Continuing my “Opportunities and Challenges” series, I’d like to focus on Amazon. I don’t have many on my short list of hyper growth companies, those who are nowhere near their upside potential, but Amazon is certainly one of them.
Driving Prime Growth. A recent Morgan Stanley note estimated the global number of Amazon Prime subscribers to be 72m globally as of the end of December. That’s up from their October estimate of 60m. Both estimates come from a survey process/methodology they have refined over the years and it has often matched many of my primary research data points, so I tend to feel it is trustworthy with sound methodology strong enough to consider their estimates in a reasonable ballpark, even if not exact. Based on key regions of research, they peg Prime subscribers by country as follows:
US = 49 million
Germany = 10 million
UK = 7 million
Japan = 5 million
France = 2 million
As you can see in these core markets, there is considerable upside growth still to be had. Granted, not every individual will have or need an Amazon Prime account since Prime accounts are often shared within a household. So a better way to model growth is more likely to look at it from a household penetration standpoint vs. an individual standpoint. If we look at it that way, Prime household penetration breaks out to 35% in the US and approaches 20% in both Germany and UK, with others quite a bit further behind. That being said, if we look at the growth trajectory from various models of Prime growth through the years, we can model ~100 m Prime accounts globally by the end of 2018 with a fair amount of confidence.
Regarding Amazon Prime’s upside opportunity, it is key to understand a few things about Prime subscribers. First, they spend about 4x what a non-Prime subscriber spends at Amazon. I’ve seen some research estimates of this number to lead me to believe it is correct and, additionally, several reports peg the annual spend of ~40 percent of Prime subscribers to be about $1000 USD. That compares to around 8% of non-Prime subscribers who spend about $1000 annually. It highlights why driving Prime growth is the central opportunity for Amazon going forward.
Looking at various research as to the motivators to sign up for Prime, the biggest feature we have seen from studies would be free overnight delivery. At the moment, free 2-day shipping remains the single biggest motivator to sign up for Prime. However, among those who have not signed up yet, free, next day shipping seems to be the feature most likely to push them over the edge. Interestingly, in every key market but France, Prime Video is an increasing driver of Prime subscribership. In the UK and Germany, for example, 35 percent of consumers listed Prime Video as the main driver to subscribe to Amazon Prime.
While Prime subscribers spend ~4 times as much as non-Prime subscribers, we see increasing evidence that, the longer someone is a Prime member, the more they increase their annual spending on Amazon. This seems entirely logical but it is still a key metric to highlight the importance of simply converting a non-Prime subscriber to a Prime subscriber for Amazon’s upside.
In many ways, Amazon is similar to Apple — once someone gets into the ecosystem, not only do they stay extremely loyal, but their total annual spend over time increases.
AI and AWS. AWS is an obvious growth opportunity for Amazon, so I want to add the AI angle to this as a focus for 2017. The hype cycle is strong for AI and Amazon’s Alexa assistant and striking while the iron is hot is to Amazon’s advantage. One of the most interesting announcements from Amazon’s AWS developer event was their integration of the Alexa toolkit, named Lex, into the Amazon platform. On top of other core tenants of machine learning like visual processing, natural language processing, big data analytics, and more, Amazon has built the backbone of their AI assistant into AWS for customers to use. As companies look to provide AI front-ends to their customer facing interfaces, Amazon has the potential to deepen the stickiness of AWS by providing these AI services as a part of the solution. This could end up being a key factor in Amazon retaining customers for AWS as the competition from Microsoft and others heat up.
Building on the Sucess of the Echo. The Amazon Echo was undoubtedly one of the sleeper products of 2016. While I agree with the scenarios Jan Dawson laid out around the Echo, there will be a short term, first mover advantage for Amazon to attempt to capitalize on in 2017. This will likely be done with follow-up products to the Echo family, as well as some new additions and form factors, but also by continuing to push development of Alexa and their overall AI backend/frontend to keep consumers interested and engaged. If they allow the hype to wear off too quickly and Alexa moves from novel to stale they risk losing consumer interest and never regaining it.
As CES was the example, Amazon has the potential to push the throttle on the ecosystem growth of devices and apps/services that offer Alexa integration/skills. The critical mass of support from third parties is a differentiator today and an opportunity for Amazon to build upon in 2017 to try and get a big enough lead to make it harder and take longer for others to catch up.
Per the Prime estimates by country I shared above, growing in international markets remains a challenge. While the US is a key and profitable market, Amazon is still seeking to grow in China and India. China is the world’s largest retail market followed by the US, Japan, Germany, UK, France and India as the top seven retail markets by annual dollars. China and India are Amazon’s weakest positions of all seven of these. While I am extremely skeptical they can crack China, India remains a real opportunity and there is short term share to be taken from Flipkart. Amazon is only beginning here but, with Flipkart and Snapdeal showing signs of weakness in light of Amazon’s presence, it appears the local incumbents may not be as strong as once thought by myself and others.
Shipping Costs associated with Prime Growth.
As I pointed out in the opportunity section, next day shipping appears to be a feature which could drive significant Prime subscriber growth. With varying shipping costs and Amazon increasing infrastructure for their Prime Now 2-hour delivery service in 28 US cities and select cities internationally, the costs associated with these compelling features will increasingly pinch their margins. This is one reason the argument for Amazon to bring shipping in-house makes sense. As autonomy comes to automotive and other forms of transportation, Amazon’s expertise in logistics creates the right opportunity for them to own more of the stack when it comes to shipping and delivery. However, this is something much farther out than 2017 and the costs associated with growing the Prime service will remain a challenge and variable for Amazon.
Continuing to Shift the Commerce Model
All signs point to the reality this is happening but it is happening quite slowly. An observation I think is noteworthy: There is no global market where e-commerce represents more than 17% of total retail commerce yet. China is in the lead at 17%, while the US is at 10%. Both markets are the largest commerce markets by far, with the most developed and affluent consumers by volume than in any other country.
While we feel it is inevitable we shift more and more of our yearly purchases online, it is interesting how slowly it is encroaching on retail as a percent of annual retail spending. Retail is resilient, for now, and should retailers continue to wake up and use technology accordingly, they can continue to fend off attacks from Amazon. Amazon’s new credit card offering, which offers aggressive cash back on Amazon purchases as well as some other purchases, is an interesting element to add for 2017 as they look to take more share from traditional retail.
Look for this to be a year where Amazon aggressively reinvests their profits into many of the core upside growth strategies I outlined above. This means 2017 may likely be a cycle where Amazon reports little to no operating profits as they invest them into crucial areas of the business to further cement their competitive advantage.