leader in the sale of its own-brand products? Should these own-brand products be marketed

the same way as products available from other suppliers? Was the launch of its own-brand products

considered unfair competition?

Amazon Go

Amazon's business model was designed under the assumption that retail businesses were all growing and

moving toward the online environment. However, with Amazon Go, the company clearly revised its

business model to combine online and offline retailing. The company opened its first brick-and-mortar food

store on December 5, 2016, near its headquarters in Seattle. It announced this new initiative only by posting

a video about the Amazon Go concept that day.37 Immediately after the post, media outlets around the world

wrote about it. The store was accessible only to the company's employees for beta testing, while a public

opening was planned for early 2017.

It seemed that Amazon might be planning to extend Amazon Go to the United Kingdom. According to the

Guardian, the company had registered a British trademark for the store concept in December 2016, on the

same day it opened the Seattle store.38 The company refused to comment to the newspaper about this

potential U.K. expansion. However, such an expansion would not be surprising given that the company had

often before used the United Kingdom as its first non-U.S. market to test new offers. These strategic moves

implied that Amazon might be thinking of developing the Amazon Go concept globally.

The Amazon Go store, which sold staple foods, was 1,800 square feet (over 160 square metres) in area. Its

uniqueness was its fast and convenient electronic payment system. Customers just entered the store, picked

up the products they wanted, and left the store without having to queue to process payments.39 When

customers took products from the store, sensors would concurrently transmit information about the

purchases to its online processing system, which would debit the price of those products directly from the

customers' Amazon Prime accounts before the customers left the store.40 Amazon Go and Amazon.com

had the same aim: to revolutionize the way people consumed in their everyday life and to offer the best

possible customer experience. According to the company, this shopping technology was really not a new

concept, as Amazon's teams had already been working on it for four years. Do Not Copy or Post

41

This document is authorized for educator review use only by Iqra Shah, HE OTHER until Mar 2022. Copying or posting is an infringement of cop The automated grocery store raised significant concerns among Amazon's employees due to the potential

job cuts in Amazon stores. It was estimated that, through this technology, Amazon's grocery stores might

eliminate thousands of jobs in the long term.42

COMPETITION IN THE OFFLINE RETAIL MARKET

Amazon Go and Amazon's private labels, including Amazon Elements, targeted markets that were quite

similar to those of its major grocery retail competitors, Walmart and Target. Over the years, Amazon had

surpassed these large retailers in terms of online sales, but would the company be able to reproduce this

online success in the offline markets? Though it might generate greater profit margins, the offline retail

market was extremely competitive, requiring much larger investments.

Importantly, Amazon had no solid experience in managing physical chain stores. Many competitors,

particularly established grocery retailers, viewed such announcements with humour. Amazon was clearly a

latecomer without sufficient knowledge of brick-and-mortar retail markets, while efficient delivery systems

allowed more customers to shop for products online. Monoprix S.A., a major French retail chain located in

key areas in city centres, made a parody of Amazon Go's video, saying that Amazon should have better

served its customers' needs.43 This reaction was similar to the response to Amazon's entrance into the

online food market, in which it became a big player. By 2016, the Amazon Prime service had over 63

million users; these users could be potential users of Amazon Go and Amazon Elements as well.44

Amazon's biggest competitor in the online retail market was Walmart, an American retailer operating in

both offline and online markets through its own brick-and-mortar stores and websites. It was the largest

offline retailer in the United States and the second online retailer after Amazon. Amazon and Walmart had

been competing in the online market for years. Walmart had even sued Amazon in 1998 for hiring former

Walmart executives and thus stealing its trade secrets.45 Doug McMillon, the president and chief executive

officer of Walmart, commented that Walmart's high number of stores gave it a competitive edge over purely

online stores such as Amazon and that, by being in both offline and online markets, the company could do

"quick last minute delivery that is free, cheaper, pushes cutoff shopping during holidays, and . . . brings

people into stores."46 The opening of Amazon Go stores and the development of Amazon's own-brand

grocery products could thus become a serious threat to Walmart.

CONCLUSION

The launch of Amazon Go and Amazon Elements, as well as other private labels, clearly demonstrated

Amazon's intention to move from being online only to becoming a mixed offline and online retail and

manufacturing company. Amazon Go and Amazon Elements had several similarities: they were offline,

were reserved only for Amazon Prime members, were in the grocery segment, and had the same competitors.

These initiatives, which were seen as good opportunities for Amazon to generate higher profits, meanwhile

put the company into a riskier position due to its lack of experience in traditional retailing. In online retail

sales, Amazon's performance had surpassed its mixed online and offline retail competitors over the years,

demonstrating its strengths in marketing, supply chain, and customer-centricity in online segments.

Could Amazon replicate the competitive advantage that contributed to its online success in the offline retail

markets? Could the company leverage its existing online assets and capabilities in the offline segments?

Given this diversification, how could Amazon manage the efficiency of its operations and the quality of its

products in the long term? Did the company have capabilities to do so? Would Amazon Go change the way Do Not Copy or Post people bought and consumed as Amazon.com had done so successfully before?

EXHIBIT 1: DIGITAL SALES WORLDWIDE, BY RETAILER (IN $MILLIONS)

Amazon.com 71,844

Walmart 13,188

Apple 10,740

Macy's 4,710

Home Depot 4,267

Best Buy 3,672

Costco 3,498

Nordstrom 2,620

Gap Inc. 2,505

Target 2,491

Williams-Sonoma 2,459

Kohl's 2,282

Sears Holdings 2,084

Source: Phil Wahba, "This Chart Shows Just How Dominant Amazon Is," Fortune, November 6, 2015, accessed April 16,

2017, http://fortune.com/2015/11/06/amazon-retailers-ecommerce/.

EXHIBIT 2: AMAZON'S YEAR END FINANCIAL RESULTS

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Revenues

(million $) 14,835 19,166 24,509 34,204 48,077 61,093 74,452 88,988 107,006 135,987

Gross

Margin (%) 22.6 22.3 22.6 22.3 22.4 24.8 27.2 29.5 33.0 35.1

Operating

Income

(million $)

655 842 1,129 1,406 862 676 745 178 2,233 4,186

Operating

Margin (%) 4.4 4.4 4.6 4.1 1.8 1.1 1.0 0.2 2.1 3.1

Net

Income

(million $)

476 645 902 1,152 631 39 274 -241 596 2,371

Earnings

Per Share

($)

1.12 1.49 2.04 2.53 1.37 0.09 0.59 0.52 1.25 4.90