Amazon.com, Inc. - 2009 Annual Report & 1997 Shareholder Letter Briefing
Sources: Amazon Inc. – 2009 Proxy Statement
Amazon Inc. - 2009 Letters to Shareholders
Amazon Inc. - 2009 Annual Report
I. Executive Summary
This briefing document analyzes Amazon.com's strategic priorities, operational philosophy, and financial performance, drawing insights from its 2009 Annual Report and the foundational 1997 Shareholder Letter. A core theme across both documents is Amazon's unwavering "obsession over customers" and a relentless focus on long-term value creation over short-term financial metrics. This customer-centric approach, coupled with strategic investments in technology, selection, and infrastructure, has driven significant growth and expansion since the company's inception.
II. Amazon's Fundamental Philosophy: Customer Obsession & Long-Term Focus
Amazon's strategic approach is deeply rooted in its "Day 1" philosophy, first articulated by Jeff Bezos in 1997 and reaffirmed in 2009. The company consistently prioritizes customer experience and long-term shareholder value over immediate financial outputs.
A. Customer-Centricity ("Start with customers, and work backwards.")
Core Principle: "Start with customers, and work backwards. Listen to customers, but don’t just listen to customers – also invent on their behalf." This principle guides all strategic decisions and product development.
Key Improvements (2009 Reflection): The 2009 financial results are attributed to "the cumulative effect of 15 years of customer experience improvements: increasing selection, speeding delivery, reducing cost structure so we can afford to offer customers ever-lower prices, and many others."
Customer Metrics Focus: In 1997, Amazon measured market leadership by "customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand."
Customer Feedback & Engagement: In 2009, approximately 7 million customer reviews were added worldwide, demonstrating active customer engagement and feedback integration.
Direct Impact on Goals: For 2010, "360 of the 452 goals will have a direct impact on customer experience," highlighting the pervasive nature of this focus within the company's operational planning.
B. Long-Term Value Creation over Short-Term Profits
Shareholder Value: "We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position." (1997)
Input-Oriented Management: "Senior leaders that are new to Amazon are often surprised by how little time we spend discussing actual financial results or debating projected financial outputs. To be clear, we take these financial outputs seriously, but we believe that focusing our energy on the controllable inputs to our business is the most effective way to maximize financial outputs over time." (2009)
Goal Setting Reflects Priorities: In the 2010 goals, "The word revenue is used eight times and free cash flow is used only four times. In the 452 goals, the terms net income, gross profit or margin, and operating profit are not used once." This explicitly demonstrates the emphasis on operational drivers rather than traditional short-term accounting metrics.
Investment Philosophy: Amazon prioritizes "long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions." (1997) This includes making "bold rather than timid investment decisions" even if some don't immediately pay off.
Cash Flow over GAAP Appearance: "When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows." (1997) This underscores a pragmatic financial approach focused on underlying economic value.
Growth Prioritization: In its early stages (1997), Amazon explicitly chose to "prioritize growth because we believe that scale is central to achieving the potential of our business model." This scale is seen as directly translating to "higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital."
III. Key Operational and Business Highlights (2009)
Amazon demonstrated significant expansion and innovation across various business areas in 2009, reinforcing its strategic pillars.
A. Financial Performance
Net Sales: Increased 28% year-over-year to $24.51 billion in 2009, which is "15 times higher than net sales 10 years ago when they were $1.64 billion in 1999."
Free Cash Flow: Increased 114% year-over-year to $2.92 billion in 2009. Amazon explicitly states its "financial focus is on long-term, sustainable growth in free cash flow per share."
Operating Income: Rose to $1.129 billion in 2009 from $842 million in 2008.
Profitability vs. Margins: Amazon "generally focus[es] on growing gross profit and operating profit dollars rather than maximizing margin percentages."
Efficient Operating Cycle: High inventory velocity means Amazon "generally collect[s] from our customers before our payments to suppliers come due." Inventory turnover was 12 for 2009, and accounts payable days were 68.
B. Product and Service Expansion
Selection & Categories: Added 21 new product categories globally in 2009 (e.g., Automotive in Japan, Baby in France, Shoes and Apparel in China). The number of items available for immediate shipment grew over 50%.
Amazon Prime: Worldwide memberships significantly increased, indicating strong customer adoption of free and fast shipping services, viewed as an "effective worldwide marketing tool."
Zappos Acquisition: In November 2009, Amazon acquired Zappos, a "leader in online apparel and footwear sales that strives to provide shoppers with the best possible service and selection," enhancing Amazon's presence in softline retail.
Kindle Ecosystem: The U.S. Kindle Store expanded to over 460,000 books (up from 250,000) and included 103 of 110 New York Times Bestsellers. Kindles were shipped to over 120 countries, with content in six languages.
Third-Party Sellers: Sales by third-party sellers accounted for 30% of unit sales in 2009, with active seller accounts increasing 24% to 1.9 million. Fulfillment By Amazon (FBA) enabled over one million unique items to be eligible for Free Super Saver Shipping and Amazon Prime.
