Amazon’s evolution: from retailer to platform

Following a relatively quiet 2015, at least by Amazon’s standards, the retailer has a much busier 2016. Below are just some of the new services and innovations the retailer has launched in the UK in 2016.

  • Amazon Fresh

  • Amazon Prime Now expansion and tie-up with Morrisons

  • Amazon Echo and Echo Dot featuring Alexa

  • Amazon Dash and Dash Buttons

  • Amazon Music Unlimited

  • Amazon Delivers

  • Amazon Flex

  • Handmade by Amazon

  • Trial of Amazon Prime Air drones in partnership with the Civil Aviation Authority

The breadth of these new services, from retail to technology to foodservice, underlines our long standing view that Amazon is transiting from a retailer first to a holistic platform of products and services, of which retail will of course continue to play a big part.

Retail – marketplace the strength

The launch of Amazon Marketplace in late 2000 transformed Amazon as a business. Its marketplace sellers give the retailer an unparalleled long-tail of products and by supporting them and bringing its most successful in house, Amazon has fostered a competitive and ever-expanding internal ecosystem of entrepreneurs.

Conservative estimates place marketplace sellers as accounting for around half of order volumes on the retail side of the businesses whilst in pure SKU listing terms they account for upwards of 80% of the products listed on Amazon. To a degree it is a double-edge sword as its marketplace sellers often undercut Amazon’s own product, or give lower cost second hand alternative, but with Amazon profiting from every Marketplace sale the sheer value of volume of products its Marketplace sellers give the wider site, compensate for occasional undercutting. And it is not just your private independent seller, some of the best and the brightest of UK retail sell through Amazon such as New Look, and

In 2016 Amazon made a number of significant moves to further expand the needs that its marketplace can fulfil. In September 2016 the retailer launched Handmade at Amazon, a marketplace through which customers can purchase around 30,000 items handcrafted by 1,000 artisan marketplace sellers. Handmade at Amazon can be seen as a direct reaction to the success of other artisan marketplaces, notably Etsy. Then in early November 2016, through the Prime Now app, Amazon launched one-hour delivery from local independent stores, hinted at the future direction of Amazon as a logistics provider for those that can support an online operation of scale on their own terms.

Logistics – supporting growth

Any online-only retailer lives and dies by how successfully it can handle and process orders. Amazon is best in class in this regard with its variety of delivery options. To ensure it is best in class, Amazon utilises 12 fulfilment centres, with four more on the horizon in 2017, and 13 external delivery and collection partners, along with its own Amazon Logistics network.

Amazon supports its marketplace sellers through the Fulfilment by Amazon service. This service allows marketplace sellers to take space within Amazon’s distribution centres, with Amazon taking over responsibility of preparation and delivery options, allowing marketplace sellers to have their products available through Amazon’s fastest Prime delivery services. The rapid expansion of the number of sellers under, or vying to be under, the Fulfilment by Amazon scheme is a key reason for Amazon looking to add four new distribution centres in 2017. It is also why the retailer launched its Seller Fulfilled Prime scheme in 2015, allowing trusted sellers to come under Prime coverage without the need to take physical space in its distribution centres.

Whilst the volumes Amazon deals in means that support from third-party delivery operators is currently crucial to the businesses, Amazon is increasingly looking to reduce its dependence on such businesses. To do this Amazon is taking increasing numbers of SME delivery partners into its Amazon Logistics arm, in a similar vein to what it has achieved with Marketplace. In July 2016 Amazon took this a step further by launching Amazon Flex in Birmingham, an Uber-style delivery platform which allows any member of the public, with an android phone and vehicle, to turn Amazon delivery driver for any length of time they so desire. Looking longer term the Amazon Prime Air drone programme, which is now being trialled with the blessing of the CAA, is a further move to control its final mile fulfilment, particularly to remote locations for which Amazon must still heavily rely on third-party operators to fulfil expedited deliveries.

Prime: building an offer that stacks up

Amazon Prime, the retailers paid subscription service, has long been the tool to tie customers into the Amazon ecosystem. But there has been a notable shift in Amazon’s approach to Prime in the past two years; it has gone from being a service most suited to high frequency users of the Amazon retail site to a service with a much broader appeal, one that can offer value even if you never buy a thing from Amazon itself. As founder Jeff Bezos put it in his statement to shareholders in 2015 “We want Prime to be such good value, you’d be irresponsible not to be a member”.

