How will Amazon adapt to the rise of Shein and Temu?
Amazon's rapid growth and diversification have led to a shifting focus, as the company balances the demands for speed and affordability in the face of competition from Chinese e-commerce platforms.
The Facts:
In the summer of 1994, a job vacancy for software engineers was posted on Usenet, an early precursor to online forums. The company in question, a Seattle-based startup named Cadabra, planned to "pioneer commerce on the internet." Eligible applicants needed to be capable of designing complex systems "in about one-third the time that most competent people think possible." This startup would eventually become the e-commerce giant we know today as Amazon.
Amazon, which celebrated its 30th anniversary on July 5th, has indeed revolutionized the world of online shopping. Over the past two decades, the company has focused on speed in e-commerce, building an expansive and optimized logistics empire to deliver products quickly, often within two days. This year, it is estimated that Amazon's websites will sell $554 billion worth of goods in America, giving it a 42% share of American e-commerce, far exceeding the 6% captured by its closest competitor, Walmart.
However, the convenience and speed of Amazon's delivery comes at a cost, which consumers are willing to pay. But they may now be opting for cheaper options from Chinese-owned e-commerce platforms like Shein and Temu, which are able to offer lower prices by sourcing products directly from the same Chinese factories and suppliers, bypassing the costs associated with Amazon's logistics infrastructure.
Amazon has since invented groundbreaking products and services, such as the Kindle e-reader, the Alexa smart speaker, and the highly influential Amazon Web Services (AWS) cloud computing platform, which commands a 31% share of the $300 billion market. Additionally, Amazon runs Prime Video, the fourth-most-watched video-streaming service in America, and its advertising business is already the third-largest in the world, behind only Alphabet (Google's parent company) and Meta (Facebook's). Investing heavily in content and sports streaming rights is a strategy to turn more Prime members into ad viewers and boost its advertising revenue.
Amazon's continued expansion has led to the company's market value surpassing $2 trillion for the first time on June 26th. Despite this, the company faces the challenge of managing its increasing sprawl and ensuring seamless integration across its diverse business units.
Historically, Amazon's business units have been rather independent of each other, often by design. However, as the company enters its fourth decade, it is now looking to integrate these units more tightly. Key integrations include leveraging Prime membership and user data to grow the high-margin advertising business, using AWS to support Amazon's video streaming and retail operations, and utilizing generative AI across the company's various offerings.
As of March 2023, Amazon Prime had 180 million subscribers in the U.S., indicating a strong demand for fast delivery. However, the company is also facing competition from Chinese-owned e-commerce platforms like Shein and Temu, which offer lower-priced products shipped directly from China with slower delivery times (9-11 days). In response, Amazon is planning to launch a new online store for low-cost, sub-$20 products shipped directly from China, with a focus on unbranded clothing and household items. When given the choice, many consumers will choose very cheap products over those that arrive very quickly.
The View:
Amazon's rapid growth and diversification have been both a blessing and a curse. The company's ability to seamlessly integrate its various business units will be crucial as it navigates the next phase of its evolution. The key challenge for Amazon as it enters its fourth decade is managing its sprawling business and maintaining its competitive edge in the face of growing competition.
While Amazon's early success was driven by its relentless focus on speed and convenience, the rise of Chinese-owned e-commerce platforms like Shein and Temu poses a new threat to this model. These platforms offer significantly lower prices by shipping products directly from China, even if delivery times are longer. This has forced Amazon to reevaluate its priorities, recognizing that for many consumers, cheap prices may take precedence over lightning-fast shipping. The company's plan to launch a new online store for low-cost, unbranded products shipped directly from China is a clear acknowledgment of this shift in consumer preferences.
This shift in the retail landscape is seen as reducing the role of "middlemen" like store clerks, marketing executives, and even Amazon warehouse employees, in favor of a focus on factory and logistics workers in China. The move towards cheaper, slower shipping could undermine the broader retail ecosystem, as it diminishes the importance of services like advertising, marketing, and product design that have traditionally supported the industry.
As Amazon navigates this new landscape, it must strike a delicate balance between maintaining its competitive edge and ensuring the long-term sustainability of its business model. The company's ability to seamlessly integrate its diverse operations, from e-commerce and cloud computing to advertising and content creation, will be crucial in determining its trajectory over the next decade and beyond. Ultimately, Amazon's success will not be measured solely by its ability to dominate the market, but by its capacity to adapt to the changing needs and preferences of consumers. The company's willingness to experiment and pivot, as evidenced by its plans to offer lower-cost, slower-shipping options, may be the key to its continued prosperity in the years to come.
TLDR:
Amazon was founded in 1994 as a Seattle-based startup named Cadabra, aiming to "pioneer commerce on the internet."
Over the past two decades, Amazon has revolutionized the world of online shopping, focusing on speed and building an expansive logistics empire.
Amazon has since expanded into various products and services, including the Kindle e-reader, Alexa smart speaker, Amazon Web Services (AWS), Prime Video, and an advertising business.
Amazon's market value has surpassed $2 trillion, but the company faces the challenge of managing its increasing sprawl and ensuring seamless integration across its diverse business units.
The rise of Chinese-owned e-commerce platforms like Shein and Temu, which offer lower-priced products shipped directly from China, poses a new threat to Amazon's model focused on speed and convenience.
In response, Amazon is planning to launch a new online store for low-cost, sub-$20 products shipped directly from China, acknowledging that for many consumers, cheap prices may take precedence over lightning-fast shipping.
The shift towards cheaper, slower shipping could undermine the broader retail ecosystem, as it diminishes the importance of services like advertising, marketing, and product design.
Amazon's success in the future will depend on its ability to adapt to the changing needs and preferences of consumers, as well as its capacity to seamlessly integrate its diverse operations.