The document analyzes Amazon's success against traditional retailers. It finds that Amazon has established a "triple threat" through assortment leadership, price leadership, and superior customer experience. This is due to heavy investments in technology, an optimized supply chain, and profitable revenue streams like Amazon Prime that drive loyalty. The summary concludes that Amazon aims to eliminate all reasons for customers to shop in stores physically.
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
Amazon's secret sauce
1. The Secret of Amazon:
Lessons for
Multichannel Retailers
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
McKinsey on Marketing & Sales – Slideshare Brief
October, 2012
2. McKinsey & Company | 1
Assortment leadershipPrice leadership
Amazon's "triple threat" value proposition is eroding traditional
retailers' value propositions
Category depth
Avg. number of SKUs / category
(5 categories)
100 random items
Price index1 vs. Amazon.com
SOURCE: William Blair pricing report, 2011; Wells Fargo SKU analysis, 2011; American Customer Satisfaction Index, 2011
1 Price including sales tax and shipping
2 Non-food and non-club, determined by 2011 revenues
Customer experience
Experience rating
American Customer Satisfaction
Index 2011
316
2,125
7X
86
76
13% higher
scores
113Top 5 retailers2 105
100
5-13% lower
prices
3. McKinsey & Company | 2
Other1
Percent of Margin
Total = 6.2 billion
Profitable diverse revenue models create lock-in and loyalty while
reinforcing Amazon's core business
SOURCE: Amazon financials; McKinsey analysis; analyst reports
Operating
margin2
41
263
29
2
3
1 Includes Advertising and other non-retail revenues
2 Gross operating profit is total sales less cost of sales and fulfillment (marketing, G&A, and technology costs are not subtracted); total margin from 2011
3 Excludes prime purchases made through marketplace vendors to avoid double-counting
How models lock-in customers
▪ Amazon web services provides end-to-end e-commerce solutions
including hosting, web design, search technology, and data storage
▪ Content strategy is centered around "cloud" powered by AWS
▪ Marketplace, introduced in 2000, allows third-party vendors to sell
on Amazon.com
▪ Increases selection, and lowers prices through competition, more
than 2M vendors sell ~30M items on marketplace
▪ Amazon's A to Z guarantee improves trust among buyers
▪ For an annual membership fee, Prime gives customers free two-day
shipping
▪ Helps Amazon to reach different segments through targeted
programs like Amazon Moms and Amazon Students
▪ Prime members spend 2.5-4.0x compared to non-prime members
4. McKinsey & Company | 3
Amazon Prime drives loyalty and supply chain predictability
while allowing Amazon more control over the customer experience
825
4,919
572
1,218
6,158
Gross marginStreaming
costs
273
Shipping and
fulfillment costs
COGSMember-
ship revenue
Incremen-
tal sales
SOURCE: Analyst and expert interviews; team analysis
Economics of Amazon Prime
USD Millions
5. McKinsey & Company | 4
0.2-0.4
1.5-2.0
100.0
Optimized inventory
control
Factory gate
Pricing/direct
supplier pick-up
1.0-1.5
Efficient outbound
fulfillment
Average MC retailer
cost of online sales
Amazon's
cost of sales
96.3-97.1
Lower cost structure driven by world-class, high-tech supply chain…InboundOutbound