Hard numbers for Amazon Prime are unknown. Industry guesses place worldwide numbers anywhere between 50 and 70 million paid members, whilst the only comment Amazon has given on UK numbers is that it has ‘millions of Amazon Prime members in the UK’. Whatever the number Amazon has certainly seen a steady increase in Amazon Prime numbers and the business is attempting to create broader appeal by both making it easier to access Prime, a monthly subscription model was launched in the UK in May 2016, but equally locking the best of Amazon behind the Prime wall.

The rapid flurry of Prime related service launches in the autumn of 2016 is a key example of this. A steady rollout of new services in September and October, from Amazon Delivers to Amazon Music Unlimited, has built up to the crucial, at least to Amazon, Black Friday period. It is notable that one of its biggest investments on the entertainment side, the Top Gear successor The Grand Tour, is launching the week before Black Friday, with a discounted £59 Prime offer to boot. Amazon knows that the combination of the Grand Tour and exclusive Black Friday deals is a potent mix, and the launch of numerous new services in the Autumn is designed to show that those who came initially for Clarkson and the cars that there is much more to Prime than that.

Groceries – experiment or serious challenge?

Following years of rumours Amazon has finally made its move in the UK grocery market with not one, but three grocery-based services in the space of a year. First came Amazon Pantry, a pantry-box solution for household supplies, at the backend of 2015 then Amazon Fresh, its fully fledged grocery service, in June 2016 and finally the integration of groceries to Amazon Prime Now in November 2016.

This scattershot approach may indicate a retailer who is hesitant in its mission to crack the most competitive of all UK retail sectors. But equally it may also show a business that has sat back and observed current grocery buying habits and launched a series of services to tap into this.

Pantry was the toe in the water, with its non-perishable offering suited to online retailing and a comfortable step for Amazon, helping to gauge the temperature of demand and get users used to buying household supplies from Amazon. Then came Amazon Fresh, with support from Morrisons and crucially bringing the best of marketplace with sellers and physical independent integrated into the mix. Then to round out the year we have the launch of Morrisons on Amazon Prime Now, again backed by Morrisons.

Groceries on Prime Now is a particular game-changer with a £20 minimum spend and free two-hour delivery perfectly targeting the frequent and fluid grocery buying habits that have emerged in the industry in the last few years. Amazon now has the services to both capture the big weekly shop, Amazon Fresh, and the growing levels of top-up shopping, Morrisons on Prime Now. The real question is if Amazon can find success enough with the services in London to justify a national rollout, or even if it has the desire to do so.

Profits – where art thou?

There is much criticism of Amazon that for a mature retailer its ability to turn a significant profit is its main downfall. On net sales of $107 billion in 2015 Amazon turned a net income of $596 million: for all of Amazon’s market leading its net margin is anything but.

However with $6.5 billion invested back into the business in 2015, criticism of Amazon’s lack of profit making is missing the point: Amazon does not regard itself as mature, it remains a business that is hungry to grow in multiple directions. It is also a retailer that is not afraid to swing and miss. How many of those new services listed at the top of this piece will be here in a years’ time? Maybe all or maybe none but crucially Amazon is still taking chances. It is notable that in a letter to shareholders in 1997, reprinted in this year’s annual report, came with the heading ‘It’s all about the long term’. This is as relevant to Amazon today as it was in 1997, and whilst it could stand still and turn a healthier profit this would be, perhaps not immediately, to the longer term detriment of the business.

The Future

The areas outlined above only tell the partial story of Amazon in 2016 and to touch on all aspects, such as Amazon Web Services which is in itself a $10 billion business, and to cover all areas would take a tome as deep as its SKU count.

But what the areas singled out here should tell you that Amazon is evolving from a retailer into a diversified platform of services, one of which will continue to be the ability to buy goods.

Alongside the increasingly important Amazon Web Services and Amazon Logistics businesses, both of which are service-giving in their own right, the Amazon site is increasingly less of a vehicle for Amazon to sell to consumers as it is a vehicle through which Amazon can encourage others to sell for it, a B2B2C model if you will.

Amazon has always strived to be the true embodiment of the ‘one-stop-shop’ and its marketplace sellers, including the physical stores now coming under its wing, are crucial to this. That is why Prime is so crucial to the business in 2016, and services under its banner have been so heavily invested in, it is both the facilitator and glue that helps Amazon invest in services, such as warehouse space and logistics, to make this transition. This is not a transition that will happen overnight but just as the Amazon of 1996, or even 2006, is wildly different to the Amazon of 2016 you can bet the Amazon of 2026 will be a different beast all together.

Back to top