COMMERCE RESEARCH / MULTI-CHANNEL ECOMMERCE

The 19 Ecommerce Growth Challenges

of 2018, Outlined by Amazon’s Annual
Report

Kaleigh Moore

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.
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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.
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).

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.

Image source

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.