Analyse the external environment of Amazon using Pestel and Swot

• Amazon Porters Five Forces 2018

1.0 Introduction

Amazon is an American electronic commerce and computing company based in Seattle Washington. Founded in 1994, it is the biggest internet retailer in the world in terms of both revenue and market value. On 4^th September, Amazon became only the second company in history to reach a market capitalization of US$1 trillion, the other one being Apple (Bradshaw 2018).

Amazon is known for its vast array of products and services from electronics, books, clothing and food. The giant retailer operates in a number of sectors including retail, consumer goods, publishing and media etc. with subsidiaries include; Audible, Whole Foods, Twitch TV, Good Reads, Zappos etc (McQueeney 2017). The internet retailer has had continuous success over the years, dominating the global e-tail industry with its low cost model that has enabled it to dominate likes of Alibaba, eBay and Walmart to become the world’s retailer (Statista 2017). 

As of 2017, the online retailer’s revenue was $178billion, 50% of it coming from electronics and media (Statista 2017). Amazon also commanded 44% of the USA e-commerce market in 2017 with sales representing $200billion in e-commerce revenues or about 4% of total US retail sales (McQueeney 2018).

2.0 Amazon PESTLE Analysis 2018

2.1 Political environment

Environmental influences that come from political sources are what constitute the political environment of a business, and can impact a firm’s performance positively or negatively. In Amazons case, a key and vital issue that’s a potential threat is Trump’s antitrust threats and calls to increase the taxes Amazon pays.

Though Trump’s accusations against the e-commerce giant may seem biased according to some political analysts, they do have legitimacy and they could negatively impact Amazon if implemented through with regulations (Salinas 2018; Sherman 2018). According to Sherman (2018), the Trump administration could enforce antitrust laws for the way Amazon for instance uses its platform in a biased manner that distorts fair competition between it and the merchants it hosts. Amazon does this in a number of ways.

Firstly, it monitors current marketplace sellers/merchants trading on its platforms and collects their data that provides it with the bestselling products consumers want and their prices before using such valuable data to launch its own branded version called “Amazon Basics” thus cannibalizing market share from original sellers on its platform (Yglesias 2018).

Secondly, it prioritizes its own products in searches, over those of competitor merchants operating on its platform. Any anti-trust regulation would thus reduce on its capacity to engage in any such anti-competitive practices, which would dramatically alter the nature and intensity of competition it faces.

2.2 Economic environment

America’s economy has remained strong with the unemployment rate hitting an 18 year low of 3.8% in May 2018. Any economic growth is an opportunity for e-commerce retailers like Amazon to grow their bottom line. According to Cox (2018), job growth, wage gains and tax cuts are giving US customers increased buying power and spending confidence, good news for e-commerce retailers like Amazon.

2.3 Social environment

The social environment often brings up social changes that can become key success factors or threats to a business. For Amazon, one such social trend is the high demand for natural hair among black women consumers, fast becoming a new social trend that US ecommerce retailers should watch out for.

According to Mintel (2018), black consumers spent at least $2.54 million on haircare in 2017, supported wholly by styling products meant for natural hair (Mitchell 2018). Upon noticing the trend, Amazon launched a Texture and Hues Shop in February 2018, featuring hair care products targeting black female customers. Textures and Hues also feature tutorials of hairstyles created by famous Vloggers, tools and products they can use to recreate trending black hairstyles (Mitchell 2018).  With natural hair becoming the new hair trend for black women, it is prudent for retailers should cater for this demographic opportunity (Mitchell 2018).

2.4 Technological environment

2.4.1 Rise of smart homes

The rise of smart homes is a key trend that’s shaping the e-commerce market. Consumer connected devices with voice activation have become a major driving trend with technology players announcing partnerships and introducing devices (Newman 2018).  Google introduced Google Home in 2017; Amazon launched Amazon Echo with Alexa Assistant, and Microsoft also introduced Cortana, a virtual assistant that can run on existing personal devices (Mintel 2018a).

