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submit a typed one-page, single spaced analytical memo with 12 font of the case. In the memo, you will assume the role of management presenting your recommendation to the Board. Please use the following format for this assignment:Case nameYour name and dateKey issue or problemRecommendations that address the problem. Number each recommendation, as many as you feel are appropriate and write a thoughtful paragraph detailing each recommendation.Write a second paragraph, immediately following the recommendation, that provides the support and rationale for your recommendation.You may write up to 2 pages if you feel warranted but please do not exceed 2 pages
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W18088
AMAZON.COM: EVOLVING INTO OFFLINE RETAIL1
Won-Yong Oh wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective
or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to
protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2018, Ivey Business School Foundation
Version: 2018-02-15
In May 2017, Amazon.com, Inc. (Amazon) released its report on its fourth-quarter earnings. Although the
company missed its target revenue of US$44.68 billion,2 it surpassed analysts’ expectations for its fourthquarter profits. However, not all shareholders were satisfied, as Amazon’s stock dropped 4.5 per cent just
hours after the report’s release. The results were in some ways disappointing because they did not reflect
the company’s claims that Amazon had enjoyed a record holiday season in 2016.3
Amazon had always invested heavily in expanding in the United States through new projects, from
establishing Amazon Prime Now (Prime Now) to setting up brick-and-mortar (B&M) Amazon Books and
Amazon Go locations.4 By April 2017, a rumour suggested that Amazon would acquire natural and
organic foods supermarket Whole Foods Market Inc. (Whole Foods) in the near future.5 Entering the
B&M industry was unfamiliar territory for Amazon, but also a promising opportunity, as the B&M
industry accounted for approximately $4 trillion and 90 per cent of retail sales in the United States.6
Could Amazon be as successful in offline retail markets as it had been in e-commerce? How could
Amazon differentiate itself in the B&M retail industry?
COMPANY OVERVIEW
Amazon was a publicly traded company started by Jeff Bezos (who also served as Amazon’s chief executive
officer) in 1994, and opened as “Earth’s biggest bookstore” in July 1995. Bezos had quit his Wall Street job
to start an online business that would allow customers to purchase items on the Internet and have those
items delivered to their homes. He had seized the opportunity when he saw that Internet usage grew 2,300
per cent in the spring of 1994. Bezos started by selling books because they were low cost and generated
universal demand. He then expanded into other industries over the subsequent two decades.7
Since Amazon went public in 1998, Bezos’s consistent message had been to “build culture, take risk, and focus
on the long term.”8 Further, Amazon was guided by four principles: an obsession with the customer rather than
competitors; a passion for invention; a commitment to operational excellence; and long-term thinking.9
By 2016, Amazon was a major e-commerce company that also operated in multiple other industries such
as books, films, and web services with various subsidiaries. Its website was well known as the most
popular destination for product searches, surpassing all other search engines and retailers. As a result, the
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majority of U.S. consumers perceived Amazon as the dominant player in e-commerce (see Exhibit 1).
Nine out of 10 consumers checked the Amazon website even if they found a product they liked while
shopping on another retailer’s site.10
In 2012, Bezos had spoken about the possibility of Amazon’s expansion into B&M stores, saying, “We
would love to, but only if we can have a truly differentiated idea. . . . What would we do that would be
different? How would it be better? We don’t want to do things because we can do them. We . . . don’t
want to be redundant.”11 Three years later, Amazon returned to its roots by opening its first bookstore in
Seattle, Washington.12 It also laid the foundation for an innovative new concept of how to shop through
its first Amazon Go location.
