How Amazon used the dotcom bust to build the foundation for the future?
Quick commerce (or fast delivery) companies have seen difficult times recently. One of the executives at the quick delivery pioneer GoPuff forecasted that most of its competitors would go bankrupt the following year.
Fast delivery companies exploded into the retail scene during the pandemic. The category was, in many ways, invented in 2020 as venture capital was poured into the nascent quick-delivery companies.
Flush with funding, the companies started expanding rapidly and competing fiercely to acquire customers. This led to enormous valuations and highly unprofitable businesses. Gorillas became the fastest company in Europe to achieve unicorn status.
As the pandemic has faded and the rapid growth of online grocery has normalised back to historical growth trajectories, many quick delivery companies have either had to close down or reduce operations to a handful of core markets to become profitable as soon as possible.
In a move representing the sector's downfall, it was reported that Getir was in talks to acquire Gorillas marking the end of the spectacular rise and fall of the company.
These problems will shake up the industry to its foundations. However, some wise companies will adjust their strategies and operations to create a more financially sustainable company in the long run. This is an actual test of character for the quick delivery companies.
Never let a crisis go to waste
Source: WSJ
This dark winter for the industry resembles the dot-com bust for the nascent e-commerce industry.
The companies that want to get to the other side of the great crash of the quick delivery model should heed learnings from Amazon during the dotcom crash.
Most of the companies failed and burnt all their money without being able to pivot to a new, more sustainable model. However, eBay and Amazon survived the long hangover from the dot-com bubble. Amazon utilised the deep problems the company faced to modify the company into what it is today.
Even though the great success for Amazon came in the 2010s, the foundations for nearly all critical business elements were laid between the period from 2000 to 2005. The transformation of Amazon is very well depicted in the great book Everything Store by Brad Stone.
“Amazon we know today, with all of its attributes and quirks, is in many ways a product of the obstacles Bezos and Amazon navigated during the dot-com crash.”
The early 2000s was a time when the general public, business press and the investor community had fallen out of love with Amazon. With this backdrop in mind, the Amazon board started to look for a replacement for Jeff Bezos. The company had brought in Joseph Galli to work as a Chief Operating Officer.
Jeff Bezos understood the problems and changed the company's mindset from fast growth to financial discipline and cost control. According to Stone, the watchwords within the company became ”discipline, efficiency and eliminating”. In 2001 Amazon went on to lay off 15% of its entire workforce.
Bezos promised the investor community that the company would become profitable by the fourth quarter of 2001.
The new building blocks emerge
After trying to buy the company, Amazon wanted to copy eBay in the late 1990s.
Initially, the project was called Amazon Auctions, then zShops, but they could not find a good concept for the service to live alongside the original Amazon business.
Jeff Bezos was confident that the marketplace would become necessary. Despite the difficulty in developing a concept for the marketplace, Bezos stated in 2000 that marketplace commissions would be half of Amazon's revenues by the time the company had revenue of $200 billion. At that time, Amazon had revenue of $2,8 billion.
Bezos was also keen on learning from the past. He did read a lot about the past giants of retailing. One of his most important books was the biography of Sam Walton. He also met Walmart executives and wanted to learn about the company.
Everyday low price and the flywheel
In the spring of 2001, Bezos met with Costco founder Jim Sinegal. Sinegal explained the ins and outs of the Costco model with everyday low prices and the membership model. This heavily influenced Jeff Bezos, who doubled down on the importance of low prices for Amazon.
Additionally, a couple of years after the meeting with Sinegal, Bezos was to launch his membership model, which would become even more popular and influential than the Costco membership model.
Later that same year, Bezos had his. g with Jim Sinegal, he invited management author and thinker Jim momentous meeting management retreat about his upcoming book Good to Great. In that meeting, Collins explained one of the concepts in the new book: the flywheel. Amazon adapted and executed the idea in force. It became one of the fundamental strategic building blocks for the company's decisions for the future.
Amazon flywheel by samseely.com
The importance of the flywheel for Amazon became evident as Jeff Bezos talked about it in the seminal HRB interview ”The Institutional Yes” in 2007.
“It helps to base your strategy on things that won’t change. When I’m talking with people outside the company, a question commonly arises: “What’s going to change in the next five to ten years?” But I very rarely get asked “What’s not going to change in the next five to ten years?” At Amazon, we’re always trying to figure that out because you can really spin up flywheels around those things.”
Bezos also explained his thinking in this interview with Werner Vogels in 2012.
Shipping and fulfilment as the building blocks
Jeff Willke entered Amazon in the fall of 1999. As Brad Stone puts it, Willke’s job was ”quell the turmoil in the distribution centres”. He came into the company from manufacturing and introduced Six Sigma and Lean thinking into the processes. Willke was also responsible for changing the Amazon distribution centres into fulfilment centres. The distribution centre model was developed by people recruited from Walmart. After all, Walmart operated massive distribution centres serving its vast stores around the country. However, Amazon did not distribute products to big stores. It fulfilled individual customer orders. This small but significant mindset change resulted in substantial changes inside the company.
