Since 1999, Amazon's disruptive bravado has made “getting Amazoned” a fear for executives in any sector the tech giant sets its sights on. Here are the industries that could be under threat next.

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Jeff Bezos once famously said, “Your margin is my opportunity.” Today, Amazon is finding opportunities in industries that would have been unthinkable for the company to attack even a few years ago.

Throughout the 2000s, Amazon’s e-commerce dominance paved a path of destruction through books, music, toys, sports, and a range of other retail verticals. Big box stores like Toys R’ Us, Sports Authority, and Barnes & Noble — some of which had thrived for more than a century — couldn’t compete with Amazon’s ability to combine uncommonly fast shipping with low prices.

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Today, Amazon’s disruptive ambitions extend far beyond retail. With its expertise in complex supply chain logistics and competitive advantage in data collection, Amazon is attacking a whole host of new industries.

The tech giant has acquired a brick-and-mortar grocery chain, and it’s using its tech to simplify local delivery, such as machine vision-enabled assembly lines that can automatically sort ripe from unripe vegetables and fruit.

Last June, it acquired the online pharmacy service PillPack. Now, it’s building out a nationwide network of pharmacy licenses and distribution that could one day allow Prime users to receive their medications through Amazon.

On its own Amazon Marketplace, the company is using its sales and forecasting data to offer de-risked loans to Amazon merchants at better interest rates than the average bank.



On calls with investors in 2018, executives of public American companies mentioned Amazon more often than they mentioned any other company, public or private. They mentioned Amazon more than they mentioned President Trump — and nearly as much as they mentioned taxes.

We researched the 4 industries where Amazon’s disruptive intentions are clearest today — pharmacies, small business lending, groceries, and payments — as well as 3 industries where Amazon’s efforts are more nascent. The disruptive possibilities in these industries — mortgages, home & garden, and insurance — remain speculative for now, but with Amazon’s scale and advantages, they could soon be a reality.

Below, we lay out the case and the progress that Amazon has made thus far.

Table of contents

The 4 industries Amazon will disrupt in the next 5 years

1. Pharmacies: Making drugs a low-margin commodity

Pharmacy chains like Walgreens and CVS have already seen their retail revenues suffer from the rise of Amazon’s convenient “everything store.” Today, they have a new challenge: in addition to disrupting their “front of store” Amazon is angling to disrupt their core business of drug distribution.

Amazon’s interest in disrupting the drugstore is decades old. In 1999, Amazon bought 40% of Drugstore.com (at the time, a pre-product and pre-revenue company). Bezos would later hire its CEO, Kal Raman, to run hardlines (retail products which are hard to the touch) at Amazon.

Amazon proceeded to lay low in the pharma space until 2016, when Amazon reportedly received its first licenses to sell pharmaceutical products and drugs from various state boards across the United States.

In 2018, Amazon made another move towards gaining footing in this notoriously complex and highly regulated space: it acquired PillPack in a deal worth around $750M.

Image source: AlphaStreet

Amazon’s acquisition of a $100M+ business with pharmacy licenses in all 50 states caused the tickers of Walgreens, CVS, and Rite-Aid to lose about $11B in value overnight — and represents Amazon’s first significant move not just against the major drug store chains, but against the powerful pharmacy benefit managers (PBMs) that manage the dispensation of drugs for major employers, and others in the healthcare supply chain.

Why Amazon is going after pharma

When it comes to pharmaceuticals, there are several reasons that Amazon — and its direct-to-consumer model — could be a good fit in the industry.

Convenience: The process of filling a prescription at a typical brick-and-mortar pharmacy is — between getting there, limited opening hours, and waiting in line — often inefficient and time-consuming. Amazon’s model aims to limit the effort patients need to expend while also getting prescriptions to them within a day or two.

Customer experience: Complaints from users of specialty pharmacies about errors, delays, confusing policies, and poor customer service have been common for years. Amazon’s advantage here comes in its two decades of e-commerce logistics experience — this could help avoid delivery mistakes, a vital consideration for serving people with complex medication needs.

Partnerships: Amazon is working with holding company Berkshire Hathaway and investment bank JPMorgan on a healthcare venture known as Haven, which aims to streamline healthcare. While little has been made public about Haven’s strategy, court testimony from then COO Jack Stoddard stated that an initial goal is to “simplify health insurance.” With its own insurance offering, Amazon would have a potential launch pad to do the work of a traditional pharmacy benefit manager for the partnership’s combined 1.2M employees — and perhaps eventually the wider public.

Pre-existing customer base and distribution capabilities: CVS has announced an experiment in medication delivery, offering $4.99 for next-day delivery. But with 100M Prime subscribers — conditioned to expect free, fast delivery on virtually any good — Amazon will likely be placed to offer better distribution than CVS or other pharmacy chains.

Physical stores: When Amazon acquired Whole Foods in 2017, it also acquired around 450 physical locations where it could theoretically dispense prescriptions the same way that CVS and Rite Aid do. These stores could also serve as hubs for medication delivery via a service like Prime Now, similar to how Amazon offers same-day Whole Foods grocery delivery.

Amazon has also announced plans for a new grocery chain, separate from its acquisition of Whole Foods. These stores would be more like conventional grocers, and could contain pharmacies — either for in-store prescription pickup, or as hubs for a local delivery service.

Streamlined distribution: Amazon’s ambitions in pharmacy may not end at just delivering drugs.

