Amazon

Report Submitted to

Finomina

By

Akhil Kumar-2011012

Alankrita-2011015

Anupama K-2011295

Himanshu 2011303

Jay Desai-2011341

Piyush Kumar Swaneja- 2011168

Ragesh Pradhan- 2011185

On

20-08-2020
Company: Amazon
Industry: E-Commerce

Growth Drivers

The Growth drivers within this industry mainly depends upon 3 factors.

 Increase in the awareness about the Internet using which draws in a lot of customers from
around the world. Its inclusive nature of accepting buyers and sellers has been the main
point of attraction for the public.
 Government initiatives like Digital India constantly push people towards an online mode of
marketing. Various policies like the FDI policy and the National E-commerce policy ensure
safety to the sellers and the buyers, which draws in key players, sellers, and buyers.
 Investors play a big role in the growth of e-commerce, along with increasing FDI inflow and
domestic investment.
 Various demographic factors play a big role in ensuring the growth of the industry.
 In India places which not very densely populated are slowly generating a larger proportion of
the sales. Big Cities like Delhi, Bombay, and Bangalore contribute the most towards this
growth.
 India has a population demography where a large percentage of us are ranged between the
age of 25-35. And it’s steadily rising. This is the major group, that is attracted to online
shopping and other e-commerce services.

Amazon is one such industry that has been growing at an accelerated rate. The main USP of
this company has been to introduce new services, apart from selling books that it initially
started with.

 Retail and Amazon Fresh: The main source of revenue for this company has been
from retail sales which make up to 81%. It is constantly on the search to partner with
new markets and provides the customers with a vast variety of products. Moving into
Wal-Mart's territory, it also provides us with household products. AmazonFresh is
 relatively new to the added services provided by Amazon but its gaining quite a
popularity due to the impeccable delivery services.
 India holds a huge potential for Amazon. It has pledged to invest $1billion to help
digitize MSBs and other micro-businesses with the goal of bringing at least 10 million
MSBS online by 2025. This is to attract South Asian customers and to increase
competition.
 Amazon’s acquisition of PillPack, an online pharmacy, might be the next big thing for
them. The use of the internet, penetration of e-commerce, discounted rates and more
convenience especially for chronically ill patients as well as the elderly will support
this growth.
 AmazonPrime became a big hit right from the start and the number of subscribers has
been steadily growing year after year, with 150 million prime subscribers right now.
With incentives such as one-day delivery, prime video, unlimited music, etc, has
really been able to retain the customers. Adding to this is the Kindle ecosystem which
is generating revenue in billions for Amazon.
 Amazon believes that “scientific innovation is essential to being the most client-
centric company in the world.” Investing a whopping amount of $35.93 billion during
2019 (12.8% of net sales) in research and development in Advanced technologies—
AI, machine learning, computer vision—are the core of its ventures—be it cloud
computing, voice-based virtual assistant, cashless Go stores, drone deliveries, robotic
warehouses, fraud detection, or cybersecurity, shows the zeal to grow and be the best
e-commerce company out there.

Cost Drivers.

 The three main pillars of Amazon’s business are Amazon Web Services (AWS),
Marketplace, and Prime which had been developed to support the core retail business,
but are now revenue and profitability drivers. The economy of scale is imperative to
the working model of Amazon’s retail business.
 Warehousing and Circulation have been the most important cost driver as the
organization works countless distribution centers internationally.
 Other critical cost drivers include the operations of various programming
advancement focuses and client benefit bases on the world.
  The underlying expense of acquiring the merchandise that they offer is another cost
driver. But they keep the economy of scale in mind as it is vital to their operations.

Market Size

Stated by IBEF “Propelled by rising smartphone penetration, the launch of the 4G network
and increasing consumer wealth, the Indian E-commerce market is expected to grow to US$
200 billion by 2026 from US$ 38.5 billion in 2017.” The data and the stats show that sooner
or later there will be a boom in this industry providing its customers with all kinds of things.
Quoting Amazon’s Moto of “A to Z”, It truly has lived up to its hype, and there are only a
few selective things that aren’t available online.