Retailers are also developing systems that use virtual reality technology for designing and visualizing kitchens, bathrooms etc. which can help consumers visualize how products like furniture will look in their room. Amazon is already planning to install virtual reality tools that can allow customers to visualize products before purchasing them. Across the industry, IKEA has also launched IKEA Place which allows customers to envision how furniture will look in their room (Mintel 2018a).

2.4.2 Digital devices trend

Music streaming, and the rise in streaming of audiobooks and other media are some of the key trends in people’s lives today. These trends have mostly been boosted by smartphone penetration which enables people to listen to audio anytime anywhere (Mintel 2018).

However, in recent years, voice-controlled gadgets such as smart speakers or voice controlled speakers like Amazon Echo are becoming popular with more content being launched on such devices (Mintel 2018). According to McGrath (2018), the popularity of smart devices like Amazon Echo or Google Home will significantly change how, when and which content people listen to, forcing streaming services to innovate as they try to know what customers want the most based on audible requests. This is a major trend e-commerce that’s driving the ecommerce sector that Amazon operates in.

2.5 Legal environment

2.5.1 California Consumer Privacy Act of 2018

The California Consumer Privacy Act of 2018 could pose a threat to tech giants like Amazon. According to Newcomb (2018), California has enacted the nation’s strongest data privacy law that could change the way big tech companies including Amazon, Apple and Google, collect and use personal data.

According to the law which will take effect from 2020, companies such as Amazon, Google and Facebook will be required to tell users what data they collect from them and who they share it with (Newcomb 2018). Customers will also have a choice of opting out of having their data sold. Companies will also be required to secure customer’s data or risk being fined. The privacy act will have legal implications and is thus a threat to tech firms like Amazon who rely on data.

2.5.2 New EU GDPR regulations

In 2018, Europe’s GDPR (General Data Protection Regulation) came into force, requiring all firms that collect customer data to enforce new strict data privacy rules. According to the regulation, any information related to a person for instance bank details, names and email addresses, must be protected (Solon 2018). Companies must comply by changing the way they collect data and consent from customers, with those that don’t comply liable to face fines of at least 4% of the company’s annual revenue (Solon 2018). The GDPR regulations are hence a threat to companies like Amazon that rely on data.

A more nuanced threat from EU that Amazon should monitor constantly is the launch of preliminary investigations by the European Commission, into how Amazon uses merchant data as host, given it also competes against those same third party merchants it hosts. The European Commission has already fined Google and Apple after similar investigations into those firms operation, so this represents a genuine threat for Amazon (Toplensky 2018).

2.6 Environmental issues

The American Clean Air Act authorizes US Environmental Protection Agency (EPA) to establish National Ambient Air Quality Standards (NAAQS) in order to protect health and public welfare and to regulate emissions of hazardous air pollutants (EPA 2017). In 2017, Amazon was accused by Green Peace over poor environment practices. the e commerce giant was accused for being opaque when it comes to publishing its environmental data (Tannam 2017). According to the accusations, the company publishes no data on its energy use, its materials handling or whether it limits the use of hazardous chemicals (Tannam 2017).

Nevertheless, the e-commerce giant has in recent years set ambitious goals on renewable energy, leveraging its technology expertise to drive innovation that can benefit the planet (Murray 2018). The company has been working on powering its global infrastructure with 100% renewable energy. It has started by launching its largest wind firm in Texas that contributes over 1 million megawatts of clean energy to the grid (Murray 2018).

