The 19 Ecommerce Growth Challenges, Outlined by Amazon’s Annual Report

On April 18th, Amazon released its Annual Report for the past fiscal year (2017).

The Amazon Annual Report, which is made available to the public through the SEC, recapped the company’s remarkable year of growth.

However, it also put a spotlight on some of the challenges and obstacles Amazon will face in the year ahead.

From general Amazon growing pains to government regulation, part of the report took a hard look at some of the major issues and potential risks ahead that all ecommerce retailers need to consider (as Amazon third-party retailers or otherwise).

Let’s take a look at some of the important highlights as well as some of the specific challenges covered within this report.

Amazon Growth Highlights

What can we take away at a high level from this report?

In a word: Growth.

Amazon Customer Base, Revenue & Shipping Data

Some of the biggest highlights of Amazon’s Annual Report were company insights shared for the very first time – like information around membership and revenue around Amazon Prime, the company’s subscription service.

• Amazon Prime has over 100 million users.

• Amazon Prime generated $9.7 billion in subscription revenue.

• More than 5 billion items shipped worldwide with Amazon Prime.

• Amazon now has 560,000 employees.

It was also revealed that Amazon Prime has more members (and a higher retention rate, at nearly 90% retention) than retail giant Costco.

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But along with the good news about growth and spikes in revenue, Amazon also spent a good portion of this report talking about risks and obstacles they’ll face in the year ahead.

These issues are insightful not just for those who sell on Amazon, but for all ecommerce retailers working at scaling up their operations – as many of the difficulties discussed are relatable (albeit on different scales.)

Let’s take a look at those next.

Amazon Risk Factors and Obstacles in 2018

The risks associated with the year ahead are fairly relatable for all retailers working in the ecommerce environment. From changes in technology to pending legislative issues, these are the top items to keep an eye on in 2018 and beyond.

1. Channel expansion and high-growth pains.

As Amazon continues to quickly scale up operations and diversify with new products, services, and verticals (like its acquisition of Whole Foods, for example), its rapid growth presents a unique set of challenges –– and places the company in a position that may be more vulnerable to risk.

The Amazon Annual Report states:

“We are rapidly and significantly expanding our global operations, including increasing our product and service offerings and scaling our infrastructure to support our retail and services businesses.

This expansion increases the complexity of our business and places significant strain on our management, personnel, operations, systems, technical performance, financial resources, and internal financial control and reporting functions.

We may not be able to manage growth effectively, which could damage our reputation, limit our growth, and negatively affect our operating results.”

This is an important insight (and a good reminder) to all ecommerce companies going through a period of rapid growth.

2. The risks of international operations.

One of Amazon’s biggest challenges in the year ahead will relate to expansion into international markets around the globe.

Data shows that as of 2017, Amazon’s global retail revenue continued to climb, as seen below (note the reporting change in Q1 of 2017).

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This is important for all ecommerce retailers with a global operation and international customers, as they will also need to consider some of the following risks:

• Local economic/political conditions: Each international relationship is subject to the nuances of constantly changing economic and political conditions. This includes geopolitical events such as terrorism and war.

• International regulations on ecommerce: From protective measures from governing bodies to taxes and export laws, it’s important to monitor the risks associated with international sales.

• Business licensing across borders: Certification, licenses, or permits may be necessary for certain imports and exports. Failure to maintain these documents can result in negative business impacts.

• Currency exchange restrictions: There many be limitations on investment of funds and/or foreign currency exchange restrictions to consider, as well as exchange rate values.

• Language/cultural differences: When staffing is necessary around the globe, understanding language and cultural differences can be difficult to navigate and carry a certain amount of risk related to communication (or even harassment).

• Net neutrality and access to the internet: Net neutrality and access to the internet in general could pose a major threat to the viability of ecommerce businesses that depend on internet connectivity. China and India, for example, in Amazon’s case, both regulate sales made through Amazon and its affiliates.

