After an unexplainable three-year wait, I just read “The Everything Store,” a book about the early days at Amazon (AMZN) and its evolution into the dominant ecommerce company it has become.
The book also doubles as a biography of Jeff Bezos, Amazon’s 52-year-old founder and CEO. Author Brad Stone did a fantastic job outlining the impact Amazon has made in numerous industries over the past two decades; once you start reading this book, I can all but guarantee you won’t be able to put it down.
The purpose of this article isn’t to summarize the book (you really must read it for yourself). Instead, I thought it would be worthwhile to reflect on some interesting items from the book.
Sales projection
Amazon.com went live in July 1995 and immediately started racking up sales ($12,000 in the first week). When the first month of business was complete, Amazon had taken orders from every state in the U.S., as well as from 45 countries around the world. Around this time, Bezos decided to go out and raise additional capital (~$1 million) from outside investors (up until this point, Amazon had been funded personally by Bezos as well as his immediate family).
In financing meetings, Bezos told potential investors the same thing he had told his parents: he still believed there was a 70% chance the business could fail. In the scenarios where Amazon managed to survive, Bezos projected sales in 2000 could reach $74 million; if things went better than expected, Bezos projected that sales might even cross $100 million by the year 2000.
As we all know, Amazon managed to survive – and ultimately crushed Bezos' estimates. In 2000, the company reported more than $2.76 billion in net sales – nearly 40x higher than Bezos’ prediction from five years earlier. The company's incremental sales in 2000 exceeded $1 billion. This wouldn’t be the last time Bezos blew investor expectations out of the water.
Free shipping
During the 2000 holiday season, Amazon tested free shipping for the first time (minimum order size of ~$100). While the economics were difficult for the company to justify, customer surveys consistently showed (as they continue to today) that shipping costs are important to customers. Unexpected shipping costs are a primary driver of abandoned "carts" and lost sales. Unlike many of its peers, Amazon actively addressed this early on. By early 2002, Amazon had a permanent free shipping offer (“Free Super Saver Shipping”) with the order minimum quickly falling to $25.
In early 2005, Amazon took its next big step forward in shipping with the introduction of Amazon Prime. For $79 per year, members had access to two-day “free” shipping nationwide on Amazon purchases. As noted in the book, the company decided to launch the service at $79 per year despite the fact that every financial analysis suggested it was crazy to do so.
In hindsight, we can see that Prime has been instrumental in creating intense customer loyalty (CIRP estimates member retention in excess of 90%). More than a decade later, Walmart (WMT) is essentially still rolling out its competing offer (Shipping Pass) – a stark example of how long it took most competitors to recognize and adequately address a primary concern of customers.
In the meantime, Amazon has deservedly earned intense loyalty from tens of millions of consumers. While competitors continue to struggle in a changing world, an intense focus on customer satisfaction continues to reinforce and strengthen Amazon's moat.
Conclusion
Bezos once said, “We don’t have a single big advantage, so we have to weave a rope of many small advantages." Those small advantages, which took many years to develop, have become quite large. Notable successes like Prime, Marketplace (third-party sellers), Fulfillment by Amazon (FBA) and Amazon Web Services (AWS) are the tangible outcomes of a culture that favors boldness, risk taking, innovation and a long-term perspective (to use the words of former Chief Financial Officer Joy Covey).
The company also figured out the “ingenious marriage of direct retail with a third-party marketplace” (to quote Brad Stone), which few competitors have been able to replicate (at least successfully). Those interwoven advantages have created a formidable opponent for its peers.
In each of these areas, Amazon has laid the necessary groundwork to build a sustainable competitive advantage and create material long-term value for shareholders. Amazon’s astounding climb over the past 20 years should be a required case study for investors.
Disclosure: Long Walmart.
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