The pharmaceutical supply chain involves all kinds of middlemen, each of whom takes a slice of profit as drugs make their way from the manufacturer to the end-patient user — the kind of messy business model that Amazon has special expertise in disrupting.

In broad terms, patients pay pharmacies for drugs, which pay wholesalers, which in turn pay manufacturers or distributors.

But there are additional layers which make the supply chain more complex. Pharmacy benefit managers (PBMs) negotiate with distributors and manufacturers for better prices on bulk drugs — a service they offer to payers (insurance companies). They also receive a copay from individual patients, and get paid by manufacturers to market their drugs to payers.



Among the different middlemen, PBMs make the lion’s share of the profit from your typical drug transaction. On the sale of a drug with a sticker price of $100, the profit breakdown is roughly:

Wholesaler: $1.00

Pharmacy: $5.00

PBM: $6.00

Virtually every insurance provider outsources its drug procurement to a pharmacy benefit manager. Most major employers use PBMs as well, in their case to help negotiate for better rates on drugs for their employees.

PBM’s core advantage is that they collect from every party along the pharmaceutical supply chain. They increase their margins, while end patients pay higher drug costs because of how complex and inefficient the process is.

In the long-term, Amazon’s skillset and scale could give it the power to disrupt and simplify this supply chain — first in the form of pharmacies themselves, and later, by targeting wholesalers and PBMs.

For more on this topic, check out our research brief on the pharmaceutical supply chain.

How Amazon is going after pharma

Amazon took its first major step in the pharmacy space when it acquired the online pharmacy PillPack for around $750M in 2018.

PillPack delivers users’ medications directly to their homes. Notably, the company sends pills in pre-sorted pouches to be taken at specific times of the day. In addition to sending medications, PillPack includes info sheets that list when to take each medicine, when the current batch of prescriptions will run out, when to expect the next shipment, and more.

The PillPack user experience is designed to be clean, simple, and more intuitive than traditional pharmacies. Image source: PillPack

PillPack’s reach is limited by its distribution licenses. Companies like PillPack that want to deliver medication nationally need to acquire a license from each state for every drug shipping warehouse. Today, it can take up to several weeks for your first PillPack order to arrive because there are only a handful of distribution warehouses, each with its own shipping limitations.

But since Amazon acquired PillPack, the company has accelerated its accumulation of distribution licenses. PillPack was granted nine new pharmacy licenses in early 2019, with at least 3 other applications pending.

Down the road, Amazon may further leverage its tech to expand its healthcare presence. For example, Amazon’s voice assistant Alexa could be used to remind patients to take medications and monitor adherence. The company recently filed a patent where Alexa can detect coughs and sniffles, then recommend cough medications or a restaurant to order soup from. And the Alexa app platform already carries lightweight healthcare apps from institutions like Mayo Clinic and Libertana to answer simple health questions, send alerts in emergencies, and help communicate with caregivers.

In the future, these capabilities could lead to Amazon getting into the diagnosis, drug recommendation, and even the prescription side of pharmaceuticals — though that future is likely some way off.

As Amazon continues to put its money and influence to work acquiring distribution licenses and potentially acquiring another mail-order pharmacy or two, it’s laying the foundation for an Amazon-branded, fast, prescription drug delivery system.

Who’s at risk?

Traditional brick-and-mortar pharmacies

Today, Amazon’s efforts in the pharmaceutical space mainly point to an attempt to disrupt the last-mile end of the pharmacy supply chain: retail pharmacies like CVS and Rite Aid.

The current process of picking up a subscription is time-consuming and inefficient, and the price that patient pay for their medicine varies based on factors like geography, insurance, and more.

Retail pharmacies’ main defense against disruption is the fact that they remain the fastest way to get a new prescription filled for most Americans.

But now, with its vast network of fulfillment centers and its PillPack acquisition, Amazon is working on a solution to this problem that could mean free 1-2 day shipping or even same-day shipping of medicines to anywhere in the US. Amazon also has footholds in the brick-and-mortar world it could leverage, through Whole Foods and its forthcoming grocery chain.

Pharmacy benefit managers (PBMs)

In the longer-term future, Amazon could use these capabilities to take aim at one of the most lucrative — and disliked — parts of the healthcare supply chain: PBMs.

Three PBMs make up around 80% of the market in the US — CVS Caremark, Express Scripts, and OptumRX.

These top three PBMs brought in $10B in profit in 2015, including from the rebates they negotiate with drug manufacturers, creating the perception that they sometimes choose to buy more expensive drugs with a higher rebate value rather than lower priced drugs with a lower rebate value — a perverse incentive for healthcare costs in the long-term.

The stated goals of Haven, Amazon’s health venture with Berkshire Hathaway and JPMorgan, are a direct rebuttal to PBMs claim that they save consumers money and are necessary middle men in the supply chain.

Excerpt from Jamie Dimon’s shareholder letter discussing the formation of Haven. Image source: JPMorgan

Amazon does not rely on pharmaceuticals to drive its profits, so it has the freedom to explore what could be, at first, a virtually non-profit approach to pharmacy benefit management — and with PillPack, it may have the growth engine required to reach PBM scale negotiating power.

In 2017, PillPack filled more than $250M in cash prescriptions, a number that could grow exponentially if Amazon used its scale to lower prices and roll the service out nationwide, and potentially even incorporate it into Prime benefits.

