Digital surge brings Bezos’s global online shopping dream closer, but Amazon still vulnerable

The pandemic has shown Amazon is essential to ordinary life in the West, but the job of running Amazon hasn’t got any easier.

Amazon founder and CEO Jeff Bezos. Picture: AFP

In the summer of 1995 Jeff Bezos was a skinny obsessive working in a basement alongside his wife, packing paperbacks into boxes.

Today, 25 years on, he is perhaps the 21st century’s most important tycoon: a muscle-ripped divorcee who finances space missions and newspapers for fun, and who receives adulation from Warren Buffett and abuse from Donald Trump.

Amazon, his firm, is no longer just a bookseller but a digital conglomerate worth $US1.3 trillion ($1.9 trillion) that consumers love, politicians love to hate, and investors and rivals have learned never to bet against.

Now the pandemic has fuelled a digital surge that shows how important Amazon is to ordinary life in America and Europe, because of its crucial role in e-commerce, logistics and cloud computing.

In response to the crisis, Bezos has put aside his side-hustles and returned to day-to-day management. Superficially it could not be a better time, but the world’s fourth most valuable firm faces problems: a fraying social contract, financial bloating and re-energised competition.

The digital surge began with online “pantry loading” as consumers bulk-ordered toilet rolls and pasta. Amazon’s first-quarter sales rose 26 per cent year on year. When stimulus cheques arrived in mid-April Americans let rip on a broader range of goods. Two rivals, eBay and Costco, say online activity accelerated in May.

There has been a scramble to meet demand. Amazon has hired 175,000 staff, equipped its people with 34 million gloves, and leased 12 new cargo aircraft, bringing its fleet to 82. Underpinning the e-commerce surge is an infrastructure of cloud computing and payments systems. Amazon owns a chunk of that, too, through AWS, its cloud arm, which saw first-quarter sales rise 33 per cent.

One question is whether the digital surge will subside. Shops are reopening. Yet the signs are that some of the boom will last. A new cohort has taken to shopping online. In America “silver” customers in their 60s have set up digital payment accounts.

Many physical retailers have suffered fatal damage. Dozens have defaulted or are on the brink, including J Crew and Neiman Marcus. In the past year the shares of warehousing firms, which thrive on e-commerce, have outperformed those of shopping mall landlords by 48 percentage points.

All this might appear to fit the script Bezos who argues that Amazon is in a perpetual virtuous circle in which it spends money to win market share and expands into adjacent industries. From books it leapt to e-commerce, then opened its cloud and logistics arms to third-party retailers. Customers are kept loyal by perks such as Prime, a subscription service, and Alexa, a voice-assistant.

By this account, the new digital surge confirms Amazon’s inexorable rise. Amazon’s shares reached an all-time high on June 17.

Yet from his ranch in west Texas, Bezos has to wrestle with those tricky problems. Some common criticisms of Amazon are simply misguided. Unlike, say, Google in search, it is not a monopoly. Last year Amazon had a 40 per cent share of American e-commerce and 6 per cent of all retail sales. There is little evidence that it kills jobs. Studies of the “Amazon effect” suggest that new warehouse and delivery jobs offset the decline in shop assistants, and the firm’s minimum hourly wage of $US15 in America is above the median for the retail trade.

But Amazon’s strategy does imply huge creative disruption in the jobs market even as the economy reels. In addition, viral outbreaks at its warehouses have reignited fears about working conditions: 13 US state attorneys-general have voiced concern.

And Amazon’s role as a digital jack-of-all-trades creates conflicts of interest. Does its platform, for example, treat third-party sellers on equal terms with its own products? Congress and the EU are investigating this. And how comfortable should other firms be about giving their sensitive data to AWS given that it is part of a larger conglomerate which competes with them?

Amazon’s second problem is bloating. As Bezos has expanded into industry after industry, his firm has gone from being asset-light to having a balance sheet heavier than a Soviet tractor factory. Today it has $US104bn of plant, including leased assets, not far off the $US119bn of its old-economy rival, Walmart. As a result, returns excluding AWS are puny.

Bezos says the firm can become more than the sum of its parts by harvesting data and selling ads and subscriptions. But the weak e-commerce margins make it harder for Amazon to spin off AWS. This would get regulators off its back and liberate AWS, but would deprive Amazon of the money-machine that funds everything else.

Bezos’s last worry is competition. Digital sales at Walmart, Target and Costco probably doubled or more in April, year on year. Independent digital firms are thriving. If you create a stockmarket clone of Amazon lookalikes, including Shopify, Netflix and UPS, it has outperformed Amazon this year. In much of the world regional competitors rule, not Amazon; among them are MercadoLibre in Latin America, Jio in India and Shopee in South-East Asia. China is dominated by Alibaba, jd.com and brash new contenders like Pinduoduo.

Amazon is thus left having to solve several puzzles. If it raises wages to placate politicians, it will lose its low-cost edge. If it spins off AWS to please regulators, the rump will be financially fragile. And if it raises prices to satisfy shareholders, its new competitors will win market share.