A SWOT Analysis of Amazon

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you've been avoiding the malls this holiday shopping season, you probably hopped on your computer to pick up your gifts. And if you're like a lot of people, Amazon (NASDAQ: AMZN) was probably one of your first stops. This post, if the title didn't give too much away, looks at the Strengths, Weakness, Opportunities and Threats facing the popular online retailer.
 
Strengths:
  • Amazon is the dominant online retailer. The Seattle-based company is synonymous with online shopping. You can buy anything, from the useful to the questionable.
  • The reason Amazon is able to dominate the online retail business is the ability to employ economies of scale. The company has a number of warehouses scattered around the world to ship its goods from. Even though it's easy to start an online store, it's difficult to set up the kind of distribution network that Amazon has.
  • Amazon offers good digital content, from movies to music, especially with Prime. Although Prime costs $79 a year, divided over 12 months it's actually a little bit cheaper than Netflix's $7.99 per month for all-you-can-eat streaming. But you can't get free shipping on boxes of popcorn from Netflix.
  • As it does business exclusively online, it doesn't have as much overhead as some of its competitors, including Barnes & Noble (NYSE: BKS), Wal-Mart (NYSE: WMT) and even Apple (NASDAQ: AAPL). Compare Wal-Mart's $85.27 billion SG&A last fiscal year with Amazon's relatively paltry $9.93 bilion. Apple spent over $10 billion on SG&A last year as well. Those cool stores aren't cheap to maintain.

Weaknesses:

  • The company's cost structure can become a liability. The company posted a loss last quarter of $27 million. A lot of its costs come from the cost of media. Those TV shows and movies it's streaming on Prime cost money.
  • The online retail indsutry has a relatively low barrier to entry: Anyone can start an online store. Just fill out the paperwork and sign a contract with FedEx or UPS. On the other hand, it's hard for small businesses to compete with Amazon's economies of scale. That would be like bringing a knife to a nuclear bomb fight. A better bet for them is to specialize, like Zappos does for shoes ... and which Amazon happens to own.
  • As nice and technically solid as the Kindle Fire is, it will always be perceived as an iPad knockoff. As Seth Myers put it on Saturday Night Live: "It's expected to sell well among parents who always buy the wrong thing," even though Kindles existed before iPads did. It's kind of like Oreos stealing the thunder of Hydrox cookies.
  • The company still gets flak for breakdowns in customer service. The company recently froze a Danish woman's Kindle Fire before reinstating her after bad publicity broke out over the Web. The incident recalls an earlier publicity black eye after Amazon remotely sent copies of George Orwell's 1984 down the memory hole.

Opportunities:

  • Consumer confidence has been high. We're headed over a "fiscal cliff," the Very Serious People constantly tell us, but you'd have a hard time convincing shoppers.
  • The above is also related to the holiday buying season. With higher consumer confidence, more people are going to be shopping, including on Amazon.
  • The Kindle Fire is competitive with the iPad and other Android tablets. It's currently the second most popular tablet after the iPad.
  • As previously mentioned, Amazon's Prime video is competitive with Netflix. It contains stuff you'd actually want to watch.
  • Apple has suffered some setbacks, especially with the new maps feature on the latest version of iOS.
Threats:
  • Competitors can always offer lower prices. Products on Amazon are often significantly cheaper than the retail list price already.
  • eBay's buy in stores feature combines the best features of online and brick-and-mortar retail. Customers can order an item and pick it up in the stores immediately.
  • Apple's iPad Mini is close to Kindle Fire price point.
  • Wal-Mart and other brick and mortar retailers offer instant gratification.
  • Barnes & Noble has an in-store experience: physical browsing, coffee and general socializing that's hard to match on the Internet.
  • Apple has a streamlined in-store experience. Apple's retail sales accounted for about 12% of its net sales over the previous fiscal year.

So will Amazon keep its place as the king of the Internet retail mountain? We'll have to wait for it to release its earnings to see, but with this analysis, it's obvious that the company has a strong position.


David Delony has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Apple and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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