With a large user base of consumers ordering drugs through Amazon, the company may be well-positioned to negotiate bulk discounts from drug distributors. This is already the operating model of companies like GoodRx and BlinkHealth. Amazon, however, would be able to leverage the largest member population in the United States to do it.

With lower costs in place, and a more transparent supply chain, Amazon could become an attractive alternative drug supply partner for employers who are unhappy with the rebate-driven PBM model that contributes to high drug costs for their employees.

And Amazon wouldn’t necessarily have to draw any profit from the project to make it worthwhile — as a value-adding service which helps keep people within Amazon’s ecosystem could draw customers to other money-making aspects of its business.

For more on this topic, check out our brief, Amazon In Healthcare: The E-Commerce Giant’s Strategy For A $3 Trillion Market.

2. Small business lending: A direct, data-driven source of financing

Amazon took its first steps into commercial loans back in 2011, when the company began offering small-business loans to merchants participating in its Amazon Marketplace via its new Amazon Lending arm. At that time, conditions were well-suited for Amazon’s entry into the commercial lending sector: the global financial crisis of 2008 had shaken confidence in even the largest commercial banks, initiated a credit crunch, and left millions of small businesses struggling to secure the capital they needed to survive.

But seizing that lending opportunity wasn’t an isolated move. Over the last decade, Amazon has taken significant steps into the payments space, credit cards, business checking, and various other financial functions — in other words, doing everything a bank does short of actually applying for a license to become a bank.

Of all these functions, however, Jeff Bezos has been the most bold about his plans in the lending space. And considering Amazon’s thousands of third party merchants, that’s not surprising.

Between 2011 and 2017, Amazon loaned more than $3B in short-term loans to merchants in the United States, United Kingdom, and Japan.

Amazon has a vast number of independent merchants that use its platform, information on the financial health of those businesses, and the customer-first culture to build a compelling lending platform.

Why Amazon is going after small business lending

Over the last two decades, the percentage of Amazon sales completed by third-party merchants has increased from 3% to 58%. These SMBs have succeeded on the Amazon marketplace in part because Amazon has, in Bezos’ words, invested in and given them “the very best selling tools we could imagine and build.” Among those selling tools today is small business financing.

Data from the US Small Business Administration states that, as of 2018, there were more than 30M small businesses across the US employing almost 59M people (or just under 50% of the American workforce).

Since 1995 and 2015, SMB loans almost doubled in volume from about $350B a year to about $600B a year. Over the same period, large business loans have increased from about $500B to more than $2T. Image source: Third Way

Giving out loans to Amazon merchants in this growing space makes sense for Amazon: if the company can give its third party merchants loans that go back into selling products on Amazon, it’s a win for both sides. Amazon gets the increased business, plus the interest from the loans; the merchant gets the capital they need to grow.

Unlike traditional small business loans, Amazon can automate its payback process, meaning a certain percentage of a merchant’s revenue is taken out to pay back loans. And its streamlined application system — which is based on pulling metrics from a merchant’s Amazon account — makes it easier for small businesses to access financing.

Even though small business owners still turn to banks more than other lenders for loans, according to Finder, the process by which banks assess loan applications puts small businesses at a natural disadvantage — research from a group of state-level federal reserve banks shows that in 2016, 60% of small business applicants received less financing than they applied for.

Often, the aims of large financial institutions stands at odds with those of small businesses. It costs a bank a similar amount of money to process a $50K loan as it does to process a $1M loan, but the expected ROI of the smaller loan pales in comparison to the return on the larger one. Given that credit needs for small businesses tends to be for smaller amounts, banks can see them as being less profitable opportunities.

Another challenge facing small businesses seeking capital from commercial banks is a lack of suitable collateral. Banks prefer to lend to businesses with assets, such as property or specialized equipment, that can be used to secure the loan. This puts small, online businesses at a distinct disadvantage, as these companies are much less likely to possess the kind of tangible collateral that mainstream banks often seek.

These challenges make small business loans an attractive market for Amazon to disrupt.

Amazon already has huge amounts of data on the lendees that use its platform — and subsequently doesn’t need the kind of extensive documentation required by many commercial banks. Whereas banks often rely upon credit scores and personal financial documentation to determine the risk associated with lending to a given business, Amazon already has information such as revenue history and future earnings projections, inventory data, and sales data.

The company also possesses a wealth of tertiary data about prospective borrowers, such as a business’ relative popularity within its vertical and its standard of customer service based upon Amazon user reviews — information no financial institution has. With all of this information, Amazon may be able to make better-informed lending decisions than the average commercial bank — and, as the approval system would be data driven, likely process them faster.

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How Amazon is going after small business lending

Today, Amazon Lending offers small business loans ranging from $1,000 to $750,000 to qualifying merchants over repayment periods of 12 months. It makes money by charging interest on the loans. Though Amazon hasn’t publicly disclosed its interest rates, existing Amazon borrowers have reportedly cited low rates and quick approval times as their prime reasons for borrowing from Amazon.

“We created Amazon Lending to make it simple for up-and-coming small businesses to efficiently get a business loan, because we know that an infusion of capital at the right moment can put a small business on the path to even greater success.” — Peeyush Nahar, former Vice President, Amazon Marketplace

As one might expect from Amazon, the e-commerce giant adopted an unorthodox approach to its small-business loan product.