As of February 2017, the company had over 341,000 employees13 and reported revenues of over $135
billion (see Exhibit 2).14 Amazon’s future plans included further B&M expansions of Amazon Books,
Amazon Go, and AmazonFresh. In addition, representatives from Amazon and from supermarket chain
Whole Foods met in Seattle on April 30, 2017. Although the companies signed a non-disclosure
agreement (because other companies were also interested in acquiring Whole Foods), the subject of the
meeting was clearly a potential acquisition.15
Growing Segment: Amazon Web Services
Amazon operated under three business segments created in 2006: North America, International, and Amazon
Web Services (AWS), a cloud computing platform and subsidiary of Amazon (see Exhibit 3). AWS resulted
from Bezos listening to customers looking for solutions to problems with expensive applications and open
source products. In this way, AWS was an outcome of the company’s customer-centric principle.16
In 2016, AWS produced $12.2 billion in revenue.17 With $926 million in operating profits, comprising
31.3 per cent of all AWS net sales (in comparison with Amazon’s operating margin of 5 per cent), AWS
was Amazon’s main profit driver in the fourth quarter of 2016.18 AWS was still growing, and offered
various services including virtual servers, storage, database, migration, networking, security, messaging
services, artificial intelligence, development tools and application services.19 Bezos confirmed, “AWS is a
$5 billion business and still growing fast.” Similarly, Dan Kurnos, an analyst with The Benchmark
Company, noted that AWS was “surprisingly more profitable than forecast.”20
A key benefit of AWS was that costs were largely variable, as they were scaled to a customer’s business,
thereby helping that customer avoid large capital expenses. Moreover, cloud computing reduced the
processing time from weeks or months to minutes through autonomic computing, which reduced labour
costs and the possibility of human errors. Hence, AWS was a reliable, low-cost, agile, open, flexible, and
secure platform that provided services to businesses in 190 countries.21
Enhancing the Shopping Experience: Amazon Prime and Prime Now
Amazon Prime consisted of two features, Prime and Prime Now. Prime was a paid membership program
that gave customers advantages such as free, cheaper, or faster shipping; savings on products and
services; access to Amazon’s entertainment subsidiaries; and other bonuses (e.g., Amazon Elements and
Membership Sharing).22 Prime Now members could receive free two-hour delivery of thousands of
Amazon items. Another area of Prime Now was its restaurant delivery service, Amazon Restaurants
(which offered food delivery within one hour to Prime members if their order met a minimum purchase
amount). To offer these services, Amazon partnered with local stores, restaurants, and couriers to provide
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more than 25,000 items across 25 categories, from basic essentials to electronics and more. The deliveries
were available seven days a week from early morning to late evening.23
Bezos stated that Amazon Prime was the “best bargain in the history of shopping” and that it was part of
Amazon’s long-term plan to strengthen the company’s hold on customers.24 In exchange for loyalty,
Amazon was willing to sacrifice profits from shipping and services. Prime was one of Amazon’s
initiatives to help change customers’ expectations about retail.25 Prime members used Amazon as their
primary source for researching products, increasing overall usage of Amazon from 44 per cent in 2015 to
55 per cent in 2016, while other search engines decreased from 34 per cent to 28 per cent over the same
period (see Exhibit 1).26
Amazon catered to the two most important factors for customers shopping online: low prices and free
shipping. Although Prime members were more likely to shop online, they still shopped as often as the
average U.S. consumer.27 Prime members were important for the company’s revenue stream since each
member spent, on average, $1,200 per year, compared with an average of $500 per year for non-members.28
ONLINE RETAILING INDUSTRY
Market Growth
With the exception of 2008 and 2009 (i.e., during the global recession), the e-commerce industry had
experienced steady growth since the dot-com boom of the late 1990s; by 2017, it had an estimated value
of $432.4 billion, growing 13.4 per cent between 2012 and 2017.29 E-commerce sales were expected to
reach $658.2 billion by 2023 (see Exhibit 4).30 Consumers shopping online had many advantages, such as
access to a greater variety of products, the ability to find products more quickly, and more convenience in
receiving them. The increased usage of mobile devices complemented the e-commerce trend, as retailers
were increasingly tailoring their digital content for mobile viewers.
