These are four industries where Amazon’s disruptive intentions are clearest today, and with the behemoth’s scale and advantages it could soon be a reality
From books to movies, to shopping and Cloud services, Amazon has been disrupting businesses ever since its humble beginnings in 1994. In 2021, Amazon’s total consolidated net sales revenue amounted to US$469.82 billion. North America was the biggest operations segment, accumulating over US$279 billion in net sales during the year. CB Insights has now analyzed how the corporate behemoth is poised to chart an even more aggressive path to foray into a slew of new businesses and disrupting those in the process.
Four industries in Amazon’s crosshairs
There are four industries where Amazon’s disruptive intentions are the clearest today – pharmacies, small business lending, logistics, and payments. The disruptive possibilities in these industries – home & garden, insurance, smart home, and luxury fashion – remain speculative for now, but with Amazon’s scale and advantages, they could soon be a reality, according to a CB Insights report.
Pharmacy chains like Walgreens and CVS have already seen their retail revenues suffer from the rise of Amazon’s convenient “everything store.” Today, they have a new challenge: in addition to disrupting their “front of the store,” Amazon is angling to disrupt their core business of drug distribution. Amazon’s interest in disrupting the drugstore is decades old. In 1999, Amazon bought 40% of Drugstore.com (at the time, a pre-product and pre-revenue company).
Bezos would later hire its CEO, Kal Raman, to run hardlines (retail products which are hard to touch) at Amazon. Amazon proceeded to lay low in the pharma space until 2016 when Amazon reportedly received its first licenses to sell pharmaceutical products and drugs from various state boards across the United States. In 2018, Amazon made another move towards gaining a footing in this notoriously complex and highly regulated space: it acquired PillPack in a deal worth around US$750 million.
The COVID-19 pandemic increased the need for streamlined medication delivery and ramped up the competition between large drug stores and Amazon in the short term. Though Amazon has an advantage in its logistics and delivery capabilities, it may need to speed up its pharma initiatives before existing pharmacies and pharmaceutical companies catch up.
Lending to small business
Lending to small businesses appears to be firmly in the sights of Amazon. Amazon’s vast network of merchants is the perfect launchpad for a lending business. Among these companies, Amazon has a deep competitive moat made up of data and speed – one that is difficult for commercial banks to match. With its data advantage, Amazon has the power to offer loans to businesses that traditional banks might consider lower-quality borrowers and refuse (or lend on more onerous terms).
Amazon took its first steps into commercial loans back in 2011, when the company began offering small-business loans to merchants participating in the Amazon Marketplace via its Amazon Lending arm. At that time, conditions were well-suited for Amazon’s entry into the commercial lending sector: the global financial crisis of 2008 had shaken confidence in even the largest commercial banks, initiated a credit crunch, and left millions of small businesses struggling to secure the capital they needed to survive. Since then, the company has doubled down on its lending efforts. As of 2021, Amazon has 2 million third-party merchants in the small and medium-sized business sector that use its platform, information on the financial health of those businesses, and the customer-first culture to build a compelling lending platform.
Over the last two decades, the percentage of Amazon sales completed by third-party merchants has increased from 3% to 56%. These SMBs have succeeded on the Amazon marketplace in part because Amazon has, in Bezos’ words, invested in and given them “the very best-selling tools we could imagine and build.” Among those selling tools, today is small business financing. Amazon Lending gives its third-party sellers access to up to US$1 million in loans or credit for inventory management, product line expansion, or product promotion through a partnership with Marcus by Goldman Sachs. It also provides loans to merchants through a partnership with Bank of America.
Giving out loans to Amazon merchants in this growing space makes sense for Amazon: if the company can give its third-party merchants loans that go back into selling products on Amazon, it’s a win for both sides. Amazon gets the increased business, plus a cut of the interest from the loans, and the merchant gets the capital it needs to grow. Unlike traditional small business loans, Amazon automates its loan repayment process, taking the owed money out of a merchant’s Amazon sales income. And its streamlined application system – which is based on pulling metrics from a merchant’s Amazon account – makes it easier for small businesses to access financing.
