Amazon was built for the pandemic—and will likely emerge from it stronger than ever
If you were designing a company from scratch that could capitalize on a global crisis, it would probably look a lot like Amazon. A fearsome operating machine that inspires equal measures of dread and admiration throughout the business world, the $280-billion-in-sales tech behemoth can react with the speed of the nimblest startup when challenged. Look no further than the company’s response this year to the coronavirus, which founder and CEO Jeff Bezos described to shareholders in late April as “the hardest time we’ve ever faced.”
Amazon’s leadership team recognized early on that the pandemic could be a historically disruptive event. And Bezos, who’d been spending one day a week at his rocket company, Blue Origin, quickly became more involved in Amazon’s operations, meeting daily with his “S” (for senior) team—a group of top executives, many of whom have been with the company for a decade or more. Almost overnight, Amazon ramped up its already massive online retail business to meet a huge surge in orders in the first quarter, as customers hunkered down at home and turned to the web for essential supplies. To bolster its response, the company embarked on an effort to vet and hire 175,000 additional employees.
The rapid mobilization paid off. For the three months ended in March, Amazon brought in $75.4 billion in revenue—a 26% gain over 2019. Sales at Amazon Web Services, the company’s cloud-computing business, crossed $10 billion in a quarter for the first time, as customers like streaming entertainment giant Netflix, videoconference sensation Zoom, and workplace-collaboration tool Slack experienced huge spikes in usage. Through early May, Amazon’s stock was up 25% for the year. And the net worth of Bezos, already the world’s wealthiest person, had surged to $144 billion—a leap of $29 billion in a matter of months.
As is often with case with Amazon, the extraordinary results didn’t come without controversy. The company had to respond to the thousands of shadowy sellers who began price-gouging on its site. Then, on May 1, some Amazon workers participated in a nationwide “sickout” to protest what they described as inadequate safety precautions by the company in its facilities. Amazon terminated a handful of employees this spring who were outspoken in their criticism of the company’s safety practices. (In each case the company said the firings were because of violations of company policies, not in retaliation for speaking out.) In announcing its first-quarter results, Amazon said that in the second quarter it would spend some $4 billion or more on COVID-related expenses, including increased salaries for frontline workers, protective gear, and employee testing—enough to cancel out all of its expected operating profits for the period. For Amazon, it’s a small price to pay in order to get the focus back on execution.
Amazon’s reputation for speedy delivery has suffered a little during the crisis as well. Before the pandemic, the norm for most of the company’s Prime customers was one-day delivery and same-day for groceries. Since the pandemic hit, essential items like household staples and medical supplies have taken as many as four days, and nonessential items even longer. Amazon, which is relatively new to the grocery game—it bought Whole Foods in 2017—has been deluged with food orders, and in many cities the company simply hasn’t been able to offer enough delivery slots to fulfill demand.
Despite those stumbles, the consensus on Wall Street is that Amazon will emerge from the coronavirus crisis bigger and stronger than ever—and with consumers even more reliant on its breadth of products and services. “No company can handle the kind of surge in demand that Amazon can,” says Mark Mahaney, the veteran tech industry analyst at RBC Capital Markets. “When the pandemic is really over, the physical retail competition will be weakened—and Amazon comes out of this a winner.”
As always, Bezos is playing the long game. And it’s a strategy that has produced spectacular results. This year Amazon jumped three spots on the Fortune 500 list to No. 2—its highest ranking ever. Since the company first made the list in 2002 at No. 492, its market value has risen more than 22,000%—it was hovering at around $1.2 trillion in early May—and the company’s sales have grown an average of 28% annually. Studying the formula behind that stunning growth trajectory is key to understanding just how much more powerful Amazon may become over time.