Online retail sales in India are expected to grow 31 percent to touch US$ 32.70 billion in
2018, led by Flipkart, Amazon India, and Paytm Mall. India is among the top 20 Smartphone
Consumers in the world. Smartphone shipments have only been increasing over the years.
Various companies collaborating with this online platform, facilitates the industry's growth.

According to GlobalData, a London-based data analytics firm. “The growth of the Indian e-
commerce market has been revised up, considering the positive push due to the coronavirus
(COVID-19) outbreak,". The e-commerce market in India is set to grow at a compound
annual growth rate of 19.6% between 2019 and 2023, according to GlobalData.

COVID came as a nightmare to most of us, whereas it was a blessing for the E-Commerce
Industry. Due to guidelines provided by the government, which restricts retail and general
stores, the best and the easiest option available to the people was using the services provided
by e-commerce. There has been a rise in offline spending during the lockdown,
  The online retail market in India is estimated to be 25 per cent of the total organized
retail market and is expected to reach 37 per cent by 2030.
 E-retail market is expected to continue its strong growth and will nearly be Rs 1.8
trillion (US$ 25.75 billion) by FY20.
 In 2019, mobile handsets were the biggest contributor to online retail sales in India
followed closely by mobile and electronic accessories, other consumer electronics
such as printers, routers, laptops, and home décor.
 FMCG segment accounted for almost 11 per cent of online sales in 2019.
 With cost of servicing tier II and other smaller cities going down, most of the growth
for E-retail’s the country is going to come from there. Overall, online shoppers in
India is estimated to reach 220 million by 2025.
Source: IBEF E-commerce

Challenges faced

Due to the fast growth in this industry and an easy mode of access to reach a larger crowd
more and more companies seem to join this industry. The barrier to entry this industry is not
that powerful. Hence a lot of competition is there and various challenges are faced.

 A key to the growth of a brand is loyalty. If there is no consumer base, the company
won’t be able to run and will experience a lot of losses. The main issue is how to
 build customer loyalty. With so many options available, a customer chooses whatever
is marketed well and is cheaper than the competition.
 Delivery and Return are the 2 main services provided by most of the companies,
which make them more attractive as compared to other companies. The issue is the
need to overcome the poor management of the supply chain infrastructures, which is
prevalent in a lot of states with poor construction and lack of roads.
 A lot of people are still skeptical about cashless shopping and believe that they will be
cheated on by the companies. These people heavily depend upon cash on delivering
(COD) option. On one hand, big companies like Amazon and Flipkart can afford a
COD request, but there are lots of small scale companies that still need resources and
capital to manage their company and are dependent upon the online mode of payment.
So these companies don’t get promoted much and lose out on the audience.
 When everything is happening online, there is a chance that our data will get
compromised. The protection of the data is a major issue that needs to be dealt with. It
is not just a problem in India, but all around the world. Hence Cybersecurity policies
and firewalls that are strong enough to protect sensitive data need to be used.
 Technology needs to be up to mark. The user face of the sites or apps needs to be easy
to toggle and user friendly, and for that research needs to be done on technology to
provide the customers a seamless experience of the digital life. Small things starting
from the allocation of buttons, symbols, colors, etc need to be kept in mind and hence
is quite a challenge.

Government Policies

Reuters reports that “the government will announce the creator of a new regulator to handle
issues pertaining to e-commerce companies. Citing sources familiar with the plan, the agency
reported that the regulator could force e-commerce companies like Amazon and Walmart-
owned Flipkart to turn over information sought by authorities in compliance with Indian laws
aimed at protecting consumers and ensuring fair competition.”