Amazon’s logistics ambitions clearly bring the retail giant in direct competition with its current delivery partners, including private companies like UPS, DHL, and the US Postal Service (USPS). Amazon’s shipping partners have benefitted from the retailer’s massive order volumes for years, but those revenues are coming under threat as Amazon builds out its own delivery capabilities. The USPS made US$1.6 billion in profit or US$3.9 billion in revenue in 2019 from Amazon alone, accounting for less than 10% of the USPS’ total annual revenue. Amazon also represents roughly 13% of UPS sales, while FedEx canceled its relationship with the big tech company in August 2019 after disclosing that Amazon contributed only 1.3% of the company’s total revenue. If Amazon continues to expand its logistics network, it is estimated that the company could reduce last-mile delivery costs by US$2 billion to US$6 billion, according to RBC Capital Markets. This incentivizes Amazon to continue to reduce its reliance on third-party shippers.
Outside of its investments in technology to improve the speed and costs of fulfillment and delivery, Amazon is spending significant amounts of money to expand its existing logistics infrastructure. For example, the company expanded its logistics square footage by 50% in 2020. It also announced the expansion of its Amazon Air capabilities in February 2019, including 50 planes and a US$1.5B hub in Kentucky, which opened in August 2021. The tech company also expanded its own last-mile delivery network, inviting individuals to develop their own fleets of Amazon vans through a Delivery Service Partner programme that launched in 2018. As of August 2020, the program has reportedly created 85,000 jobs across 1,300 small businesses, delivering 1.8 billion packages.
Building a payments presence
Amazon has been building out a presence in the payments space for years, with products including:
- Amazon Pay: An integrated payment management system that allows third-party merchants to sell their products on their own sites, but use Amazon’s payment tech to receive orders. It also streamlines the payment experience for customers.
- Amazon Cash: Allows consumers to deposit cash without any fee into an online Amazon account by scanning a special barcode at partner retailers.
- Amazon Visa debit/credit cards: Amazon has partnered with Visa to offer a debit card for Prime members and a credit card for non-Prime members. Both offer cash-back perks.
- Amazon Reload: This feature allows Amazon Prime members to transfer money from their bank into their Amazon accounts to create a balance. As a reward, 2% of the transfer amount is added to the user’s account right away.
- Amazon Go: Amazon Go is a cashier-less convenience store where consumers can simply walk in, grab items off the shelf, and then walk out. The customer’s Amazon account is billed for the purchase when they leave the store.
- Amazon Fresh: This chain of grocery stores uses the same “Just Walk Out” technology as Amazon Go, but shoppers can also use checkout lanes.
- Amazon One: This contactless payment and identity verification service relies on palm recognition. The logic behind this kind of financial ecosystem is clear – if the company can get consumers to put money into an Amazon-owned account, they will ultimately spend more with Amazon. For example, Amazon Prime Visa rewards users with Amazon credit. If Amazon can create a payments channel that’s good for Amazon consumers and saves merchants money, it could have the edge it needs to disrupt the payments industry in a tectonic way.
When you swipe a credit or debit card at a store, the retailer is charged an additional transaction fee as a small percentage of the overall purchase, also known as an interchange fee. These fees range from 2–4% per transaction. In 2020, credit card companies earned US$51 billion from interchange fees. Such fees can significantly cut into the bottom line for small businesses, especially if they mostly deal with smaller purchases. But the price isn’t the only factor merchants have to consider when choosing a payment processor – they also need one that doesn’t negatively impact the customer experience. Especially with the COVID-19 pandemic, the adoption of contactless payment options like Apple Pay or Google Pay is rising. By 2025, nearly 60% of consumers worldwide will use mobile wallets. If Amazon can find a way to make its own payment options stickier, easier for consumers to use, and cheaper for merchants to accept, it could find huge opportunities in this industry.
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