Merchants who wish to participate in the Amazon Lending program must be invited to do so, meaning that not every Amazon Marketplace merchant can apply for a loan. Amazon extends these invitations based on an algorithmic evaluation of a merchant’s business, from the popularity of their merchandise to their inventory cycles, among other factors — a critical calculation that helps Amazon mitigate its lending risk.

The advantage of this exclusivity is that Amazon can offer loans quickly: unlike traditional lenders that rely upon extensive documentation typically furnished by the borrower, Amazon Lending typically approves loan applications within just 24 hours. Amazon also does not charge borrowers origination fees or penalize them for prepayments.

Despite only offering short-term loans to prequalified merchants, Amazon’s small business loans have proven to be popular. Between the official launch of Amazon Lending in 2011 and 2017, Amazon loaned more than $3B in short-term loans to merchants in the United States, United Kingdom, and Japan — including over $1B loaned between just 2016 and 2017.

The sales report menu that an Amazon merchant sees in their dashboard.

The invite-only nature of Amazon Lending might seem exclusionary, but it allows Amazon to prequalify merchants and provide a superior experience for borrowers by streamlining the loan application process and reducing the time needed to reach a lending decision.

Who’s at risk?

Commercial banks & local lenders

Amazon’s vast network of merchants is the perfect launchpad for a lending business.

Among these companies, Amazon has a deep competitive moat made up of data and speed — one that is difficult for commercial banks to match. With its data advantage, Amazon has the power to offer loans to businesses that traditional banks might consider lower-quality borrowers and refuse (or lend to on more onerous terms).

“Amazon has had a hugely positive impact on our business. Traditional funding vehicles wouldn’t support our model of direct to consumer and we needed help. Amazon stepped in and is a great partner for us.” — Caleb Light, VP of Sales, Power Practical

This data also means Amazon has a significant advantage in terms of the customer experience of applying for a loan, as getting a loan through Amazon is much faster than getting a loan through a bank.

Competitor e-commerce platforms

While there may be no incentive for Amazon to lend outside its own ecosystem today, the company is using its small business financing program as a means to encourage merchants around the world to leave local competing e-commerce companies and join Amazon.

Amazon’s streamlined lending system offers its merchants capital to use on buying more Amazon inventory, and in return deducts monthly payments automatically.

In September 2017, Amazon began offering loans to pre-qualified Amazon merchants in India via a partnership with the Bank of Baroda in anticipation of that year’s holiday shopping season, allowing their merchant customers to expand their inventories ahead of the crucial holiday period.

Amazon followed up its tentative steps into small-business financing in India in April 2018, when the company invested $22M as part of the Series C round of SMB-focused capital finance marketplace platform, Capital Float.

Amazon has also made clear that it has ambitions to move into China with its small business lending business — the top market for e-commerce in the world.

Amazon has made significant investments in fintech and in M&A in India.

The significance of these moves is less that they promote Amazon loans to current Amazon merchants, but that they have the potential to bring new merchants into the Amazon ecosystem.

In China, Amazon has less than a 2% share of the e-commerce market. By offering small business financing, Amazon could encourage more merchants (most of whom today work with Chinese companies like Ant Financial) to join its platform.

In addition to loans, Amazon can also offer the small businesses it lends to marketing opportunities, better placement within Amazon’s search results, or information about how to increase sales.

Small businesses themselves

All this said, there are reports Amazon is scaling back the growth of its lending program, and re-focusing its marketplace approach to emphasize two different kinds of business: large, well-known brands, and private labels.

If small businesses grow overreliant on the availability of Amazon lending, they risk a hard fall should Amazon significantly scale back its focus on SMB financing and product promotions.

Recent reports suggest that Amazon is ramping up its work with manufacturing partners to develop new private label products for the company to sell under its own brand. These kinds of private label products provide Amazon with an obvious host of benefits, such as not having to share space and revenue with other SMB brands or spend time developing its own products.

Private labels could also increase competition for the SMBs that want to use the Amazon marketplace to sell their wares.

Amazon is taking steps toward selling bigger brands that the site hasn’t stocked in the past. This recent holiday season was the first time that Apple sold products directly on Amazon’s site — giving Apple a direct route to a large pool of customers and providing Amazon a cut of high value items.

The pivot to big brands is likely connected to the flattening of Amazon’s retail revenues — Amazon may be looking to drive increased business on that side of the company.

Amazon’s sales of big brands were mostly up over the course of 2018, indicating a shift in the company’s focus from smaller merchants to name brands. Image source: Atlas

Prioritizing big name brands and private labels over small businesses would make small business lending inherently less attractive inside Amazon, and along with the numerous major risks involved, may imply that the company is walking back some of its ambitions in the space.

For more on Amazon’s financial services strategy, see our brief, Everything You Need To Know About What Amazon Is Doing In Financial Services.

3. Online groceries: Faster delivery and better logistics

In 1998, Jeff Bezos and his biggest VC advocate, John Doerr, began investing in promising dotcom startups trying to bring the grocery store online. Most would go bankrupt — Pets.com, Wineshopper.com, Homegrocer.com, and delivery service Kozmo.com — but the experience seeded Amazon’s future ambition to dominate the US grocery industry, estimated to be worth more than $800B.

A decade later, Amazon would hire four former executives from Webvan, a prominent online grocery company and failure of the dotcom era, and set its sights on online grocery again. Today, that project, Amazon Fresh, has merged with the 2-hour Prime Now delivery service. In select metropolitan areas, Amazon is already delivering groceries from both its own warehouses and Whole Foods stores within 2 hours.