National e-commerce policy proposes with setting up a legal and technological framework
for restrictions on cross-border data flow and also lays out conditions for businesses
regarding collection or processing of sensitive data locally and storing it abroad. Basis of this
policy was to protect data across borders which could be used by other companies as well.
Framework would be created to provide the basis for imposing restrictions on cross-border
data flow.

Policies affect the very core of the working of the companies. They may ease out the work or
may make it very difficult for companies to flourish.

Government Policies that impact the industry

Ecommerce under the Policy is defined as buying and selling of goods and services including
digital products over a digital and electronic network. This includes two prominent models:

1. Inventory based model of ecommerce – Inventory based model of ecommerce means

an e-commerce activity where the inventory of goods and services is owned by
ecommerce entity and is sold to the consumers directly. No Foreign Direct Investment
is permitted in this model
2. Marketplace based model of ecommerce – Marketplace based model of ecommerce
means providing of an information technology platform by an ecommerce entity on
the internet to act as a facilitator between buyer and seller and the ecommerce entity
providing the platform has no inventory of its own. 100% foreign direct investment
under the automatic route is permitted in this model.

The above changes are likely to impact the core business model of the likes of Amazon
where they encourage sourcing and sales through their preferred vendors like Cloudtail and
WS Retail amongst others as they have a direct or indirect equity stake in such preferred
vendors.

The customers buying products sold by these vendors are usually given additional benefits in
terms of pricing, fast delivery and cashbacks etc. By virtue of overall control, they could
provide large discounts, better user experience and quality control.
Furthermore, Amazon by virtue of their dominant positions now cannot insist on exclusive tie
ups with brand owners. Also, the private labels launched by Amazon now need to give space
to other players in the same category and cannot be indiscriminately promoted at the expense
of other players.

Effects of Covid on Amazon :

Amazon CFO Brian Olsavsky said the coronavirus-focussed lockdown in India has “cut back
a lot” on its offering. Amazon said that it incurred over $600 million in COVID-19 related
costs in first quarter, and expects these costs to grow to $4 billion or more the coming
quarter. Due to the lockdown we observe that though the sales of Amazon have increased, the
net effect isn’t what was expected

About the Company:

1. Shareholding Pattern:

The top individuals who hold the major chuck of the Amazon company shares are Jeffrey
Bezos, Andrew Jassy, and Jeffrey Blackburn. And the top institute that are holding the major
chunk of the Amazon are Advisor Group Inc., Vanguard Group Inc., and BlackRock Inc.

Jeffrey Bezos is the biggest shareholder of the company and he holds close to 55.5 million
shares equating 11.1% of the total company share. Andrew Jassy owns 94,797 shares of the
company, or 0.02%. Jeffrey Blackburn holds 48,967 shares of Amazon, or 0.01%

Advisor Group owns 35.4 million shares of Amazon stock, or 7.1%. Vanguard Group owns
33.0 million shares of Amazon, or 6.6%. BlackRock Inc. firm holds 27.0 million shares of
Amazon, or 5.4%.

2. Market share:

The total market value of E-commerce in India is projected to grow close to US$ 120 billion.
And as per Oct 2019 data the total market share of amazon was 31.2 percent.

The closet rival of Amazon is Flipkart with a market share of 31.9 percent
3. Products:

There are various products and services that Amazon provides but they are majorly involved
in retail business. They provide many options in various categories such as Electronics,
Fashion, Kitchenware and many more from which a customer could buy the thing of their
interest. Apart from their main operation they also are present in the online media and
entertainment industry, they carter to their viewers by providing them an option to catch up
with various entertainment stuffs they share via their Amazon Prime app. Its basically an
online streaming app.

4. Major revenue/cost:

The major chunk that constitute its part of revenue and cost comes from operating the online
and physical store sale. Apart from this amazon also operates in other business as online
streaming business which contributes to the remaining part of it revenue and cost.

Revenue Recognition

Revenue recognition is identification of sources of revenue and based on the type and source
of revenue listing the revenue in the income statement.

