In my first article for GuruFocus, I noted that the most successful investor in the UK in recent years, James Anderson, had been a frequent critic of value investing and had stated that investors would learn more by reading Jeff Bezos' annual shareholder letters than those written by Warren Buffett (Trades, Portfolio). While I do not believe value investing is dead because we just need to adapt value investing to the modern world, understanding Bezos' thinking is certainly a very good idea in my view.
So, I have carefully gone through Bezos' 24 annual shareholder letters, and in this article, we will see what we can learn as investors from Bezos' letters for the years 2011 to 2015, and what we need to look out for in companies that could be the next Amazon.com (AMZN, Financial).
Key lessons from Amazon’s letters to shareholders: 2011-2015
2011
This letter was all about how Amazon’s inventions have been transformational and radical by empowering others to unleash their creativity, e.g. Amazon Web Services, Fulfilment by Amazon and Kindle Direct Publishing. This speaks of the venture capital approach of trying many businesses and delegating authority to business heads and letting them run as separate entities.
2012
Bezos says that motivation comes from desire to impress customers rather than to outcompete rivals. This induces proactivity rather than waiting for external pressures. Internal motivation to improve services before the company would be forced to do so by the market, including lowering prices or recommending customers to switch their service configuration to lower their costs, will always be beneficial in the long run. The focus is on building a “heavier” company to have the capacity and resources to do this.
"When we’re at our best, we don’t wait for external pressures. We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition. We think this approach earns more trust with customers and drives rapid improvements in customer experience – importantly – even in those areas where we are already the leader."
2013
New offerings are centred around improving customer experience – this is a recurring theme in Bezos’ letters. Also, he talks about how Amazon offers employees up to $5,000 once a year to end their employment, as the company looks to retain only people who really want to stay at Amazon. The company also employs the Kaizen program in fulfilment centres. This is originally a Japanese strategy employed at Toyota Motor Corp (TM, Financial), described as follows:
"Employees work in small teams to streamline processes and reduce defects and waste."
2014
According to Bezos, the characteristics of an excellent business offering are as follows:
"Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades."
Tools to achieve these characteristics include:
"Customer obsession rather than competitor focus, heartfelt passion for invention, commitment to operational excellence, and a willingness to think long-term."
Iterative innovation leads to success:. Amazon Marketplace started as Auctions, continued as a fixed price version and could not attract customers. Allowing third-party sellers to compete against company-owned retail category managers on the product detail page, which was the most valuable page, became successful.
"The success of this hybrid model accelerated the Amazon flywheel. Customers were initially drawn by our fast-growing selection of Amazon-sold products at great prices with a great customer experience. By then allowing third parties to offer products side-by-side, we became more attractive to customers, which drew even more sellers. This also added to our economies of scale, which we passed along by lowering prices and eliminating shipping fees for qualifying orders."
On the Prime flywheel:
"Every time a seller joins FBA, Prime members get more Prime eligible selection. The value of membership goes up. This is powerful for our flywheel. FBA completes the circle: Marketplace pumps energy into Prime, and Prime pumps energy into Marketplace."
2015
Bezos argues that corporate cultures are enduring, hard to change and can be a source of a competitive advantage because people self-select. He believes that Amazon is the “best place in the world to fail," describing it as truly innovative because it is willing to accept many failed experiments. This is due to the long-tailed distribution of returns big winners pay for many experiments (this is very similar to James Anderson’s investment strategy).
Video content is part of the Prime flywheel. Its difference compared to other video content and streaming companies is that while others aim to be fast followers of competitors, Amazon Webservices builds 90% to 95% of new features in response to customer wishes.