Today, online groceries represent one of the biggest opportunities in retail. Many consumers have embraced online grocery shopping, particularly younger, tech-savvy shoppers who lack time to shop and are willing to pay a premium for the convenience of door-to-door grocery delivery. Now, supermarket chains all over the country are battling for their attention.

Amazon Fresh, the business born out of Amazon’s hiring of 4 former Webvan executives, which merged with Prime Now in 2018.

Traditional grocery retailers, however, have struggled to provide consumers with both the seamless experience they expect from online retail and competitive prices — cracking the market is being made all the more difficult by Amazon’s aggressive expansion into the online grocery vertical.

With its constantly expanding nationwide logistics network and immense spending power, Amazon is a formidable opponent in an already intensely competitive vertical.

Why Amazon is going after online groceries

Online grocery sales then more than doubled from 2016 to 2017, according to an FMI and Nielsen survey. The number of people shopping for groceries online is now rising so rapidly that some predict that the proportion could reach up to 70% by 2022.

While online grocery shopping has expanded significantly over the last several years, its overall penetration in the American market is still relatively low. In 2018, online grocery purchases accounted for just over 5% of total sales, according to data from consulting firm Brick Meets Click.

One of the biggest challenges facing online grocers is that of keeping costs low both for themselves and for consumers. Margins in the grocery industry are notoriously low, and while typically bringing retail online is a means of increasing margins — moving grocery selling online has historically been a problem for grocery stores’ revenues.

In addition to the costs of inventory, which can fluctuate significantly across the year, online grocers have to maintain expensive investments in storage and distribution facilities, which brings costs up significantly. Perishable foodstuffs must be frozen or refrigerated, meaning that storage facilities are often climate-controlled, which can further increase costs.

Distribution is the other major cost challenge online grocers face. Owning and maintaining a fleet of delivery vehicles can be costly, as can operating regional distribution centers. As with storage facilities, delivery vehicles must be climate-controlled to preserve freshness of the products. Managing brick-and-mortar grocery stores, by comparison, is relatively inexpensive.

Amazon, however, is uniquely positioned to face these challenges, by virtue of its extensive shipping and logistics networks and its Whole Foods stores — which can act as both shops for in-person shoppers and distribution centers for online grocery shoppers.

One of the other major challenges online grocery retailers must overcome is a consumer preference for in-store shopping. It’s hard to compete with the convenience of online ordering and delivery, yet many consumers still prefer shopping in-store due to the ability to pick their own produce.

Around 70% of consumers polled in 2018 stated that they did not use online grocery services because they preferred to see and select their own groceries themselves, according to data from AlphaWise and Morgan Stanley Research.

Image source: Morgan Stanley

To some, consumer preference for in-store shopping may seem like an insurmountable obstacle to increasing market share for online grocers. However, many major retailers are exploring digital solutions to this challenging analog problem.

In January 2018, Walmart filed a patent for 3D imaging technology known as “Fresh Online Experience,” or FOE.

The FOE system works by having shoppers select grocery items using stock imagery — the same as many online grocery services do. However, once a shopper has selected an item, a sales associate scans it in-store with a 3D scanner, which then presents the shopper with a virtual 3D image of the exact item to be shipped. The consumer can then accept or reject that particular item, better reflecting a physical supermarket experience.

“Bigger picture, Americans have shown tremendous willingness to make purchases online — including when holiday shopping. Thus, it’s not likely that technology is what holds most people back from adopting new digital approaches to ordering food.” — Lydia Saad, Senior Editor, Gallup

Amazon is working on building out machine learning technologies to lower the cost of its providing services.

Notably, the company has developed an “automated ripeness detection system” that scans fruits and vegetables in its warehouses and cold storage facilities. The algorithm analyzes the fruit or vegetable, determines its high-level quality (e.g if it’s damaged or expired), and decides whether to throw it away or not. The technology is currently being used by Amazon in Europe to supplement a manual inspection practice already being undertaken by associates at AmazonFresh depots.

As mainstream retailers such as Kroger and Target move more aggressively into the online grocery space, it’s likely we’ll see continued investment in and adoption of similar technologies, as retailers seek to close the gap between the in-store shopping experience and its online alternative.

How Amazon is going after online groceries

Amazon’s $13.7B purchase of organic grocery chain Whole Foods, the company’s largest acquisition to date, raised more than a few eyebrows in 2017.

Some analysts claimed Amazon’s purchase of the retailer was short-sighted, and that Whole Foods’ reputation as a premium retailer — with prices to match — was at odds with Amazon’s low-price, high-volume model.

“While Whole Foods is all about an upscale experience, Amazon is about trolling for bargains at your own risk. This market positioning is reflected in the corporate cultures of both organizations, and they are not compatible.” — Geoffrey James, Contributing Editor, Inc.

However, this analysis overlooked a key source of value for Amazon’s acquisition: namely, the potential to use Whole Foods stores as ready-made distribution centers.

With its acquisition of Whole Foods’ 440+ locations across the US, Amazon gained quick access into the highly competitive grocery retail market. Even without its inventory, equipment, and storage facilities, Whole Foods’ physical locations were valuable.

Moreover, many Whole Foods stores are located in affluent urban areas and typically attract higher-income consumers with a preference for high-end grocery products — a similar demographic to that most likely to shop for groceries online, according to a Gallup survey.

