Laughing at Amazon is a mistake

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SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on October 29th, 2020.

Unintentionally funny translations and poorly rounded prices. But those who base their conclusions on linguistic details have not only misunderstood what type of creature that has landed among the Swedish e-commerce players. They have also underestimated Amazon.

“Men’s luggage compartment” instead of boxer shorts. “Waist lamp” instead of panties. Prices stated to the exact penny, and also, not necessarily lower prices than their competitors.

The e-commerce giant Amazon was widely ridiculed on social media after the launch of its Swedish site this week. Nor were the expert comments gracious. “Not exciting, hardly serious,” said one. “Calling this a threat to Swedish e-commerce is an insult to all talented Swedish e-commerce companies,” said another.

To see this as a long-term sustainable analysis of Amazon in Sweden is to deceive oneself. To begin with, it is too early to even analyze the launch. One can also question whether this should even be considered a launch. A litmus test for how the company should proceed, is probably a better description.

It can continue like this for a few weeks or months. In the long run, it does not matter. If Amazon wants to win the battle – then they will win the battle. The arguments for why are many, but a lot is about Prime which is the company’s engine.

The membership program’s main offering is fast and free shipping on many products. In addition, a wide range of other services are included – for instance the video service Prime Video, the music service Amazon Music Unlimited and discounts in the grocery store Whole Foods, which is located in North America and the United Kingdom.

Prime costs 119 dollars per year, equivalent to about 1000 Swedish kronor (SEK). In January, the company announced that it had over 150 million members. Thus, Prime alone has a turnover – without selling a single product – of around 150 billion SEK per year. A study from 2018 also showed that Prime members spent more than twice as much on the site compared to others.

Secondly, we have the deliveries. Amazon uses a variety of suppliers, but in recent years it has taken on more and more of this on its own (equivalent to 58 percent, about 2.3 billion packages in 2019, according to Bank of America). This already makes them the fourth largest logistics company in the United States after USPS, Fedex, and UPS.

In Sweden, the company cooperates with Postnord. But as their American counterparts have discovered, this loyalty runs risk of eroding as Amazon’s ambitions increase.

Thirdly, we have the investments. Amazon, like many of the tech companies, can make huge central investments that benefit all of their markets.

Investments in, for example, smart speakers such as Alexa are difficult to justify solely for the Swedish market, as it is too small to bear the costs. But adding Swedish as a language to a service that has already been developed is a relatively small cost. This also makes it difficult to compete against.

Amazon is financing the investments through the stock market, which now accepts that the company’s growth is more important than their potential profits.

The company’s CEO, Jeff Bezos, reportedly once said that “your margin is my opportunity“. Thus, there is no rush to make any profits, as long as they can increase their turnover.

Amazon likes to enter a market and undercut their competitors’ prices – and they can afford to do so for a very long time. This means that the margins of competitors quickly disappear. But that does not mean that Amazon is always the cheapest. Like many modern e-commerce players, it adjust its prices all the time. Thus, it is difficult to look at the Swedish website and draw many conclusions about where the prices will ultimately end up.

Not everyone has owners with the same attitude to capital as Amazon’s shareholders. But they have many reasons to continue to believe in Jeff Bezos.

In 2019, the company had sales of over 280 billion dollars, more than three times as much as in 2014. In addition, the share price has risen around 75 percent – in the last year alone. Being patient with the profits has paid off.

Fourth, Amazon Web Services (AWS) is embedded in the stock, which is the not-so-well-hidden card up its sleeve. The cloud services have grown massively and are hugely profitable. Today, AWS is an obvious part of the web’s infrastructure and many Swedish e-commerce companies use AWS in some way.

The shortcomings of Amazon’s Swedish website are obvious. They have a lot of work to catch up on, but Sweden should not overestimate itself in an international context. The company has succeeded in much more difficult markets than this.

In the long run, a sloppy start does not matter. Instead, take a closer look when they have launched Prime, and perhaps their own logistics in Sweden. Only then have they really launched.

It is no insult to say that Amazon is a threat. It is the new reality.

This analysis was first published in SvD Näringsliv, in Swedish, on October 29th, 2020.

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