Revenue Recognition for E-commerce company such as Amazon gets really complex as most
of its services that are being provided are first promised then provided to customer with a
certain delay which involves a lot of other hidden charges such as logistic, transportation,
delivery, packaging which also needs to be accounted in the income statement.

For example, if a customer orders an item by visiting the store online, he/she has a choice of
either paying for the service beforehand or he could provide for the service once it has been
received by him/her. Based on the option opted different entry will be made in the income
statement, T accounts. If he opts for the first option the entry will be made in the Accounts
receivable section based on the condition that the following revenue will be added to
company cash received or revenue generated once the service have reached the customer.
And if we go by the first option then the same transaction will not be recorded in the T
accounts but it will be recorded in cash receivable as soon the transaction gets complete by
providing the service to the customer. Also, the revenue is not registered in the company
balance sheet unless the expiry date by which the customer could return the product has
passed.

Amazon revenue policy need to validate the appropriateness of the product which are sold,
also the cost that are being incurred during the sale, and also commissioning and other cost
incurred because of the presence of another stakeholder’s being involved like a partnering
courier company. Amazon sets the prices of commodities based on what and on which rate
the selected suppliers provide or avail the product to Amazon. Based on these Net sales and
commissions are generally recorded. Also, there are additional factors such as using fixed
fees, percentages of revenues, per-unit activities.

There are other kind of services that are provided by the company like subscription to prime,
gift cards and coupon cards which also needs to be recorded in the balance sheet and the
methodology that is used in these cases while recording are that they are recorded as sales
revenue.

The overall recording of revenue by the e-commerce business is very complex and needs to
be carefully handled as there are some recurring revenue i.e. repeated after every fixed
interval of time and other which are just one-time revenue recognition

SWOT Analysis

STRENGTH
1. Global brand recognition and reliable image in the market
2. Amazon is a consumer-oriented company, as they cater the masses by providing
goods at competitive prices.
3. Infrastructure cost saving due to online-only mode of retailing
4. They have over the years successfully created the biggest product assortment
5. Acquired firms like Wholefoods and IMDB generate revenue on their own
6. Strong and Stable Leadership 

WEAKNESS
1. Tax evasion controversies tarnish the image of the brand
 2. Failed in house products like Firestick, Fire Tablet etc
3. Negative reports on employee condition at the lower levels
4. Totally dependent on distributors, the inhouse collection is very limited
5. An easily imitable business model

OPPORTUNITY
1. Expansion to physical stores for some items which are uneconomical to ship in small
quantities
2. More acquisitions in or out of the industry to increase profits
3. Better screening methodologies to prevent the sale of duplicate items
4. Self-driving technology which can be a game changes as traditional auto
manufacturers look to find strategic partners to compete with Tesla Autopilot

THREAT
1. Government regulation to prevent or heavily tax this new industry
2. Aggressive competition from giants like Flipkart, Walmart, eBay and to an extent
Alibaba
3. Pandemics or Economics slowdowns
4. Controversies relating to breakage of Competition law in India
5. Controversies relating to the mistreatment of labour and workers
6. Selling of Counterfeit products can tarnish the brand image

Amazon India Head

Amit Agarwal is the dynamic leader who heads Amazon India. He is a graduate from
Stanford and IIT Kanpur in Computer Science. He has been a part of Amazon.com since
February 1999. He has played a lynchpin role in aligning the company’s vision and actions.
He can be attributed to the success of Amazon E-commerce services in India amidst heavy
competition. He also is the man that was in charge of the company’s expansion to India.