Amazon’s grocery initiatives beyond Whole Foods could also give it a leg up in this industry. The company’s forthcoming grocery chain could give it further brick-and-mortar stores to act as distribution centers, while experiments like its cashierless Amazon Go stores provide Amazon with even more granular data about local shoppers’ shopping habits, connecting purchases to individual Amazon accounts.

Finally, Amazon’s voice assistant could also help the tech giant’s foray into grocery delivery. Though still in its earlier stages, shoppers can use the Alexa voice-activated assistant to place grocery orders online.

With Amazon’s US online grocery sales increasing by 59% in 2017 alone, the e-commerce giant currently commands almost 20% of the American online grocery market — more than twice the market share of Amazon’s closest competitor in this area, Walmart. However, when including traditional brick-and-mortar grocers, Amazon’s overall share of the grocery market is still relatively small.

But looking to the future, Amazon still poses a formidable threat, largely because of its significant logistics edge — which can be summarized by two broad advantages.

First, Amazon is willing and able to take a financial loss on delivery if it means providing a faster, superior delivery service to consumers that will lead to greater market share in the future.

Second, Amazon’s investments in its logistics infrastructure aren’t limited to its online grocery business; the improvements Amazon makes to its grocery delivery services can be adapted and scaled to other parts of its logistics operations and vice-versa.

Who’s at risk?

Competing grocery delivery services

Amazon’s immense spending power has allowed the company to compete effectively within the online grocery market from the outset. Amazon currently offers free two-hour delivery (in select locations) to Prime members on grocery orders of $35 or more, and one-hour delivery on similar orders for a $7.99 surcharge. Even Amazon’s closest competitor in this area, Instacart, is likely to find it challenging to compete at such a price point

Instacart’s annual membership fee of $99, which offers free delivery on orders above $35, is lower than an Amazon Prime membership, but it is limited to items available through Instacart’s partners and doesn’t include other perks such as video and music streaming. Amazon is likely to continue pressuring traditional grocery retailers and emerging rivals like Instacart as competition intensifies.

Amazon itself

Despite its enviable position, Amazon faces risks of its own. Amazon spent approximately $21.7B on shipping costs alone in 2017, according to the company’s annual report — almost twice the amount Amazon spent on shipping costs in 2015.

While Amazon may be willing and able to suffer losses on delivery for now, the company is not immune to the rising cost of shipping in general. According to David Vernon, an analyst with investment consultancy Bernstein, shipping costs could increase by as much as 7% annually — a rate of increase that may pressure Amazon to restructure the pricing of its Prime memberships.

Amazon’s lack of a physical presence in comparison to Walmart — its foremost competitor in the online grocery space — also puts it at a disadvantage. Walmart has more than 5000 stores across the United States, while Amazon owns just over 450 Whole Foods locations. Walmart also owns about 600 Sam’s Club locations, all of which also sell groceries and other merchandise.

Having an extensive brick-and-mortar presence offers convenience, easier last-mile delivery, and the ability to sell higher volumes of fresh fruits and vegetables.

Over the next decade, if Amazon can significantly build out that physical presence to compete with Walmart, and successfully scale up the efficiency and quality of their online delivery function, it will pose a serious threat not just to other online grocery retailers, but to every traditional grocer in the country.

4. Payments: Giving small merchants a cheaper option

Amazon has been building out a presence in the payments space for years, with Amazon Cash, Amazon Reload, Amazon Pay, and Amazon Prime Visa.

The logic behind this kind of financial ecosystem is clear: if the company can get consumers to put money into an Amazon-owned account, they will ultimately spend more with Amazon. For example, the Amazon Prime Visa rewards users with Amazon credit.

If Amazon can create a payments channel that’s good for Amazon consumers and saves merchants money, it could have the edge it needs to disrupt the payments industry in a tectonic way.

Why Amazon is going after payments

When you swipe a credit or debit card at a store, the retailer is charged an additional transaction fee as a small percentage of the overall purchase. These fees range anywhere between about 2.75% and 4.35% per transaction, adding up to around $90B a year, mostly paid out to banks.

These fees can significantly cut into the bottom line for small businesses, especially if they mostly deal with smaller purchases. But price isn’t the only factor merchants have to consider when choosing a payment processor — they also need one that doesn’t negatively impact the customer experience.

Seventy-two percent of all big-box retailers have some kind of “expedited checkout option” — including Apple Pay, Google Pay, etc. — but these options haven’t yet completely caught on with customers or merchants.

If Amazon can find a way to make its own payments options stickier, easier for consumers to use, and cheaper for merchants to accept, it could find huge opportunity in this industry.

How Amazon is going after payments

Amazon is coming at payments from the perspective of the merchant, who needs a cheaper processing method, and the consumer, who needs a reason to choose Amazon Pay over any other service.

For merchants, working with Amazon means getting access to low fees, Amazon marketing services, and, in the future, easy, one-click access to new tools that capitalize on Amazon’s 100M member base.

The evolution of Amazon Pay began more than a decade ago when Amazon first launched the ability to pay with Amazon.

Adopting an Amazon Pay account could allow merchants to experiment with new retail techniques, from cashierless payments to improved targeting to better “buy-online, return-in-store processes.”

Amazon is reportedly working to convince brick-and-mortar retailers — especially gas stations and restaurants, which are not direct competitors — to begin accepting Amazon Pay at their stores. In return, Amazon promises lower transaction fees and “marketing services.” For example, Amazon could promote businesses that use Amazon Pay to Amazon users through Prime Now, Restaurants, and other services.

