Amazon.com, Inc. 2013 Annual Report and Proxy Statement Briefing
Sources: Amazon Inc. – 2013 Proxy Statement
Amazon Inc. - 2013 Additional Proxy Material
Amazon Inc. - 2013 Letters to Shareholders
Amazon Inc. - 2013 Annual Report
I. Executive Summary
This briefing summarizes key information from Amazon's 2013 Annual Report (specifically the "Letter to Shareowners" and Form 10-K) and the 2013 Proxy Statement. The documents highlight Amazon's unwavering commitment to customer obsession, long-term investment, and continuous innovation. In 2013, Amazon continued to expand its product and service offerings across various sectors, including e-commerce, digital content, cloud computing, and fulfillment. The company's financial strategy prioritizes long-term free cash flow growth over short-term profitability, fueled by increased operating income and efficient capital management. Challenges include intense competition, managing rapid global expansion, and evolving regulatory landscapes.
II. Core Business Philosophy & Strategy
Amazon's fundamental approach, consistent since its 1997 letter to shareholders, is rooted in:
Customer Obsession: "We seek to be Earth’s most customer-centric company." (2013 Form 10-K, p. 3). The goal is to "reinvent normal" and "get customers to say 'Wow.'" (2013 Letter, p. 1). This is achieved through focusing on selection, price, and convenience, including faster delivery and ease of use.
Long-Term View: "We believe that a fundamental measure of our success will be the shareholder value we create over the long term." (1997 Letter, p. 1). This involves making "investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions." (1997 Letter, p. 2).
Invention and Experimentation: Amazon fosters a "patient, pioneering, customer-obsessed culture" where "great innovations, large and small, are happening everyday on behalf of customers, and at all levels throughout the company." (2013 Letter, p. 2). The company embraces "failing early and iterating until we get it right." (2013 Letter, p. 2). In 2013, Amazon ran 1,976 internal experiments (Weblabs).
III. Key Business Areas & 2013 Highlights
Amazon operates across two primary geographic segments: North America and International, serving consumers, sellers, enterprises, and content creators.
A. E-commerce & Consumer Offerings
Prime: Continued significant growth with "tens of millions of Prime members worldwide" in 2013. The number of eligible products grew from 1 million at launch to over 20 million, with added digital benefits like Kindle Owners’ Lending Library and Prime Instant Video.
Digital Content (Readers & Authors):Kindle: Launched the high-resolution Kindle Paperwhite, integrated Goodreads, introduced FreeTime for Kindle, and expanded Kindle availability to India, Mexico, and Australia.
Publishing: Introduced Kindle Worlds, Day One literary journal, eight new Amazon Publishing imprints, and launched Amazon Publishing in the UK and Germany, empowering "thousands of authors... to build fulfilling writing careers." (2013 Letter, p. 1).
Audible: 2013 was a "landmark year," with nearly 600 million listening hours downloaded. The "Whispersync for Voice" feature allows seamless switching between Kindle reading and Audible listening, called "Amazon’s new killer app for books" by The Wall Street Journal.
Prime Instant Video (PIV): Experienced "tremendous growth across all metrics." Selection expanded from 5,000 titles in 2011 to "more than 40,000 movies and TV episodes" by 2013, including exclusive TV seasons. Amazon Studios invested heavily in original content, greenlighting six new originals in 2013.
Fire TV: Launched in 2014 after two years of development, offering "fast and fluid" streaming with "ASAP technology" for instant starts. Features voice search and access to over 200,000 movies and TV episodes, plus high-quality games.
Amazon Game Studios: Launched "Sev Zero," a Fire TV exclusive, demonstrating the capability for "intense moments" of gameplay on inexpensive streaming devices. Plans for more innovative games for Fire tablets and Fire TV.
Amazon Appstore: Expanded to nearly 200 countries with over 200,000 apps and games. Introduced Amazon Coins (saving customers up to 10%), Whispersync for Games, Mobile Associates program, and Appstore Developer Select. Also embraced HTML5 web app developers.
Fresh Grocery: Expanded Amazon Fresh to Los Angeles and San Francisco after five years of trials in Seattle. "Prime Fresh members pay $299 a year and receive same-day and early morning delivery" on groceries and over 500,000 other items, partnering with local merchants.
Fast Delivery: Partnered with USPS to offer Sunday delivery in select cities, with plans for nationwide rollout in 2014. Developed "fast, last-mile delivery networks" in the UK and uses bike couriers in India and China due to less mature infrastructure. Prime Air (drone delivery) team is "flight testing our 5th and 6th generation aerial vehicles."
Apparel and Shoes: Amazon Fashion experienced a "boom," with premium brands utilizing the platform to reach "fashion-conscious, high-demo customers." Features include free returns, detailed photos, and video clips. Opened a new 40,000 sq ft photo studio in Brooklyn, shooting over 10,000 photos daily.
Frustration-Free Packaging: Program grew to "over 200,000 products," designed to be "easy-to-open, recyclable packaging." Partnered with over 2,000 manufacturers and eliminated "33 million pounds of excess packaging to date."
Fulfillment by Amazon (FBA): Seller adoption grew by "more than 65% last year." FBA allows sellers to store products in Amazon's fulfillment centers, benefiting from its network and Prime eligibility. Survey showed "nearly three out of four FBA respondents reported that their unit sales increased on Amazon.com more than 20% after joining FBA."
Login and Pay with Amazon: Expanded service allowing customers to pay on external sites using their Amazon account credentials, boosting merchant conversions (e.g., Cymax Stores saw 20% of orders, tripling new account registrations, and increasing purchase conversion by 3.15%).