In addition, there was a race to bring the grocery retail sector online in the United States. The largest
obstacle to this objective was providing fresh products and foods because customers preferred to be able
to inspect the quality of such items before buying them. Another challenge was that customers did not
want to pay high fees for deliveries, nor did they want to wait to receive their purchases. To address these
needs, large traditional grocery stores such as Wal-Mart Stores, Inc. (Walmart) and Kroger offered “clickand-collect” services, which allowed customers to place their grocery orders online and collect them at
their convenience.31 These grocery retailers had increased the options they offered for online food
shopping, mainly in anticipation of Amazon’s potential expansion into this category.
Over the past several years, consumers’ grocery shopping behaviours had changed dramatically.
Euromonitor International reported that 25 per cent of U.S. consumers shopped for groceries online at
least once in 2013. In 2016, the percentage increased to 38 per cent.32
Competition
Amazon led the e-commerce industry and competed with large retailers such as Walmart and Target
Corporation (Target) using a fast-growing, dynamic channel that was essential to compete with storebased retailing.33 In 2016, Amazon’s revenue was $136 billion, approximately 27.9 per cent of Walmart’s
$486 billion.
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In terms of sales volume, Amazon had been unable to compete with Walmart; the main reason was that,
in the United States, nine out of 10 dollars were spent in offline retail stores. Thus, Amazon realized it
was imperative that the company enter the offline retail segment. Accordingly, Amazon launched
Amazon Go and its other B&M stores as a first step in this direction.34
As the competition between Amazon and Walmart increased, Walmart stores stopped selling Kindles, the
e-readers designed and marketed by Amazon. Walmart also began offering same-day delivery during
holiday seasons by shipping directly from its stores.35
Yet Walmart was not the only competitor that Amazon faced. In 2012, eBay Inc. launched eBay Now, a
courier service offering one-hour delivery for only $5. Further, in 2013, Amazon’s market share in
product search was 30 per cent in comparison with Google’s 13 per cent, which resulted in the latter
launching Google Shopping Express.36
STRATEGIC CHANGES: OFFLINE MARKET
Amazon intended to deliver “the omnichannel experience”—a multichannel approach that offered
customers an integrated shopping experience—by opening multiple B&M locations. The omnichannel
approach was becoming increasingly popular in the retail industry. Large retailers such as Amazon and
Walmart began blurring the lines between online and offline as they catered to their customers’ needs.
Although the majority of retail sales occurred in the B&M market, e-commerce’s influence was growing,
as demonstrated by research that found 45 per cent of U.S. customers preferred to make their holiday
purchases online (compared with 52 per cent who preferred to make their purchases offline).37 According
to the Retail Systems Research, omnichannel platforms were also growing, and 59 per cent of U.S.
retailers believed that omnichannel customers were more profitable than non-omnichannel customers.38
The B&M industry, where 90 per cent of all U.S. retail sales were made, was valued at $4 trillion.39
Amazon tried to take advantage of this opportunity. By experimenting with physical stores—such as
Amazon Books, AmazonFresh, and Amazon Go—Amazon hoped to replicate its e-commerce success in
the B&M market.
Amazon Books
Amazon successfully launched its first B&M store, Amazon Books, in a retail industry where most
retailers were moving toward e-commerce. Its first location was established in Seattle on November 2,
2015, and was followed by more stores in Chicago (Illinois), Portland (Oregon), and San Diego
(California).40 Amazon Books took features of the traditional bookstore concept, such as a relaxing
environment, to attract customers and encourage browsing. Although these aspects did not differentiate
Amazon Books from other bookstores, they were key to its success in adapting to the B&M industry.