On the customer side, the focus is on convenience, speed, and perks that encourage consumers to use their Amazon Pay accounts rather than a debit card.

To make Amazon Pay an attractive option for consumers, Amazon has spent the last several years building additional Amazon financial products and services that complement its value:

Amazon Cash: Amazon Cash allows consumers to deposit cash without any fee into an online Amazon account by scanning a special barcode at partner retailers.

Amazon Visa debit/credit cards: Amazon has recently partnered with Visa to offer a debit card for Prime members and a credit card for non-Prime members. Both offer cashback perks.

Amazon Reload: This feature allows Amazon Prime members to transfer money from their bank into their Amazon accounts to create a balance. As a reward, 2% of the transfer amount is added to the user’s account right away.

Amazon Go: Amazon Go is a cashierless grocery store where consumers can simply walk in, grab items off the shelf, and then walkout. The customer’s Amazon account is billed for the purchase when they leave the store.

The common theme with all of these products is that they encourage customers to load money onto their Amazon accounts. The more a customer builds up an Amazon balance, the more useful Amazon Pay and Amazon’s other financial features become.

As far as actually getting users into this ecosystem, Amazon’s recent partnership with Worldpay has put the company on its most promising trajectory yet.

Worldpay handles payments for more than a million different merchants across the US, both online and off. It is the largest processor of credit and debit payments in the US by general purpose transaction volume, doing more than 20B payment transactions every year. By integrating with it, Amazon gets sudden access to a vast network of merchants.

who’s at risk?

Card processors & online payment providers

The companies that should be most concerned about Amazon’s ambitions in the payments space are online payment providers like PayPal and Stripe, and card processors like Chase, Visa, and Mastercard.

Today, Amazon Pay’s costs are competitive with other major online payment gateways. With its 2.9% transaction fees and $0.30 authorization, Amazon comes in right alongside PayPal Standard when it comes to annual costs.

Image source: CodeinWP

Amazon can differentiate itself with its access to data about a merchant’s customers and its ability to offer new kinds of marketing. PayPal and Stripe do not have a wealth of information about what customers are buying or how they’re buying it — and that’s information Amazon can use to make sure its payments products are more valuable than others.

On the in-store side, Amazon competes with providers like Chase, Visa, Mastercard and American Express, largely through its ability to power new kinds of in-store experiences.

For example, in an Amazon Pay pilot launched in 2018, fashion retailer Moda Operandi customers were able to preorder items before ever entering the store, then simply collect them and walk out. This saves merchants labor in the form of a cashier: a huge value add to get from a payments provider.

Previously, getting set up with Amazon Pay could be challenging for for merchants, who had to manually configure the workflow.

By partnering with Worldpay, integrating with Amazon Pay is no longer any more difficult than accepting Visa or Mastercard. And when the process for the consumer is easy as scanning a QR code, the value proposition of Amazon Pay is even more compelling for merchants.

Global payments competitors

Amazon’s push into payments has been global.

Internationally, the company has been especially focused on countries with large unbanked populations and high growth e-commerce markets.

In India, Amazon’s main competitors in payments are Flipkart’s PhonePe and Alibaba-backed Paytm. Amazon has invested more than $100M in promoting Amazon Pay in the country since 2017.

In June 2018, Amazon announced a promotion in India where customers who spent over Rs1,000 (about $14 USD) on Amazon Pay would receive Rs 250 in cash back, paid back into their Amazon Pay wallets.

A few months later, Amazon launched bill pay through Amazon Pay in India. It also spent $40M acquiring app aggregator Tapzo, primarily to increase Amazon Pay usage by making it a default payments scheme for customers using apps like Uber, Ola, Swiggy, Zomato, and others.

As of March 2019, Amazon — along with rival MercadoLibre — was in talks with the government of Mexico to help launch a QR code-based method of mobile payment in the country. Only 37% of adults in Mexico have a bank account. This system would allow users to use their smartphones to pay for goods through both brick-and-mortar and online shopping.

Amazon has an advantage over other startups and banks in international markets and domestically because it doesn’t need to drive a profit from transaction fees — and subsequently doesn’t need to cut deeply into merchants’ margins. In many cases, it may even be able to help merchants drive revenue.

This is because Amazon benefits from activity taking place in Amazon Pay wallets, as well as the resulting upward trend in Amazon spending. This is why Amazon’s presence in payments needs to be taken seriously, and why the mounting spread of the Amazon Pay button is the best signal yet that disruption in payments is coming.

For more on Amazon’s financial services strategy, see our report Everything You Need To Know About What Amazon Is Doing In Financial Services.

The 3 industries Amazon could go after next

5. Mortgages: Owning the distribution end

Speculation about Amazon’s potential entry into the mortgage lending space picked up in March 2018 when the company was reportedly starting to look for someone to lead a newly formed mortgage division.

Amazon wouldn’t be the first company to try to disrupt the $1.6T residential mortgage industry, nor would it be the first to use its distribution advantage to out-compete the incumbents. It might, however — owing to its massive customer base and pervasive brand — be one of the best positioned.

The process of applying for a mortgage has not changed much in the last few decades.

Applicants generally have to work with a mortgage professional, produce documentation for the financial institution behind the mortgage and underwriters, attend in-person signings, get a home appraisal, clear up any judgments or liens against their property, and wait 40-60 days just to figure out if they’ve been approved.