1 Advanced shipping notices
Pick up 90% items from
suppliers, saving shipping
charges vs. prepaid
Pick up only 35-40%
items from suppliers
20 DCs within 95% of MSAs.
Most orders fulfilled through
zone 0-1 shipping
Favorable contracts with
shippers (20%) cheaper
Only 1-2 DCs for online
necessitate use of Zone
3-5 shipping
High shipping cost due
to lower volume
Only 20% of items in all DCs, --
reduces inventory by 3-5 days
Track and trace through ASN1
reduces inventory by 1-2 days
▪ Most DCs not designed
for stocking products
▪ Online and store
systems not integrated
Other multichannel
retailers
SOURCE: Expert interviews; team analysis
6. McKinsey & Company | 5
32
-34
Top 5 retailers1
… and superior working capital management
SOURCE: Bloomberg; financial statements; team analysis
42
90
15
16
59
40
Top 5 retailers1
Amazon.com
Days
inventory
Days
receivable
Days
payable
Key drivers
▪ Amazon only keeps the fastest
moving items in stock in all DCs
▪ Long-tail items are kept in only a few
DCs or drop-shipped
▪ Advanced demand estimation
technology leads to less inventory
▪ Amazon customers are only allowed
to pay by credit/debit card, ensuring
fast receivable collection times
▪ Companies with large cash sales
(e.g., Walmart) have advantage over
Amazon
▪ Amazon agrees to pay many
suppliers (book publishers) only
after item is sold
▪ Amazon takes 14 days to pay its
Marketplace sellers
Cash Conversion Cycle (CCC)
Days, 2011
1 Non-food and non-club, determined by 2011 revenues
If the top 10 retailers had Amazon's CCC, they would collectively save $150B+ in working capital
7. McKinsey & Company | 6
`
Amazon spends on R&D
like a tech company …
… resulting in breakthrough efficiency and
business models
Technology spend1
Percent of sales, 2011
Maniacal focus on technology (~3X IT investment over top retailers)
has created breakthrough efficiency and business models
SOURCE: Financial statements, Jeff Bezos’ letters to shareholders, Team Analysis, ACSI 2010
Technology examples Impact
▪ Amazon invented colla-
borative filtering algorithm for
recommendations
▪ 35% of sales in 2006 came
from recommendations
▪ Automated/email based
customer service systems
(90% automated vs. 44% for
average retailer)
▪ Best-in-class customer
satisfaction (ACSI score
of 86)
▪ Sophisticated supply
chain systems
▪ Best-in-class efficiency
reduces COGS by 3-4%
▪ Dynamic pricing algorithm
and web crawlers
▪ Intra-day price changes
to maintain 5-20% price-
leadership over retailers
6
2
+300%
Top 5 retailers1
1 Non-food and non-club, determined by 2011 revenues
8. McKinsey & Company | 7
…have made Amazon a go-to search destinationBreakthrough content and
search innovations…
▪ 7 million user-submitted
reviews in 20091
▪ 57% of online consumers
trust other users on retail
websites2
▪ Amazon supports
keyword, barcode,
image, and voice search
for price comparison and
product research
What next? Amazon's content and advanced search capabilities have
put it at the forefront of product research
SOURCE: iConsumer 2011
12
Home improvement 11
Health & Beauty 15
Household products 16
Furniture
Electronics 29
DVDs/Videos 40
Video Games 30
Books 49
20
25
20
20
21
12
20
10
1 Jeff Bezos' letter to shareholders 2010
2 Percent of consumers that trust or somewhat trust reviews by source, iConsumer 2011
Where consumers start online research
% of respondents
Search engine
9. McKinsey & Company | 8
Amazon will further strengthen its "triple threat" value proposition by
continuing to eliminate remaining sources of friction in online shopping
3
9
6
11
22
23
27
Easy Returns
I don't shop online
Human customer
service reps
No delivery costs
Quality of
product concerns
Immediacy
Enjoyment of
shopping
SOURCE: iConsumer retail survey 2011; U.S. 13+ year-old internet users
What if Amazon eradicates
every single reason for your
customers to go to the store?
Percent Example Amazon initiative to address reason…
▪ Amazon is building same-day
delivery capability
▪ Selling the Kindle in-store
▪ Partnership with 7/11
▪ Developing own store
▪ Prime offers free 2-day
delivery
▪ Mobile apps allow any shopping
experience to become Amazon
purchases
▪ Amazon offers free returns
for defective products
Top reasons consumers shop in-store
Amazon is
working
towards
removing
88% of
reasons
people shop
in store
10. McKinsey & Company | 9
Amazon is on track to become…
The king of retail … knocking big box stores
off price leadership throne with 10% lower
prices
The next generation convenience
multichannel retailer … without any major
retail presence
Your "anytime, anywhere digital identity"
… knowing you better than you know yourself
Your “go-to” product search engine … the
default destination for all product information
The B2B backbone of choice … from your
site to their doorstep
Your bank account and more … from books
to personal finance, travel and beyond