Since the day Bezos founded Amazon in 1994, it has essentially been a data-driven company that just happened to do retailing. Over that quarter-century span, Bezos built perhaps the most sophisticated and successful data-powered corporation the world has ever seen. Amazon’s online retail business is powered by algorithms that scan buying patterns second by second and adjust what the company stocks in its vast warehouses, where to stock it, and the fastest way to deliver it.
Well before the pandemic, Amazon was using its digital might to increasingly insinuate itself into our lives. Some 150 million Prime members—a number that grew by 50 million in less than two years—order clothing, staples, and electronics from the e-commerce giant, watch original Prime Video movies and TV shows, and listen to music on Amazon’s streaming media channels. Even consumers who don’t actively use Amazon’s website to shop spend much of their digital lives using services like Netflix that run on Amazon’s ubiquitous AWS servers.
Now the pandemic has accelerated these trends more than anyone could have imagined—and America’s increased reliance on Amazon’s services is likely to stick. Some have even argued that Amazon is becoming a kind of corporate Red Cross, given its essential role in providing supplies for strapped local and state governments. Gene Munster, a partner at the research and investment firm Loup Ventures, told Fortune in a recent interview: “The U.S. would be in a tighter spot if it were not for Amazon. It is a national asset.”
More opportunities for expansion lie ahead. While Amazon dominates the U.S. e-commerce market with a 38% share, it accounts for only about 5% of total retail in the U.S. Pre-COVID-19, some 90% of all retail still occurred in brick-and-mortar stores. But until scientists discover an effective vaccine—and under the best-case scenario, that’s at least months away—many shoppers will be reluctant to return to malls and department stores. That means more will keep reaching for Amazon’s buy button. Even after the virus is contained, it’s easy to imagine that Amazon’s grocery business will continue to thrive. RBC predicts the segment, driven in part by online sales, will reach $88 billion in gross revenues by 2023—nearly double the 2020 level.
Amazon also sees an opportunity to use the virus to expand into new areas. Alexa, its magical voice genie, can now answer tens of thousands of COVID-19 questions such as, “Alexa, what do I do if I think I have the virus?” Or, “Alexa, give me tips for cleaning and disinfecting my home.” The company has even patented a technology that will enable Alexa to recognize the sound of a cough. How long before Amazon enters telemedicine? (It’s already offering its Amazon Care telehealth service to its Seattle employees.)
At the same time, Bezos has jumped headlong into the autonomous electric-vehicle race. He has invested billions to build a future in which packages will be delivered by self-driving vans, small bots rolling through neighborhoods, and drones buzzing to their destinations. One thing all those delivery options have in common? They’re impervious to the coronavirus. (Though potentially vulnerable to a computer virus.)
How did Amazon adapt so quickly to the pandemic? One of the company’s great strengths is that it’s run like a federation of independent nations, each with its own leader and citizens. In Seattle, where the company is headquartered, there’s no central corporate suite for the heads of all the business units. The execs are spread throughout the city, running their own operations. Bezos, of course, is the leader of the federation, and his word on important decisions is final. But his lieutenants have more latitude to move quickly, make decisions and investments, and pursue new innovations than is typical in today’s corporations.
From the outside, this structure seems like a recipe for disaster: fiefdoms operating in separate buildings scattered throughout downtown Seattle. But it works. And for one reason only. Bezos has inculcated his business with three bedrock principles that guide all decision-making: customer obsession, extreme innovation, and long-term management. Just about any CEO worth his or her stock options claims to follow some or most of these principles—so much so that they’ve become leadership clichés. Most, however, fail to execute them consistently and over long periods. Under Bezos, Amazon does.
Bezos’s secret is what he calls his flywheel, a conceptual engine that drives his three deeply seated values. At heart, the flywheel—a concept popularized by management guru Jim Collins—is a metaphor for a virtuous cycle. Rather than focusing on the competition, Amazonians spend their every working moment trying to make their customers’ lives better. One way is to lower costs. By doing that, Amazon increases the number of customers who visit Amazon.com. That attracts more independent sellers who want to reach the growing traffic on Amazon’s platform, which leads to more revenue for Amazon. That in turn leads to economies of scale, which help further lower prices for customers. The lower prices pull in still more customers. And the flywheel keeps turning and turning and turning.
