A Prime Change at Amazon

Amazon's New CEO Takes Over

It’s Day 2 at Amazon. Yes, the second richest man in the world is stepping from his 27-year career at Amazon. On Tuesday, Jeff Bezos announced that he is stepping down as CEO of the $1.6 trillion e commerce giant.⁠

⁠Not bad a career for a man who left his high-paying hedge fund job in 1994 to build Amazon out of a Seattle garage. It was there that Bezos first debuted the Amazon website on July 16, 1995 as an online bookstore.⁠

Bezos plans to step down in the third quarter of 2021. He will transition to the role of executive chair of Amazon’s board in the third quarter, which starts July 1. Jeff will shift his focus to “new products and initiatives”, which include the Day One Fund, Bezos Earth Fund and Blue Origin.

“We do crazy things together and then make them normal,” Bezos said in a statement. “We pioneered customer reviews, 1-Click, personalized recommendations, Prime’s insanely-fast shipping, Just Walk Out shopping, the Climate Pledge, Kindle, Alexa, marketplace, infrastructure cloud computing, Career Choice, and much more.”

“If you do it right, a few years after a surprising invention, the new thing has become normal,” Bezos continued. “ People yawn. That yawn is the greatest compliment an inventor can receive. When you look at our financial results, what you’re actually seeing are the long-run cumulative results of invention. Right now, I see Amazon at its most inventive ever, making it an optimal time for this transition.”

Who is Andy Jassy?

The father of Amazon’s cloud computing business will become the next CEO. Andy Jassy joined Amazon after graduating from Harvard Business School in 1997. In 2006, he launched Amazon Web Services (AWS), the company’s $51 billion cloud computing service. Last quarter AWS’s revenue grew to $12.74 billion, up 28% from the same period last year. Andy knows a thing or two about hyper growth.

Below is a chart of the company’s quarterly revenue growth, year over year. Not a single quarter fell below 25%. Very impressive for a multi-billion dollar division.

AWS quarterly revenue growth

No other executive is more aligned with Bezos’ original vision. Also very executives have stayed with Amazon for +20 years, during the good and bad years. So please join me in congratulating Andy on his new role and Jeff’s promotion as executive chair.

The next big question is who will replace Jassy but we’ll save that for another time.

Another Billion Dollar Quarter

The changing of the guards announcement came during Amazon’s 2020 fourth quarter earning announcement. The company delivered $125.56 billion in sales, its quarter in company history.

In the first quarter of 2021, the company forecasts an operating income of $3-6.5 billion, assuming $2 billion in Covid-related costs. While sales will slow down from the holiday season, we can expect 30-40% over the prior year. Another $100 billion quarter is around the corner.

The record holiday season results can be attributed to Prime Day and accelerated ecommerce growth. More than one billion products were delivered to shoppers across the world. With record sales, comes record hiring as well. Amazon tripled fourth quarter hiring to 175k new full and part time employees, bringing its total employee count to 1.3 million employees!

But not all was with a record breaking quarter. First, shipping costs increased 67% year over year to $21.5 billion. Amazon physical store sales also dropped by 8% as grocery sales shifted online. You can find more details in the company’s earnings press release here.

AWS is a core business for Amazon

Today AWS division delivers 10% of Amazon’s total revenue but 52% of the company's operating income! This is a 37% increase from a year earlier. AWS has $50 billion in backlog contracts as of the end of 2020, according to David Fildes, Amazon’s director of investor relations.

“That’s up about 68 percent year over year, so that’s one component of all the great work that AWS is doing,” he said. “You’re seeing some continued very strong…usage and revenue growth. It’s continuing to grow at a meaningfully larger absolute dollar rate than others out there, and we’re really pleased.”

AWS ended 2020 with its ninth annual re:Invent conference online for cloud customers and partners. The division announced more than 180 new services and features -- across compute, storage, databases, machine learning and other technologies at this conference.

"There is no compression algorithm for experience" as Andy Jassy would say. Below is a 43 minute interview with Andy on how he landed his dream job.

Your Margin is my Opportunity

This has been Amazon’s motto since day one. In fact, the company looks for high margin costs in its own business to attack. Let me explain.

You see, to build a big ecommerce business Amazon required a fulfillment center, massive data centers, best-in-class shipping and fast checkout. Does any of this sound familiar to you? Of course it does! These are fundamental pillars of Amazon’s business model today.