There has been some migration of the mortgage industry online; today, the top mortgage lender in the country, Quicken Loans, is an online lender.

Image source: Attom

But distribution is an expensive challenge. Mortgage buying keywords are the third most expensive on Google, with a top cost-per-click (CPC) of $47. That means very high customer acquisition costs — a problem that Amazon, with its 100M paying members, would have a considerably easier time surmounting.

Amazon also has an advantage in its scale. The average startup will likely find it very difficult to bring in investors and capital needed for getting customers and granting the mortgages. Amazon, however, already has relationships with some big banks, and a large amount of free cash flow to back up its activities.

Still, the in-person requirements around getting a mortgage, and the state-by-state regulatory morass that companies must navigate to grant them, mean that entering the mortgage lending space will be a huge challenge and risk, even for Amazon

If Amazon is serious, the best path may be partnering with an existing lender on the distribution side rather than trying to boil the ocean itself.

6. Home & garden: Capitalizing on supply chain expertise

When Amazon launched its Plants Store in early 2018, the garden sector was wrestling with a change in attitudes across the industry. But Amazon had strong evidence that its logistics and distribution expertise could make gardening a profitable niche for the company to grow into.

Amazon’s prior work in the home & garden space had already proven to be a powerful growth opportunity. In 2017, Amazon’s home & garden store in the United States did about $2B in annual sales, up 19% from the year before. (Its home and garden store in the UK, on the other hand, sold only about $100M, but with 31% YoY growth.)

About 25% of those total group sales came from Amazon’s lawn & garden section, which was worth over $430M in 2017 with 25% YoY growth.

Many younger consumers, particularly first-time homeowners, view gardening as a product or service rather than the leisurely, long-term pastime of older generations. Generally, younger consumers want plants, but don’t have the time to devote to keeping difficult plants alive. They also often prefer to order plants online rather than visit a nursery in person.

Online companies like The Sill have successfully carved out a space in the home & garden industry by making the plant selection process less risky. They primarily sell plants that are hardy and easy to keep alive, include detailed care information, and offering a money-back guarantee on plants that die soon after purchase.

But the challenges of shipping plants — along with rapidly changing climates, ongoing changes in water restrictions, and heightened demand for hardier plants — have made the home & garden sector more difficult for smaller, brick-and-mortar operations and online-first startups to navigate successfully.

The Sill ships nationwide from its own warehouse and shipping facility, which is crucial for maintaining quality control when it comes to shipping plants with specific needs.

When Amazon launched its Plants Store in 2018, it gave consumers the ability to sort plants by a range of criteria, including size, type, climate zone, and even the amount of sunlight required for optimal growth. Image source: Amazon

Amazon could expand its footprint in gardening by using its warehouse network, nascent brick-and-mortar network, and massive advantage in supply chain to make buying and selling plants online more convenient for its associated merchants.

Amazon’s acquisition of Whole Foods and emerging conventional grocery chain could be powerful leverage in disrupting the gardening space.

And with more than 140 fulfillment centers nationwide, Amazon’s superior logistics infrastructure could pose an existential threat to traditional home and garden centers.

Amazon can continue to apply pressure on incumbent plant suppliers by directly appealing to younger, more convenience-focused consumers continue to see gardening as an extension of their lifestyle.

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7. Insurance: Bundling value into the shopping experience

Amazon has already shown some interest in building out its own insurance business.

In 2016 it launched Amazon Protect, a UK service that provides accident and theft insurance on products sold through Amazon. In 2018, it confirmed an investment in the India-based startup Acko, which primarily works on car and bike insurance policies.

A 2017 product manager job listing in Amazon’s EU Product Insurance group hinted that the company had definite designs in the insurance space: “We have ambitious plans to significantly grow operations in our current markets and create new, innovative products that will provide excellent customer experience and satisfaction.”

More recently, Amazon announced a new healthcare venture with JPMorgan and Berkshire Hathaway. The project, called Haven, will reportedly aim to improve access to primary care and simplify insurance.

With Amazon Protect gaining traction and rumors of Amazon’s ambitions in the home insurance market, the company could likely enter the space on the broker side of property and casualty (P&C) insurance.

Amazon’s main competitive advantage over startups here is, as with mortgages, its distribution expertise. Amazon has a huge member base and already sells products on its platform, meaning that adding insurance is little more than a minor UX change — one it has already implemented in several different markets.

On the distribution side, Amazon could charge traditional insurance carriers a hefty fee to send them customers — as it’s done with the Warranty Group, which underwrites Amazon Protect in the UK — with an incredibly low amount of friction through the Amazon purchasing UX.

The Information reported in June 2018 that Amazon was considering bundling home insurance with purchases of its smart home products like the Echo.

It wouldn’t be an unprecedented maneuver: smart lock manufacturer August Home and Liberty Mutual already have a similar arrangement, with Liberty Mutual offering customers $100 discounts on August Home locks (and 5% discounts on home insurance). State Farm has worked with ADT and startup Canary, while Liberty has also partnered with Google’s Nest.

Whether offering home insurance, product insurance, or car insurance, Amazon could use its size as an e-commerce retailer and its huge member base to become a major distributor in the United States.

Amazon’s strong brand and customer trust could make Amazon Insurance a highly attractive option for customers — especially Prime customers — looking for a more valuable insurance offering.

This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like:If you aren’t already a client, sign up for a free trial to learn more about our platform.