3.0 Amazon SWOT analysis 2018

3.1 Strengths

• Strong financial capability. Amazon’s revenues and profits have been growing steadily through the years giving the retailer enough revenue bases to invest in new innovations and expansion. As only of just two companies in the world to reach a market capitalization of US$1 trillion, Amazon together with Apple, has demonstrated very strong financial capabilities (Bradshaw 2018). The strong financial backing is what is enabling to expand and diversify into different sectors.
• Strong brand name. Amazon is the biggest e-commerce retailer in the world. By 2014, almost 40% of people looking to buy something online were skipping search engines and going directly to Amazon. This grew to 55% by the fall of 2016 and has continued growing (Mitchell 2018).
• Winning diversification strategy. Buoyed by a strong financial performance from continued growth, a treasure trove of valuable customer data and efficiencies that come from scale, Amazon is diversifying heavily into various fields. Recent acquisitions include the purchase of Whole Foods for $13.7bn in 2017 (food), the acquisition of PillPack in 2018 (healthcare) and big investments in Prime advertising and its own logistics and delivery services (Bond and Crow 2018; Bond 2018; 2018b).
• Amazon’s low cost are among one of its major strengths. The low costs partly derived from scale and efficiency, have enabled the retailer to out-compete its competitors and dominate global ecommerce, making it the biggest e-commerce retailer globally (Ward 2018).
• Strong partnerships.  Amazon already has strong partnerships with many firms including delivery companies such as DHL, FedEx, UPS, USPS etc. It has also partnered with NFL which gives it an opportunity to stream live Thursday night football games to its prime subscribers (Kafka 2018), this will increase its presence in football loving demographics which will also increase its prime subscribers.
• Amazon’s free shipping incentives and same day delivery for Prime Amazon members is a key strength and competitive advantage for Amazon. Fast delivery and reliability in fact is one of the company’s strength continues to be a major competitive advantage over competitors (Cohan 2018).
• Valuable data. Amazon has access to a vast data resource of very valuable customer data that it has accumulated over the years. This valuable treasure trove of customer data is resource that’s fuelling Amazons rapid expansion and diversification into fields such as healthcare, cloud computing, advertising, delivery etc (Bond 2018 and Crow; 2018b).

• Supply chain efficiency. A key strength of Amazon is the efficient supply chain and a widespread selection of products and services, a system utilizing scale efficiencies to help the online retailer fulfill customer orders in a timely manner as well as provide excellent customer care which cements customer loyalty (Cohan 2018).
• Strong US sales. The giant online retailer already takes more than $4 out of every $10 Americans spend online. And it is not just in the US where it dominates (Bond and Crow 2018).
• Strong UK sales. As showed in figure 3 (below) Amazon UK is the leader in the e-commerce sector, commanding 29.7% of all retail sales in UK followed by Sainsbury’s at 6.5% (Chambers 2018). This has mainly been due to UK’s dense population; widespread internet access and good road network (Chambers 2018). See Pestle analysis for Amazon UK for more information.

3.2 Weaknesses

• Amazon’s worker conditions. According to the report by China’s Labour Watch, workers assembling Amazon Kindle and Echo devices at a Foxconn factory in China don’t have enough access to food, training, earn low wages, work in poor safety conditions and are forced to work for very long hours (Burns 2018). This adds to Amazons poor reputation when it comes to labour conditions including low pay. The fact that Amazon has associations with Foxconn, a Taiwan firm notorious for mistreating workers, could affect the company’s reputation at a time when it’s trying to enter the China market.
• Low sales and growth in India and China. Despite increased investments, Amazon is still struggling in battleground emerging markets including India, where it faces tough competition from Flipkart and in China where it has struggled to take on domestic powerhouse Alibaba, due to a Beijing instigated business environment that’s hostile to foreign companies. This has kept Amazon’s market share below 1% in China (Coren and Hao 2018).

3.3 Opportunities

• USA strong economic growth is giving customers more buying power and confidence thus an opportunity for Amazon to grow its margins.
• UK low corporate tax rates are an opportunity for Amazon to grow. UK cut its corporate tax by more than a third to 19%, a great growth opportunity for Amazon UK (Chambers 2018).
• Strong online shopping in UK is also an opportunity for Amazon to grow its profits.  According to Chambers (2018), UK is leading the world into an online shopping future leaving traditional brick and mortar businesses struggling for survival with ecommerce commanding 18% of sales in UK retail.
• More disposable income for millennials. According to McQueeney (2018), millennials  who are Amazon’s biggest customers are getting older (20-36years old) and have more disposable income. Millennials have contributed at least 33% to Amazon’s growth in furniture sales, they have also contributed a lot to to the retailers estimated $5.5 billion in home and kitchen ware (McQueeney 2018). This gives Amazon an opportunity to invest in a demographic they are already familiar with.

