Amazon.com, Inc. utilized the following three growth strategy alternatives in the global and domestic retail markets: expanding new and existing products through Amazon Web Services (AWS) and developing and producing media content, entering into the food and beverage industry through Whole Foods Market, Inc. and expanding geographically. Firstly, the company expanded by offering cloud services to businesses of all sizes worldwide, such as global compute, storage and database. The expansion also included developing and producing media content.
Secondly, Amazon.com, Inc. increased its physical retail presence through the acquisition of Whole Foods Market and launching Amazon Go store (Penzel, Kryvinska & Strauss, 2017). Thirdly, the company expanded its retail presence by focusing on the international segment. These growth strategy alternatives positively influenced the profitability of the company. For example, these strategies resulted in rapid increases in net income during the last five years. In terms of the successfulness, these strategies seemed to be aligned with the four principles of Amazon.com: customer obsession, passion for invention, commitment to operational excellence and long-term thinking (Amazon.com, Inc., 2018). The most successful strategy was expanding the range of services through AWS.
The share of sales of the AWS segment has been increasing since 2015 (Amazon.com, Inc., 2018). In addition, the AWS segment has a great potential for increasing profitability thanks to a predominant share of fixed costs in the cost structure of this segment. In addition, the AWS segment has shown two digits growth in sales and operating income in recent years. Among the three alternatives, the geographical expansion is the least successful one because the international segment has resulted in operating loss of $699 million, $1.28 billion, and $3.06 billion in 2015, 2016, and 2017 (Amazon.com, Inc., 2018). However, this strategy has many benefits in the long term.
During the last five years, Amazon.com made a plenty of acquisitions and investments. Investing activities of Amazon.com correspond with “cash capital expenses, such as leasehold improvements, software and website development costs, cash outlays for acquisitions, investments in other companies and intellectual property rights, and operations with marketable securities” (Amazon.com, Inc., 2018, p. 23). For example, on August 28, 2017, Amazon.com acquired Whole Foods Market (Cusumano, 2017). Also, the company is committed to investing in technology and content, including AWS and technology infrastructure. In addition, Amazon.com invest in “expansion of new and existing product categories and service offerings” (Amazon.com, Inc., 2018, p. 20). The financial value of the acquisitions and investments is as follows: net cash used in investing activities was $6.5 billion, $9.9 billion and $27.8 billion in 2015, 2016 and 2017 (Amazon.com, Inc., 2018).
The increases in investment expenditures were mostly caused by cash paid for acquisitions and capital expenditures in technology infrastructure to support AWS (Penzel et al., 2017). In 2017, the company significantly increased cash capital expenditures and cash payments related to acquisitions. For example, cash payments related to acquisition totaled at $14.0 billion 2017, compared to $795 million and $116 million in 2015 and 2016 respectively. In 2017, the company acquired Whole Foods Market for $13.2 billion, an e-commerce business Souq for $583 million, and some other technology companies for $204 million. In 2016 and 2015, Amazon.com acquired companies for $103 million and $690 million respectively. Cash capital expenditures on technology investments to support AWS totaled at $10.1 billion in 2017, compared to $4.6 billion and $6.7 billion in 2015 and 2016 respectively. The acquisitions and investments had a positive impact on profitability during the accounting period as the profit margin increased from 1.35% in 2015 and 1.71% in 2016 to 3.07% in 2017.
The equity investments and impairments resulting from the acquisitions and investments by Amazon.com result lead to the fact that the company owns nearly 40% of the domestic e-commerce market (Cusumano, 2017). The strategy of Amazon.com is to invest its excess cash in fixed income securities and AAA-rated money market funds. In terms of equity investments, Amazon.com states that equity investments are accounted as other assets using equity method if the investment gives the company influence, but not control. Equity investments that do not give the ability to exert influence are also accounted as other assets. Equity investments with determinable fair values are accounted as marketable securities. The value of equity investments as of 2017 in public and private companies was $737 million. When it comes to the financial effect, the equity-method investment resulted in losses of $22 million, $96 million and $4million in 2015, 2016, and 2017 (Amazon.com, Inc., 2018). In 2016, Amazon.com faced significant equity-method investment losses and impairments. However, the strategy of Amazon was creatable because the company has the ability to exercise significant influence over investees operating within the e-commerce industry.
Growth in the European market can have a significant impact on current earnings and profit for Amazon.com. Amazon.com, Inc. faces the risk of foreign exchange. The expansion of international operations has increased the exposure of Amazon.com to exchange rate fluctuations. The growth of the European market is likely to strengthen its currency, Euro. Since the financial reporting currency of Amazon.com is the US Dollar, strengthening of Euro relative to the US Dollar will result in higher consolidated net sales and operating expenses. The share of sales of the international segment in total net sales is 30% (Amazon.com, Inc., 2018). Therefore, the weakening of the US Dollar relative to Euro in case of the growth in the European market would increase current earnings and profit of Amazon.com.