He became the new chairman of Internet and Mobile Association of India (IAMAI) in 2019.
IAMAI is an industry body which seeks to enhance and develop online, and mobile value-
added service sector. It is the body that represents the collective voice of this industry in front
of the state, investors, customers and other stakeholders. This role is of key importance as the
E-commerce industry has been trying to push government for favourable policies for this
sector. The term of the new council of IAMAI is for two years. [Economic times, June 2019]

The Man Behind the Idea

Jeffrey Preston Bezos, or simply Jeff Bezos is the Founder and Chief Executive Officer of
Amazon.com. The company has diversified into a lot of services like Food delivery, home
automation and AWS; but the core business of the company, ‘E-commerce’ is the money
maker and point of recognition for the organisation. Bezos built his empire, by starting with
an online book store for hard to find publications, which he hand-delivered in the initial
days. [Thomson Reuter, 2019]

Analysis
The company’s majority stakeholder is still the Founder, and the Company head for India has
been associated with the organisation for more than 21 years now, this gives a sense of strong
and stable leadership making the company attractive to long term investments.
The one red flag one should be aware of is the fact that government of India is seeking ways
to tax and control this industry. This issue is fuelled by the fact that the Confederation of All
India Traders (CAIT) planed a nation-wide protest against the company during the start of
this year. India has also ordered an investigation over the alleged violation of competition
law. The government policy can make or break an Industry as we saw in the AGR saga.
Management Discussion and analysis

Forward looking statements

The Annual report on Form 10-K includes forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995.All statements other than historical fact
that made on the annual report are forward looking. The words such as anticipates, believes,
expects, future ,intends and similar expressions are used as forward looking statements.
Forward looking statements reflects the current expectation of Management. The actual
results may vary for variety of reasons such as fluctuations in foreign exchange rates, global
economic conditions and customer spending, world events , online services and cloud
services.

The primary source of revenue for amazon is through the sale of wide range of products and
services to customers. The products offered through amazon stores include merchandise and
the content purchased for resale and products offered by third party sellers and it also
manufacture and sell electronic device and produce media content. The Gross revenue are
recognized from items they sell from their inventory as product sales and recognize their net
share of revenue of items sold by the third party sellers as service sales. It seek to increase
unit sales across our stores through increased product selection across numerous category
products. It also offer services such as compute, storage, and database offerings,
advertising ,publishing and digital content descriptions.

The main financial focus is on long term , sustainable growth in free cash flows. Primarily
free cash flows are driven by increasing operating income and efficiently managing the work
capital and cash capital expenditures including taking decisions regarding purchase or lease a
property and equipment. The increase in operating income results an increase in sales or
products and services and thereby helps in managing operating costs. In order to increase
their sales of products and services they focus on improving all the aspects of customer
experience. This includes lowering of prices, improving availability, offering faster delivery,
increasing product categories and service offerings, expanding product information ,
improving ease of use, improving reliability and earning the trust from customers.

They seek to reduce variable costs per unit and work to leverage their fixed costs. Because of
their model they are able to turn their inventory quickly and have cash generating cycle. High
inventory velocity means collecting from consumers before their payments to suppliers come
due. They expect spending in technology and content as it will increase over time by adding
computer scientists, designers, software and hardware engineers and merchandising
employees. This often support a variety of product and service offerings due to geographic
expansions and cross functionality of operations.

They seek to efficiently manage the shareholder dilution while maintaining the flexibility in
issuing the shares for financing, acquisitions and aligning employee compensation with
shareholders interests. Since the currency of financial reporting is in US dollar denomination
if there is any change in foreign exchange rates affect the reported results significantly.

The financial statements is prepared in conformity with generally accepted accounting

principles of United States. It requires estimates and assumptions that affect the reported
amount of assets and liabilities, revenues and expenses, etc. The company critical accounting
policy is the one that are most important to the portrayal of company financial condition.

