This week’s The Economist carries this piece in its Leaders section with a caricature of Jeff Bezos that has a mischievous resemblance to Dr Evil of Austin Powers fame. The article highlights that indeed the pandemic and the lockdown have clearly boosted the prospects of e-commerce, what with a whole of host of consumers who hitherto shied away from digital transactions now forced to being recruited as the next leg of e-commerce customers. With WFH here to stay and the surge in online communication has also given a leg up for cloud computing and infrastructure which also benefits Amazon’s supremely profitable AWS (Amazon Web Services) business. However, the article also highlights three challenges for Amazon – “fraying social contract, financial bloating and re-energised competition”
Much has been written about Amazon’s handling of employees with low wages and stretched targets. Alongside this, regulators have also been looking at privacy laws that deal with customer data and conflicts of interests with its supplier base competing with its own products on its platform.
“…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 American 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?”
Second, as much as investors believe big tech’s asset light model as a huge advantage, Amazon’s assets are no longer primarily intangible. “As Mr 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 $104bn of plant, including leased assets, not far off the $119bn of its old-economy rival, Walmart. As a result, returns excluding aws are puny and the pandemic is squeezing margins in e-commerce further. Mr Bezos says the firm can become more than the sum of its parts by harvesting data and selling ads and subscriptions. So far investors have taken this on trust. 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.”
Finally, the surge in the market opportunity for e-commerce hasn’t gone unnoticed with competitive intensity picking up. “…[Bezos] has long said that he watches customers, not competitors, but he must have noticed how his rivals have been energised by the pandemic. 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, and brash new contenders like Pinduoduo.”Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this email in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.
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