Amazon Smile: Launched in 2013, enabling customers to support charities by donating a portion of eligible purchase prices when shopping at smile.amazon.com. Nearly a million charities available.
The Mayday Button: Introduced on Fire HDX, offering "on-device tech support" with an "Amazon expert" appearing on screen. Response time goal is "15 seconds or less," achieved an average of 9 seconds on Christmas. Amusing interactions included marriage proposals, pizza orders, and birthday songs.
B. Enterprise & Infrastructure Offerings
Amazon Web Services (AWS): Eight years old with an "accelerating pace of innovation." Launched 280 significant services and features in 2013 (up from 61 in 2010). Expanded geographic footprint to 10 regions, 26 availability zones, and 51 edge locations. Prices reduced "more than 40 times in the past 8 years."
IV. Employee & Corporate Initiatives
Employee Empowerment:Career Choice: Pre-pays 95% of tuition for employees in "in-demand fields," regardless of relevance to Amazon careers, to "enable choice."
Pay to Quit: Annual offer to pay associates to quit (starting at $2,000, increasing to $5,000). Headline: "Please Don’t Take This Offer." Aims to encourage employees to reflect on their desires, as "an employee staying somewhere they don’t want to be isn’t healthy for the employee or the company."
Virtual Contact Center: Allows employees to provide customer service from home, offering flexibility for parents or others. "Our fastest growing 'site' in the U.S."
Veteran Hiring: Actively recruits military veterans (hired over 1,900 in 2013) due to their leadership qualities (invent, think big, bias for action, deliver results). Offers programs to aid transition into civilian workforce and internal veteran networks.
Fulfillment Innovation: 96 fulfillment centers (7th generation design). Utilizes "Kaizen program" for continuous improvement, with employees streamlining processes and reducing defects. Rolled out 280 major software improvements in 2013. Offers public tours of fulfillment centers.
Urban Campus: Investing in new Seattle headquarters (four city blocks, millions of sq ft) despite higher costs than suburbs, believing it's "much greener," reduces car dependence, attracts talent, and benefits employee wellbeing and the city.
Corporate Governance: The Board is responsible for company control and direction, aiming to "build long-term shareholder value." The CEO, Jeff Bezos, also serves as Chair of the Board. An independent lead director (Mr. Alberg) presides over independent director sessions and Board meetings in the Chair's absence. The Board prioritizes director independence, with all committee members being independent. Risk oversight is delegated to the Audit Committee (financial, data privacy, operational risks) and the Leadership Development and Compensation Committee (succession planning, compensation risks).
V. Financial Performance & Compensation
Revenue Growth (2013): Total net sales grew 22% to $74.452 billion. North America sales grew 28%, International sales grew 14%.
Operating Income (2013): Income from operations was $745 million, an increase of 10% from 2012.
Free Cash Flow (2013): $2.0 billion, a key financial focus for long-term sustainable growth.
Inventory Management: High inventory velocity results in a cash-generating operating cycle, typically collecting from consumers before paying suppliers. Inventory turnover was 9 for 2013.
Capital Expenditures: Increased significantly over recent years, reflecting investments in fulfillment operations, technology infrastructure (including AWS), and acquisitions.
Compensation Philosophy: Emphasizes tying total compensation to long-term shareholder value, primarily through stock-based compensation (restricted stock units). Base salaries are kept significantly lower than competitors. Jeff Bezos does not receive stock-based compensation and has a low salary ($81,840 in 2012) due to his "substantial stock ownership (approximately 19%)." (2013 Proxy, p. 15). The company does not offer nonqualified deferred compensation, supplemental executive retirement plans, or cash severance programs. Security costs for Mr. Bezos are considered "reasonable and necessary" for the company's benefit.
VI. Risks and Challenges
Intense Competition: Amazon faces "rapidly evolving and intensely competitive" markets across retail, e-commerce, digital content, and cloud services, with competitors potentially having "greater resources, longer histories, more customers, and/or greater brand recognition." (2013 Form 10-K, p. 6).
Expansion Strain: Rapid global expansion and diversification into new product/service offerings "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." (2013 Form 10-K, p. 6).
International Market Risks: Expansion into new international markets carries risks such as "local economic and political conditions," "government regulation," "limited fulfillment and technology infrastructure," and "difficulty in staffing, developing, and managing foreign operations as a result of distance, language, and cultural differences." (2013 Form 10-K, p. 7).
Operating Result Fluctuations: Sales and operating results can fluctuate due to factors like customer retention, new customer acquisition, ability to offer favorable product terms, competitive introductions, and investment levels.
Inventory Risk: Significant risks from seasonality, new product launches, rapid product cycle changes, and consumer demand shifts can lead to "excess or insufficient inventory or fulfillment capacity." (2013 Form 10-K, p. 7).
System Interruption: Occasional system interruptions and delays could make websites and services unavailable, reducing sales and attractiveness.
Intellectual Property: Challenges in protecting IP rights globally and risk of claims from third parties for alleged infringement.
Stock Price Volatility: Amazon's stock price is highly volatile due to various factors, including market conditions, operating results, and analyst expectations.
Government Regulation: Evolving regulations on the Internet, e-commerce, and devices (e.g., taxation, privacy, competition) can "impede our growth" and "increase our cost of doing business." (2013 Form 10-K, p. 9). This includes sales tax collection obligations.
Supplier Dependence: Reliance on a limited number of shipping companies and key suppliers, without long-term agreements, poses risks to availability and delivery.
Legal Proceedings: Involved in various claims, proceedings, and litigation, including patent infringement and wage-and-hour lawsuits, which are "inherently unpredictable" and could materially impact results.
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