If there’s anything Amazon.com Inc. (AMZN, Financial) has done particularly well in its short history, it has been to successfully enter new business arenas. What began as a small online bookstore in 1994 has since become a juggernaut in almost every type of retail today. And, as we’ll see later, health care may be an appropriate new arena.
Founder Jeff Bezos had a diversification plan. He articulated the highlights of that plan in the 2006 letter to shareholders.
He said there are two key characteristics of Amazon businesses:
- They experience growing and high returns on capital.
- They operate in very large market segments.
As Bezos noted, those characteristics comprise a high bar for new businesses they might enter. Further, he said, “Before we invest our shareholders’ money in a new business, we must convince ourselves that the new opportunity can generate the returns on capital our investors expected when they invested in Amazon. And we must convince ourselves that the new business can grow to a scale where it can be significant in the context of our overall company.”
Again, a couple of strong criteria: a rate of return that will satisfy Amazon investors (who have high expectations) and the new business must make a material difference to a company that was already bringing in $10 billion annually. Significant hurdles on both criteria. One more point: Bezos and his team must be satisfied the opportunity is underserved and Amazon has the capabilities to effectively serve customers in that market.
Amazon observer Sanjay Parthasarathy, the founder and CEO of Indix Corp., says "Amazon can harness the power of its algorithms to enhance the overall customer experience and combine products and services, such as buying luggage when booking flights," should it decide to go back into the travel business.
At Forbes magazine, a 2012 article made the point that Amazon's stock is volatile because management makes surprise moves in its strategy, with major capital expenditures and willingness to wait for positive cash flow. Building on that, contributor Haydn Shaughnessy argues Amazon has mastered the art of "radical adjacencies," which involves going beyond normal business practices and grasping opportunities in widely-adjacent markets (he gives the example of Apple (AAPL, Financial), a computer manufacturer that moved into music, smartphones and more).
John Rossman, a former Amazon executive and author of “The Amazon Way: 14 Leadership Principles Behind the World's Most Disruptive Company,” says small teams are one of the keys to innovation and high performance. Teams of six to 10 staff members all own something, whether that’s product or feature, a service or a process. This ownership produces motivation and continuous improvement, as well as transparency and accountability for results and future investments. As a result, these teams have a built-in advantage when engaging in new business lines.
From a financial perspective, Bezos said in the 2006 letter that he is often asked about plans to open physical stores. He is not necessarily opposed, but said, “That’s an expansion opportunity we’ve resisted. It fails all but one of the tests outlined above. The potential size of a network of physical stores is exciting. However: we don’t know how to do it with low capital and high returns; physical-world retailing is a cagey and ancient business that’s already well served; and we don’t have any ideas for how to build a physical world store experience that’s meaningfully differentiated for customers.” Perhaps with Amazon Go they now have found that solution to brick-and-mortar stores.
This all reflects the need for a long-term perspective. Bezos says such a business will require a three- to seven-year commitment. He adds that such time frames were needed for Amazon’s international businesses, earlier non-media businesses and the third-party seller businesses.
Within this context, will Amazon and its new partners succeed in improving the health care of their employees, as outlined in a January news release? Or creating a new, breakthrough model for health care in other companies and, perhaps, even in government? Amazon’s partners in this tri-partite exercise are Berkshire Hathaway (BRK.A, BRK.B) and JPMorgan Chase & Co. (JPM, Financial).
It is an ambitious plan, and investors should hope it will be realized because health savings could make a material difference on bottom lines. Berkshire Hathaway’s Warren Buffett (Trades, Portfolio) said, “The ballooning costs of healthcare act as a hungry tapeworm on the American economy. Our group does not come to this problem with answers. But we also do not accept it as inevitable. Rather, we share the belief that putting our collective resources behind the country’s best talent can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes”.
In the news release that first announced this initiative, Bezos said, “The healthcare system is complex, and we enter into this challenge open-eyed about the degree of difficulty,” and “Hard as it might be, reducing healthcare’s burden on the economy while improving outcomes for employees and their families would be worth the effort. Success is going to require talented experts, a beginner’s mind, and a long-term orientation.”
While this project is not Amazon’s alone, it has the hallmarks of an Amazon entry into a new line of business:
- Returns on capital have the potential to be high and growing.
- The market segment is very large.
- The market is underserved (that is, there appear to be no existing programs that satisfy employers).
- Amazon is capable of effectively serving customers.
- Health care is a radical adjacency.
Although Bezos speaks soberly of the challenge with health care for their three companies, and perhaps beyond, it must be the type of challenge he relishes. Amazon has 560,000 full-time and part-time employees and any improvement should provide gains in free cash flow. Add in the employees of Berkshire Hathaway and JPMorgan Chase, as well as the employees of potentially thousands of large employers, and this becomes a very large opportunity.
So far, Bezos and Amazon have met many business entry challenges and succeeded. Will they be able to do it again? If history is any indicator, health care may be in for a game-changing season.
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours. I do list books for sale on Amazon.com and other online book retailers.