Amazon's Flywheel

Since 2005 the company has been relentless on turning every major cost into a major source of revenue. Books = Amazon Kindle and Fire, Fulfillment = Fulfillment by Amazon; Payments = Amazon Payments; and the list goes on.

These images are from Chamath Palihapitiya’s 2016 investment presentation at the Ira Sohn Conference. You can view the entire deck here. Back then he predicted Amazon will become a $3 trillion company by 2025. Retail will be a $1T business, AWS will be a $1.5T business and the rest will come from small bets and cash worth $0.5T by 2025. Today in February 2021 the company is worth $1.7 trillion or more than half way there. Since his presentation, Chamath delivered a 6.6x return on his investment.

Chamath mentioned AWS will be a tax on the internet. In one way it has already accomplished that by powering cloud computing for every major software application. AWS has become the toll booth of the digital age. Let’s see what the next four years has in store.

One hidden growth sector

In 2017, Amazon acquired PillPack for $750 million to enter the online pharmacy market. This acquisition is a clear threat to the pharmacy industry. Today, none of the major pharma companies have put the customer first. Until now.

In an earlier newsletter I mentioned Amazon had spoken with the Biden Administration about providing 800,000 vaccines to its staff. That was only within the company. In the last quarter, Amazon has been providing Covid tests for more than 700 employees every hour. The company’s dedicated COVID-19 labs have processed more than one million tests globally. Now imagine what they can do for the consumer.

The original acquisition plan included building out physical pharmacies but those plans changed during Covid. The company will continue to ramp up its online drug delivery sales until the lockdowns are over. This is an untapped blue ocean for the company and direct threat to the current pharmacy benefit managers. Also, once Amazon creates a better healthcare distribution network, they'll be able to deliver vaccines and other drugs across America to millions with best-in-class customer service! Talk about a multi-billion dollar growth opportunity.

In some ways it is still Day One for this ecommerce giant.

My Prime Delivery Experience

Amazon On-the-Go

Last year I was already blown away by the Amazon Go stores in NYC. I was very impressed by the lean staff managing a fully automated retailer. I suspect this contactless store will boom when the economy reopens. We're already seeing these types of cashierless stores do well in Europe and in parts of the US.

Groceries On-demand

I signed up for Amazon Prime for the first time last month. I know I'm very late to the game. But to be honest I've never had a need for it. Now during the lockdown I see a greater demand for Amazon Prime. The biggest benefit for me is grocery delivery. The added benefits are Prime video and music along with a few other Prime benefits.

You see, grocery delivery is a unique and difficult service to deliver. I've always gone shopping for my own groceries but the pandemic changed my habits. First was because of the lockdowns at grocery stores and rapid spread of the Coronavirus. But when Walmart announced its delivery service in September 2020, I decided it was time to sign up for a grocery delivery service.

Now I've tested both programs from Amazon and Walmart. There's no comparison. While Walmart beats everyone on price, Amazon still wins on customer service and delivery. Walmart’s delivery came an hour late with missing items. Amazon provides two hour delivery with better packaging. Plus it's hard to compete when Amazon throws in free shipping, movies, music and more.

P.S. I’ve been using Amazon 2009

I've been a loyal Amazon customer for 12. My single biggest repeat purchase are books.  Makes sense since Amazon built its original business selling books online.

I've had Audible memberships, the Kindle and a 1000 book wish list since then. This week I found out about the Amazon book clubs. Something I've always wished the platform had. Now you can join other readers to discuss new books. This is a new feature and is slowly rolling out.

As for recommendations, I’ll leave you off with some great reading material. First is the Everything Store, the best biography about Jeff Bezos and Amazon. I also enjoy reading Jeff’s annual shareholder letters since 1997. This collection is like a mini-MBA on how to build a hyper growth online business. There are several billion dollar ideas hidden away in every page. I also recommend watching this Frontline documentary on the rise of Jeff Bezos.

P.P.S. I didn’t mention it in this article but Amazon’s Third Party Seller is huge. I even launched an Amazon ecommerce store in 2015. This is an explosive part of the ecommerce marketplace. Amazon seller’s can launch a store for $39.99 per month. I recommend checking out JungeScout if you want to find the best ways to build an Amazon business.

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