C. Technology and Infrastructure
Amazon Web Services (AWS): Continued "rapid pace of innovation," launching new services like Relational Database Service and Virtual Private Cloud, and expanding globally. AWS added "more customers in 2009 than ever before, including many large enterprise customers."
Investment in Technology: Amazon expects "spending in technology and content will increase over time as we add computer scientists, software engineers, and employees involved in category expansion, editorial content, buying, merchandising selection, and systems support."
Website Enhancements: Shoes and apparel teams created over 121,000 product descriptions and uploaded over 2.2 million images for an improved "vivid shopping experience."
Fulfillment Network: Continual expansion of fulfillment capacity to accommodate greater selection and meet shipment volumes.
IV. Core Values and Operational Principles
Beyond financial results, the documents highlight Amazon's foundational principles influencing its daily operations.
Lean Culture & Wise Spending: "We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses." (1997)
Talent Acquisition & Retention: "Setting the bar high in our approach to hiring has been, and will continue to be, the single most important element of Amazon.com’s success." (1997) Compensation is weighted towards stock options to ensure employees "think like, and therefore must actually be, an owner." (1997)
Work Ethic: "It’s not easy to work here (when I interview people I tell them, 'You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three'), but we are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about. Such things aren’t meant to be easy." (1997)
Continuous Improvement & Invention: The company is "dedicated to improving further" and acknowledges that many of its 2010 goals "will not be achieved without invention." (2009)
Vigilance and Urgency: Despite optimism, Amazon maintains a "sense of urgency" given the "aggressive, capable, well-funded competition" and "considerable growth challenges and execution risk." (1997)
V. Risks and Challenges Identified
Amazon acknowledges several inherent risks in its business model and rapid expansion.
Intense Competition: Facing numerous competitors with "greater resources, longer histories, more customers, and greater brand recognition" across retail, e-commerce services, digital content, and web services. The Internet facilitates competitive entry and comparison shopping.
Strain from Expansion: Rapid global expansion increases business complexity and strains management, operations, systems, and financial resources.
New Market Segments: Limited experience in newer segments and potential for lower profitability in these areas.
Operating Results Fluctuations: Inability to accurately forecast growth, fixed expenses, softening demand, and various operational factors can lead to volatility.
International Expansion Risks: Local economic/political conditions, government regulation, business licensing, repatriation limitations, limited infrastructure, payment risks, cultural differences, and geopolitical events. Specific mention of regulatory uncertainties in China with Joyo.com.
Fulfillment Optimization: Risks related to predicting customer demand, managing inventory, staffing, and reliance on shipping companies and third-party fulfillment. Seasonality places increased strain on operations.
Intellectual Property: Challenges in protecting IP rights and potential claims of infringement from third parties.
Business Model Evolution & Stock Volatility: The rapidly evolving business model contributes to significant fluctuations in stock price.
Government Regulation: Evolving laws on taxation, privacy, consumer protection, and unencumbered Internet access could impede growth or increase costs.
Vendor Relationships: Lack of long-term arrangements with most vendors poses risks to availability and terms.
Payments-Related Risks: Fees, reliance on third-party processors, compliance with payment rules, and potential liability for fraudulent activities by sellers.
Security Breaches: Risk of failure to protect consumer information and prevent fraudulent transactions.
VI. Corporate Governance and Financial Reporting
Board Structure: The Board of Directors includes eight members, with Jeff Bezos as Chairman, President, and CEO.
Independent Directors: Eight of the directors are classified as independent under Nasdaq rules.
Committees: The Board has established an Audit Committee, a Leadership Development and Compensation Committee, and a Nominating and Corporate Governance Committee, all composed of independent directors.
Director Compensation: Directors do not receive cash compensation but are eligible for stock-based awards (restricted stock units) which vest over several years, aligning their interests with long-term shareholder value. Jeff Bezos has never received stock-based compensation from the company due to his substantial ownership.
Executive Compensation Philosophy: Primarily stock-based compensation to align with long-term shareholder value. Base salaries are "significantly less than those paid by similarly situated companies." New-hire cash bonuses are designed to bridge compensation until stock-based awards vest.
Financial Audits: Ernst & Young LLP is the independent auditor. The Audit Committee oversees financial statements, internal controls, and auditor independence.
VII. Future Outlook (as of 2009 Report)
Continued Investment: Plans for "significantly increase[d] capital expenditures for additional investments in corporate office space and in support of continued business growth, including capacity to support our fulfillment operations and Amazon Web Services."
International Growth: Expects the "International segment will represent 50% or more of our consolidated net sales" over time.
Product Mix Shift: Anticipates an increasing relative mix of sales from "electronics and other general merchandise" as it offers increased selection and lower prices in these categories.
Accounting Standard Update: Prospective adoption of ASU 2009-13 (SFAS 167) as of January 1, 2010, affecting revenue recognition for multi-element arrangements like Kindle sales, though the exact impact on future periods is not estimable.
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