Amazon.com Inc. (AMZN) has been the little engine that could for the past 20 years. Twenty years of barely there profits culminated in July 2015 when Amazon declared a profit of close to $400 million or $0.19 earnings per share (EPS). In the wake of that announcement, Amazon’s stock jumped and the e-commerce company quickly overtook Wal-Mart Stores, Inc. (WMT) as the number one retailer in the country.
Optimistic shareholders will argue that Amazon’s profits are stable and the result of decades of aggressive marketing. Pessimists, though, have to wonder if perhaps Amazon is too diversified and expanding too rapidly fuelled by its reputation and success.
History of Amazon
Amazon was founded in 1994 by Jeff Bezos to be “the world's most consumer-centric company, where customers can come to find anything they want to buy online.” By taking advantage of the opportunity for change that the Internet provided, Bezos created what has arguably become the largest and most famous bookstore in the world. In 2007, Amazon released its first Kindle e-reader and began selling e-books. Amazon is also considered responsible for the bankruptcy of bookstore chain Borders in 2011. (For related reading, see: The Best Ways to Profit From Bankruptcies.)
Since the late 1990s, Amazon has turned away from books. The e-commerce giant began to sell general merchandise and began to aggressively promote its free shipping service Amazon Prime.
The Amazon of today is a behemoth that 1994’s Amazon could never have dreamed possible. The e-commerce retailer sells everything it can, and has an incredibly competitive advantage in that it's exempt from collecting sales tax in about half the states it sells to, and offers same-day delivery to 16 cities.
Amazon also has its hands in many, many different honey pots. With Amazon’s state-of-the-art warehousing system, diversifying into services like Fulfilled by Amazon could be seen as natural progressions of the business. With its solid history as a bookstore, the self-publishing options, e-readers, tablets, Kindle Unlimited and its investment in Audible are also natural extensions of Amazon. (For more, see: Why Is Starbucks Expanding Its Evening Menu?)
Instead of growing along natural paths, Amazon has made the choice to expand its operations into literally every sector imaginable. In the third quarter of 2015 alone, Amazon Studios released three new TV shows and announced 12 new pilots; Prime Music launched in the U.K. and expanded in the United States; Prime Now expanded; Amazon Handmade, Quicksight and Aurora were launched; Amazon Grocery was launched in three European countries and Amazon’s restaurant delivery service was expanded. This is in addition to the four new models of Fire tablets and three new models of Fire TVs that Amazon also launched.
Now Amazon is not only competing with bookstores and retail giants like WalMart and Target Corp (TGT) but it is also competing with network TV, Apple Inc. (AAPL), Alphabet Inc. (GOOG), grocery stores, Netflix Inc. (NFLX), Oracle Coporation (ORCL), International Business Machines (IBM), Microsoft Corporation (MSFT), Etsy Inc. (ETSY) and the public library system. Not only do most of these companies have financial resources that match or exceed those of Amazon’s, but they also have the advantage of being first-to-market and of having name recognition––consumers will use Apple TV over Fire TV any day.
A Slow Decline: Personnel
Like a child who wants to play with everything it sees, this practice cannot end well for Amazon. With a lack of focus and strategy, it will be too easy for Amazon to over-stretch itself logistically and personnel-wise. (For more, see: Eight Reasons Why Valued Employees Quit.)
Assuming that Amazon can consistently hire competent people to run its ever-expanding departments, the fact remains that increasing the size of the workforce at a time when retailers are coming under pressure to pay higher wages could prove disastrous for Amazon. Amazon has already faced criticism from its employees for its lackluster work environment and overworking its existing employees––a common problem when a company expands too quickly––would exasperate the problem.
Not only do companies that expand quickly have personnel problems but they are also less able to adapt to a changing market. High overhead costs aside, with so many new departments and people, the business environment becomes confusing and it becomes difficult to get new projects off the ground. The new teams are also eager to please and so admitting that a new project may be infeasible or has failed is nearly impossible. As a result, projects that would have otherwise never gone past their planning phases are subsidized along for months.
Amazon's Big Failures
Amazon Destinations and Amazon’s Fire Phone are two recent examples of new projects that have failed. Amazon Destinations, a travel website that was quickly expanded to 35 cities, was financially supported by Amazon (and its shareholders) for a year before being shuttered. The Fire Phone and its associated $170 million write-off, proved commercially unviable after a year of price markdowns.
Although a lack of market testing could have played a part in its failure, the Fire phone likely suffered because of Bezos’ insistence on creating what he saw as the perfect phone with little resistance from his staff. At any rate, both Amazon Destinations and the Fire phone were the result of a quickly expanding company that’s lost control of its army of departments.
The Bottom Line
Expanding is necessary for any company to remain successful. Blind expansion into every sector that looks profitable and expanding quicker than Amazon can manage, are not wise business practices. Unfortunately Amazon is currently doing both without regard for the consequences. While profitable now, over- diversification could be Amazon’s downfall in the future.