3. Optimization of data & fulfillment centers.

Along with Amazon’s rapid growth have come a particular set of challenges relating to the optimization of its data and fulfillment centers. This is a very relatable concern for any ecommerce retailer that’s growing quickly.

The report states:

“If we do not adequately predict customer demand or otherwise optimize and operate our fulfillment network and data centers successfully, it could result in excess or insufficient fulfillment or data center capacity, or result in increased costs, impairment charges, or both, or harm our business in other ways.”

There are a couple of things to consider here:

• Inventory has to be optimized. If accomplished, optimized inventory will help lower shipping costs from fulfillment centers and increase margins.

• Good terms are crucial with shipping companies. Since Amazon depends on third-party shipping companies to deliver packages bearing its name, it relies on a cost-effective agreement, reliable delivery, and good service from those providers through a contractual agreement with well-defined terms.

4. Seasonality and holiday strain.

Like most retailers, Amazon faces a massive influx of traffic and orders during the fourth quarter each year thanks to the year-end holiday shopping surge.

This rapid uptick in customer volume means preparing for things like:

• Demand forecasting: Ensure there is enough inventory available without selling out.

• Planning for increased shipping costs: Formulate a strategy for last-minute shoppers and express delivery.

• Risk of site crash due to increased traffic: Add extra bandwidth for increased site traffic volume without having the site go down (which can hurt sales).

• Extra staffing: Plan ahead for extra staffing during the holidays, including holiday pay and overtime considerations to meet customer demand.

5. Rapidly evolving business model.

The pains Amazon feels during the holidays doesn’t lessen too much throughout the rest of the year thanks in part to the company’s rapid growth.

Data shows that sales jumped from $135 billion to $178 billion between 2016 and 2017 alone.

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Let’s look at a few of the risks that accompany this growth trajectory.

• Technology: The speed at which technology advances (and thus, users adapt their habits) poses a certain amount of risk for a business that can’t be flexible or agile enough to adapt to those changes quickly.

• Stock value: As a publicly traded company, Amazon has to answer to investors while trying to maintain a rapid pace of growth. The stock value of the company is also extremely volatile and can be influenced by things like media coverage.

• Industry trends: The way people discover, research, and buy products is always changing, so accounting for shifts and trends can be difficult and costly.

6. Government regulation.

There’s a lot up in the air right now around government regulation for companies like Amazon, but also for ecommerce retailers in general, too.

Watch for the following legislative issues to make an impact:

• Data protection: With topics like GDPR in the news, ecommerce businesses have to think about how changes around data protection will impact their companies. This may require increased investment around data security and monitoring for risk mitigation.

• Energy consumption: Any major changes to laws and regulations could have serious implications for everything from manufacturing to shipping and beyond.

• Taxation: The Supreme Court is discussing ecommerce taxes right now, which could mean additional taxes for online retailers.

• Online payment services: Changes around online payments could have major implications for ecommerce retailers –– not to mention the disruption posed by digital currencies like bitcoin and systems like blockchain.

Executive Summary

The numbers were good for Amazon this year, but that doesn’t mean it’s guaranteed smooth sailing in the future.

Being aware of the risks and challenges associated with ecommerce in general and with Amazon’s unique business model allows the company to prepare as best it can. You can take a page from this playbook, too.

Amazon’s 2018 Risk Checklist for High-Growth:

• Local economic/political conditions.

• International regulations on ecommerce.

• Business licensing across borders.

• Currency exchange restrictions.

• Language/cultural differences.

• Net neutrality and access to the internet.

• Optimizing inventory.

• Good terms with shipping companies.

• Demand forecasting.

• Planning for increased shipping costs.

• Risk of site crash due to increased traffic.

• Extra staffing.

• Technology.

• Stock value.

• Industry trends.

• Data protection.

• Energy consumption.

• Taxation.

• Online payment services.

Want more information about Amazon? Check out: How to Successfully Market Products on Amazon & Think Like a Buyer.