It is this flywheel concept, which every Amazon manager knows by heart, that enables the giant corporation to operate as a federation of independent nations. Employees don’t have to wonder what their role is. Their job is to push the flywheel a little harder every day.
When the pandemic is really over, the physical retail competition will be weakened—and Amazon comes out of this a winner.Mark Mahaney, technology industry analyst at RBC Capital Markets
To keep building Amazon’s momentum, Bezos understood that his company had to continually renew each element of the flywheel by innovating. This meant Amazonians had to think imaginatively. They had to ask constantly what they could do to please customers and to attract more third-party sellers. “We are eager to pioneer and invent,” Bezos said last year. “This marries well with customer obsession, because customers are always dissatisfied even if they don’t know it, even when they think they’re happy. They always want a better way, and they don’t know what that will be. I warn people that customer obsession is not just listening to customers, it’s also inventing on their behalf.”
Every new innovation—Prime membership with one-day free shipping, free video and audio streaming, the Kindle, Fire TV, the Echo smart speaker, and Alexa—is designed to attract new customers and keep current ones happy.
As for being long-term oriented, Bezos has always known that building and maintaining a flywheel is a long, hard slog. All of Amazon’s major innovations—from the Kindle to AWS to the Echo—were many years in the making. Even when Amazon failed, as in the case of its late-to-market and mediocre Fire Phone, it kept innovating. Bezos felt deeply that failures were inevitable but even flops might pay off in the long run. Some of the learning from the failed Fire Phone, for instance, ended up in the Echo.
The relentlessness of Amazon’s push for efficiency and dominance has drawn accusations that the company has at times crossed anticompetitive lines. In late April, the Wall Street Journal published an investigative report alleging that Amazon had used inside information about sellers on its platform to develop competing products and then undercut the vendors on price. That prompted Congress to request that Bezos testify before the House Judiciary Committee. Amazon has said it is cooperating with the committee, but it is not clear whether Bezos will agree to testify. In response to the Journal article, Amazon said that using pricing data to undercut vendors would violate its policies and that it has launched an internal investigation.
Over the past decade, Bezos has taken the flywheel concept to an even higher level. Amazon is now applying big data, A.I., and machine learning to the operation at an unprecedented rate—to make it spin even faster on its own. This capacity is what helped Amazon respond so swiftly to the pandemic. In his 2016 shareholder letter, Bezos explained the power of such models: “Machine learning drives our algorithms for demand forecasting, product search ranking, deals recommendations, merchandising placements, fraud detection, translations, and much more.”
Think of this new iteration as the A.I. flywheel. The tens of thousands of engineers, data scientists, and programmers whom Bezos has hired have made the A.I. flywheel a learning machine, a cyber contraption with its own intelligence that takes all the data that Amazon collects on its customers and then analyzes it in minute detail. The machine makes decisions about what items to purchase, how much to charge for them, and where in the world to stock them. As Jeff Wilke, CEO of Amazon’s worldwide consumer division, explains: “In the old days we used data to help make decisions, but humans still made the ultimate decisions. Part of what we’re doing now with machine learning is taking some of the most repetitive intellectual processes and eliminating the requirement for human decision-making. We are able to close the loop so humans no longer have to decide. We place buy orders for millions of items automatically.”
Even scarier for its competitors is how much smarter Amazon’s algorithms may get from all the pandemic-fueled activity. Unlike businesses that are cutting budgets to stay afloat, Amazon is built to optimize in a crisis. It will almost certainly emerge on the other side delivering better service, at lower prices, to its customers. And the flywheel will keep on turning.
A version of this article appears in the June/July 2020 issue of Fortune with the headline “Amazon Was Built for the Pandemic.”