Unlike in traditional bookstores, books were displayed with the cover (rather than the spine) of the book
facing customers, stores were limited in terms of the number of books in stock, and occasionally, reviews
from the Amazon website were provided.41
Amazon had taken advantage of the concept of “showrooming” (i.e., examining products in a physical
store and then buying it online for a better price) and incorporated the best parts of online and offline
purchasing by ensuring the lowest possible prices while giving customers the instant gratification of
making an offline/physical purchase. Customers paid the same prices as listed on the Amazon website,
and Prime members were still able to receive discounted prices in the stores.42 Customers could use in-
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store scanners or use their own Amazon application to confirm the price, which helped to reassure them
and saved time for employees, as they did not have to change the price tags on inventory if prices
changed. The B&M stores also served as locations for customers to purchase products from the Amazon
line, such as the Echo devices, Fire tablets, and Kindle e-readers.43
Amazon sought to ensure low friction between the online and offline shopping experience by charging instore purchases to the credit card linked to a customer’s Amazon website account. Customers
automatically received an emailed receipt and each in-store purchase was recorded in the customer’s
Amazon order history. This system created an omnichannel shopping experience that allowed Amazon to
blur the virtual and physical retail industries.44
AmazonFresh
Originating in Seattle, AmazonFresh was an unlimited grocery delivery service available exclusively to all
Prime members at a cost of $14.99 per month.45 Customers could shop online or by mobile application and
schedule a delivery time. AmazonFresh boasted a selection of over 100,000 grocery items, and the shopping
process was simple, easy, and potentially threatening to competitors.46 Although this process was logistically
complex, AmazonFresh was successful in providing fast delivery; however, delivering fresh food could be a
challenge, as many customers preferred to choose fresh food and vegetables in person to ensure quality.47
AmazonFresh was in at the beta testing phase for its drive-up grocery store service, known as
AmazonFresh Pickup, and had opened two such locations to the public on May 25, 2017.48 Both beta
testing locations were located in Seattle and allowed Prime members to place their grocery orders online
and pick them up at one of the drive-up locations. Although an AmazonFresh membership was not
necessary, having one sped up the process to the point that members could collect their groceries just 15
minutes after ordering. In comparison, Prime members had to wait at least two hours before a pickup
window was available. Although drive-up food collection was far from a revolutionary concept, Amazon
hoped to use AmazonFresh Pickup to challenge its competitors in the grocery industry.49
Amazon Go
Amazon Go was a store concept with a unique approach to the grocery format. Its main draw was the lack
of checkout lines and cashiers, with the tagline, “No Lines! No Checkout! Just Grab and Go!”50 Amazon
Go sold assorted food and snack options made fresh daily, and carried a variety of products, including inhouse and well-known brands. The store underwent beta testing in Seattle in late 2016 and early 2017,
and used motion sensors to detect what shoppers purchased as they proceeded through the store;
purchases were then charged to customers’ Amazon accounts as they exited the store. If the technology
was unable to identify purchase items, Amazon Go’s deep learning technology was implemented to
process the customer’s past purchase history to help identify the items in question.51
The concept of Amazon Go first appeared in the media December 2016.52 At that time, Amazon wanted
to push the boundaries of technology and use these innovations to improve customers’ shopping
experience in terms of convenience and wait times. The advanced shopping technologies implemented
were computer vision, sensor fusion, and deep learning technology.53 Amazon had developed these
technologies through its subsidiary, AWS, and had already used the technologies in various other aspects
of its business.54
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Amazon Go represented a new type of shopping, in which the advantages of digital technology were
combined with the offline shopping experience. Unlike most retailers, Amazon excelled in offering
convenience and responsiveness to its customers. The company had 244 million active customers (and 54
million Prime customers), all of whom had accounts with their payment information on file.55 Amazon Go
connected these customers with products through the use of new technology. The store used cameras and
state-of-the-art software to identify customers through facial recognition as they stood in front of
products, and weight sensors detected when products were removed from shelves and purchased.
To be effective and efficient for customers, Amazon Go required a high degree of accuracy. Because it
was data-driven, the company also had the ability to apply the data to personalize each store with a
product mix for specific locations. Amazon could use its $10 billion cloud computing service, AWS, to
facilitate Amazon Go. Moreover, A …
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