In 2000, Amazon asked itself a fundamental question regarding the expensive fulfilment centres it operated: should the company do what many of its competitors did and outsource the fulfilment arm entirely?
eBay was regarded as the eCommerce company at the time, and it did not operate any warehouses or own any stock
As Bret Wegner recalls in the Everything Store,”We had a key decision to make. Was distribution a commodity or was it a core competency? If it was a commodity, why invest in it?”
Willke and Bezos turned to the classic operations research book The Goal by Eliyahu Goldratt, and identified critical bottlenecks in the fulfilment centres. After they understood the role of the jams and transformed the flow of the goods in the system, they realised that fulfilment centres were to become core to what Amazon was doing. Instead of abandoning fulfilment centres, Amazon doubled down on them and built everything from scratch.
At the time, this certainly was not an obvious and easy choice. As the industry sentiment favoured outsourcing everything, the significant investment must have seemed like a risky bet.
This was to become one key enabler for the Fulfilled by Amazon (FBA) that was later to become one of the critical elements of the Amazon flywheel.
Fulfilment and shipping took a step further with memberships.
A couple of years later, in 2004, Charlie Ward came up with the idea of Super Saver Shipping. It became the basis for Prime, which was introduced in early 2005.
As Brad Stone puts it, Prime was an act of faith as Amazon did not have tangible evidence to back up any estimation about the actual cost of the program. However, Jeff Bezos went with his experience. With Super Saver Shipping, Bezos understood the importance of delivery fees to customer buying behaviour. Additionally, 1-Click ordering taught the importance of removing friction to get customers to spend more.
Prime became one of the most significant parts of the Amazon flywheel, increasing customer loyalty to new heights.
A year after Prime in 2006, another critical element for the flywheel was introduced: Fulfillment by Amazon (FBA). It enabled the marketplace's rapid growth, becoming the engine for Amazon’s growth in the 2010s.
The technology company and the unique culture emerge
Besides the retail-related initiatives introduced in Amazon during the dark years after the dot-com bubble, Amazon also embarked on a journey to become the technology company Jeff Bezos had always said the company was. According to Brad Stone, most of the critical technology initiatives within the company were started between 2003 and 2005.
Source: Newsweek
Two of these would become monumental for the company’s future. The first was initiated in 2004 as Amazon was finding a way to find out how to create a digital device for reading books. Kindle was introduced to the world in 2007. It was the first accurate public illustration that Amazon was more than a retailer.
The other, more critical initiative started in 2002 as Tim O’Reilly got Jeff Bezos interested in Application Programming Interfaces (APIs) for developers who became an essential constituent for Amazon building services on the platform. The development of the venue for the developers was tasked under a group that was given a name: Amazon Web Services.
Another big revelation at the time for Jeff Bezos related to communication. He started to see how communication became more burdensome as the company grew. Slowly but surely, the dependencies between the different parts of the organisation would grind the company’s growth. Brad Stone Bezos saw the other Seattle-based technology company Microsoft as a dangerous example of a big company becoming slow. Despite that, Bezos had copied the idea of Think weeks from Bill Gates. In one of the think weeks, Bezos developed the concept of small independent teams that did not need to ask permission or wait for other teams. These were to be called ”two pizza teams”.
Bezos also instituted a policy of no Powerpoint slides in the meeting (partly adapted from Apple founder Steve Jobs who famously hated PowerPoint). Instead of slides, the meeting organisers had to prepare a six-page memo on the topic discussed. At the start of the meeting, each participant would read the memo for 15 minutes before the discussion started.
These two practices reduced team interactions and freed up significant time. These managerial innovations can be regarded as essential catalysts for the meteoric rise of Amazon during the 2010s. However, one must remember that decentralisation has a lot of benefits, but it can also produce a lot of double work as teams are unaware of what each other is doing.
Not everyone believed in Amazon in 2005
Although most of the company's essential innovations had already been operational by 2005, not everyone believed in the company and its founder. The community had turned against Amazon during the early years of the new Millenium.
As Amazon was celebrating its tenth anniversary, New York Times ran a long article about the company, where Mark Anderson, a famous technology analyst at the time, told the paper that ”it's time for Mr Bezos to do as the founders of so many other technology companies have done before him: find a professionally trained chief executive with a deep background in operations to take the reins.”
Quick commerce can adapt to become relevant
Despite the tragic outcomes in the quick commerce sector and the overall lack of belief in the concept, some companies can have life in the future. However, to survive, the companies will need to adapt. Similarly, as Amazon invented itself against all odds, one or two quick commerce companies could get out of this crisis.
One should never underestimate the power of convenience. If something can be made simpler or faster, it traditionally gets traction from the customers. With the right kind of business models and customer value propositions, quick delivery can survive. Customers don’t probably need the delivery in 10 or 15 minutes. One or two hours is also fast but would give more flexibility for the operations.
Source:
Stone, Brad. The Everything Store: Jeff Bezos and the Age of Amazon . Little, Brown and Company. Kindle Edition.