A version of this essay was originally published at Tech.pinions, a website dedicated to informed opinions, insight and perspective on the tech industry.
When Amazon reported its financial results recently, foreign exchange fluctuations played a big role. They caused a roughly $1.3 billion hit to “International Revenues.” However, even without the impact of those foreign exchange movements, international would have continued the pattern of growing more slowly than the North American business:
This pattern has been going on for some time, and it’s all the more worrying because it’s not like Amazon is failing to invest in this business, or capturing margins at the cost of growth. It’s losing money, too:
Whereas the North American business has positive operating margins almost every quarter, the reverse is true for the international segment, which loses money almost every quarter. Given that Amazon’s business is so much smaller internationally, with even more headroom for growth, this combination of slower growth and lower profits is rather concerning. So what’s behind this?
Density and proximity are key factors
One of Amazon’s key strategies in its e-commerce business has been getting closer and closer to its customers so as to be able to offer more and more competitive features. Amazon now has a business increasingly different by geography, with many of its newer services and features exclusive to particular geographical areas, even within the U.S. The diagram below illustrates this pattern, with the size of circles representing the geographic reach of different products:
A number of these services depend on building accompanying infrastructure, especially Amazon’s own distribution and fulfillment centers. They also rely heavily on deals with partners such as retailers (for Amazon Locker) or the U.S. Postal Service (for Sunday and same-day deliveries). These services are therefore increasingly tough to scale outside local delivery areas and especially to scale to new countries where those partners may not have any presence at all. Amazon’s fulfillment network is particularly critical here.
In the U.S., it has more than 60 fulfillment and distribution centers, with approximately 50 million square feet of space, dwarfing its presence in any other country (Germany and China are next, with less than 10 million square feet each). Whereas in the past, Amazon was able to differentiate solely on the basis of its massive online selection and low prices, its differentiation going forward increasingly depends on getting very close to customers, and only its scale in the U.S. enables the kinds of innovations it’s deploying here.
Elsewhere, it can’t justify building the infrastructure necessary, and as such, its lack of scale and market share in other countries is actually a vicious circle that will likely prevent it from ever being able to match the services it provides in the U.S., while local competitors with better scale and infrastructure in-country will march ahead.
Amazon should refocus to a handful of countries
The reality is that Amazon’s revenue comes predominantly from a handful of countries. It doesn’t break out every country in detail, but its North America region (made up of the U.S., Canada and Mexico, but dominated by the U.S.), Germany, the U.K. and Japan make up around 95 percent of its revenues. It’s likely these are the only countries in which Amazon can ever hope to achieve the kind of density and scale it has already reached in the U.S., and it might well be served by focusing more explicitly on building scale and density there rather than spreading itself more thinly.
At the moment, it’s investing heavily in China in particular, and to a lesser extent in India, but given the strong local competitors in both countries and the high bar of regulation there, it’s unlikely to succeed in a meaningful way in the long term. It’s already investing essentially all of its cash and profits back into the business, including its current expansion plans, but on an international basis in particular it really doesn’t seem to be paying off. The more thinly it spreads itself, the less effectively it is able to differentiate in any single country outside the U.S., and so this strategy is likely counterproductive.
Amazon’s land-grab mentality
The problem here is that Amazon senses it has a limited window of opportunity to establish itself in key markets before others become too entrenched. It hints at this problem in its most recent quarterly filing with the SEC as part of its risk factors disclosure:
Our international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and websites, and promote our brand internationally. Our international operations may not be profitable on a sustained basis.
This land-grab mentality leads to Amazon’s strategy of spreading its investment thinly across many markets rather than focusing on a few. However, the reality is that in many markets it’s probably already too late to establish the kind of dominant position in online retail Amazon needs to succeed.
Perhaps a better analogy is of a military commander who tries to fight battles on numerous fronts at once, sending small battalions of soldiers to each, rather than using a concentrated force in one or two key locations. Using this strategy, both the military commander and Amazon risk leaving themselves exposed and failing to take a decisive victory in any single spot. I think it’s time Amazon started to recognize this.
Jan Dawson is founder and chief analyst at Jackdaw, a technology research and consulting firm focused on the confluence of consumer devices, software, services and connectivity. During his 13 years as a technology analyst, Dawson has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. Prior to founding Jackdaw, Dawson worked at Ovum for a number of years, most recently as chief telecoms analyst, responsible for Ovum’s telecoms research agenda globally. Reach him @jandawson.
This article originally appeared on Recode.net.