Corporate Governance
Board Leadership

The Board is responsible for the control and direction of the Company. The Board’s primary
purpose is to build long-term shareholder value. The Chair of the Board is Mr. Jeff Bezos.
The board believes given the high ownership and vision Jeff shares he is the best choice . The
Board’s ability to focus on key policy and operational issues is improved because of this and
helps the corporate achieve its long term goal sustainably. In addition, the independent
directors on the Board have appointed a lead director from the Board’s independent directors,
currently Jonathan J. Rubinstein. That is done in order to promote independent leadership of
the Board. The lead director presides over the executive sessions of the independent directors,
chairs Board meetings in the Chair’s absence, works with management and the independent
directors to approve agendas, schedules, information, and materials for Board meetings, and
is available to engage directly with major shareholders where appropriate. The guidance and
direction provided by the lead director reinforce the Board’s independent oversight of
management and contribute to communication among members of the Board.

Remuneration
Amazon is a key figure in campus placement for Business Schools and Engineering
Institution, as the pay offered to the freshers is very lucrative. The growth pattern for
corporate workers also seems lucrative, as reported on Glassdoor via numerous employees.
[Glassdoor.com]. Amazon heavily invests in Research and Development of new technologies
in a plethora of fields and is willing to pay their Researchers, Scientists and Analysts. In the
Bangalore area, Salary for Software Developers ranges between 14 LPA to 17 LPA for new
hires. 
The Remuneration for the CEO includes a short-term variable incentive for achievement
related to annual revenue goals, which is not extended to any other Board member. The
chairperson, along with the CEO, is also provided with a few extra Non-monetary benefits,
which includes Company car and Insurance for any civil liabilities. Board of Directors does
not have a Severance pay agreement to date. Coming to the General Managers of the firm, the
receive Fixed pay, Short term incentive approved by the board relating to annual budget goal
fulfilment. Their Non-monetary benefits include Insurance for injuries, civil liabilities,
Healthcare cover and Car for mixed-use. Similarly, for other Key Executives, as apart from
fixed compensation, they are given short term incentives, some of the criteria are uniform
across all area of responsibility along with few role-specific ones. [Amazon, Remuneration
Report, 2019]

The main stakeholders in the preparation and implementation of the Remuneration policy for
Amazon are Board of Directors, Chair, CEO, HR department, Finance division, along with a
Remuneration and Appointments Committee. Few important functions of this Committee are
to regularly assess the adequacy and uniformity of the Remuneration Policy, delivering a
proposal to the Board of Directors, monitor the implementation of any new decision taken by
the boards. [Amazon, Remuneration Report, 2019]

The scenario takes a 360-degree turn for worse when we talk about, non-corporate
employees, especially for the workers in their fulfilment centres (which are basically
warehouses). Though after a lot of Clashes with Bernie Sanders in USA (biggest market for
Amazon), the minimum wage has been increased to 15$, the fact that the workers are put
under immense metal, and physical stress remains to addressed. [TruthDig, December 2019]

Independent auditors’ reports:

The independent auditor’s report verify the company Balance sheet, Profit and Loss sheet and
Cash flow based on the International Financial Reporting Standards (IFRS) if the company is
outside of USA as in the case of Amazon India division else it is verified based on the
Generally accepted accounting principles (GAAP) if the company is headquartered in USA as
is the case with the Amazon is.

Katie Arcieri, Retail & Consumer Products,

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-
headlines/flipkart-is-no-1-in-india-but-faces-formidable-foe-in-amazon-say-experts-
54083920#:~:text=Flipkart%20is%20the%20largest%20online,controls%20a
%2038.3%25%20market%20share.

Titin F. Nur1, Hadining Kusumastuti, Revenue Recognition for E-Commerce Retailers

NATHAN REIFF, Top Amazon Shareholders,

https://www.investopedia.com/articles/insights/052816/top-4-amazon-shareholders-amzn.as
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https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-
headlines/flipkart-is-no-1-in-india-but-faces-formidable-foe-in-amazon-say-experts-
54083920#:~:text=Flipkart%20is%20the%20largest%20online,controls%20a
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Retailers

8. NATHAN REIFF, Top Amazon Shareholders,

https://www.investopedia.com/articles/insights/052816/top-4-amazon-shareholders-
amzn.asp