3.4 Threats

• The California consumer privacy act of 2018 is a threat to companies like Amazon that depend on valuable customer data for a competitive advantage.
• Declining global market share of the smart speaker market. Amazon and Google’s smart speaker shipments have declined from 94% in fourth quarter of 2016, 84% in the same quarter of 2017 to 70% in 2018 (Lacy 2018). This has partly been as a result of the strong growing smart speakers market in China where Amazon and Google are currently not operating (Lacy 2018). This combined with the growing competition in the smart speakers market are a threat to Alibaba revenue profits and growth.
• Amazon’s issues with workers unions are a threat.

Conclusion

Amazon has enjoyed tremendous success in the last couple of years, not only becoming the biggest e-commerce retailer in the world but also and dominating the retail industry, overtaking big retailers like Walmart. Together with Apple, Amazon is now a trillion dollar company in market value.

However, an environmental analysis of Amazon using Pestel has revealed some critical trends and macro shifts that may negatively impact Amazon. Trump’s anti-trust and low tax threats to the retailer could result in regulatory issues which could affect the retailer’s growth and success if it goes beyond political rhetoric. No retailer has benefited from access to data more than Amazon. Valuable customer data is the foundation of Amazon’s success, giving the online giant access to a treasure trove of data on what consumers are actually searching for and buying every day on its platform. Armed with such data, Amazon is on an acquisition spree, buying companies in sectors as diverse as healthcare.

But new EU GDPR rules could undermine such unrestricted access and use of customer data. The EU has also launched preliminary investigations into how Amazon uses merchant data as host given it also competes against those same third party merchants it hosts. The EU has already fined Google and Apple after similar investigations so this represents a genuine threat for Amazon. There is also the issue of the California Consumer Act 2018, a regulation that could also affect Amazons use of data for organic growth in the US.

Nevertheless, Amazon still has reasons to be upbeat given America’s strong economy in 2018, the growing millennial market, strong online shopping in UK as well as the newly reduced tax rates in both the US and UK, all representing great opportunities to leverage existing strengths for further expansion and growth. A key challenge for Amazon is overcoming its major weakness currently; the poor showing and struggles in battleground emerging markets including India, where it faces tough competition from Flipkart and in China where it has struggled to take on domestic powerhouse Alibaba.

References

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Bond, S., & Crow, D. (2018) “Amazon shakes healthcare business with pharmacy deal” Financial Times, New York.

Bond, Shannon (2018) “Amazon delivery plan poses threat to US Postal Service growth” Financial Times, New York.

Bond, Shannon (2018b) “Amazon set for Prime Day ad revenue bonanza” Financial Times, New York.

Burns Janet (2018) “Amazon suppliers still violating China labor laws from wages to food, watchdog says” Forbes [Online] at http://www.forbes.com/sites/janetwburns/2018/06/11/watchdog-amazon-supplier-still-violating-chinese-labor-laws-from-wages-to-food/#50c2bf146f28

Chambers Sam (2018) “Britain’s Amazon obsession puts retailers at breaking point” Bloomberg [Online] at http://www.bloomberg.com/news/articles/2018-02-09/britain-s-amazon-obsession-pushes-retailers-to-breaking-point

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EPA (2017) “Summary of the Clean Air Act 42 U.S.C 7401 et seq. (1970)” [Online] at http://www.epa.gov/laws-regulations/summary-clean-air-act

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Mintel (2018) “The smartphone has become the most popular device for listening to music and podcasts” Mintel Reports

Mintel (2018a) “Consumer trends, attitude and spending habits for the home -UK- January 2018” Mintel Reports

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