Amazon Needs to Watch What It Eats

Even Jeff Bezos's trainer wouldn't be able to keep the company looking lean

By any measure, things are going pretty well for Jeff Bezos. On Thursday, the chief executive briefly surpassed Microsoft co-founder Bill Gates to become the richest person on Earth. Bezos—who is worth almost $90 billion thanks to a 17 percent stake in the mega-retailer—has so much money that he's taken to asking random people on Twitter for suggestions on how to spend it. And in his spare time, the 53-year-old got swole.

Gates retook the rich-guy crown on Thursday night, after Amazon did what it always does and reported that it barely made any money, despite selling $38 billion worth of goods and services. That fact briefly spooked Wall Street, but it's a matter of time before Bezos is on top again.

Amazon's profit was miniscule because the company is pouring money into myriad new growth opportunities, including international expansion, grocery stores, Hollywood movies, and wacky new gadgets. Analysts remain optimistic about Amazon, which is worth about $500 billion. Some say it could outpace the likes of Apple to become the world’s first trillion-dollar company.

It's a good story, one Bezos has been telling for 20 years. "It remains Day 1," he wrote in his most recent letter to Amazon shareholders, a reference to the first such letter. In that note, Bezos correctly observed that e-commerce had lots of room to grow. Two decades later, in April, he wrote that Amazon "can have the scope and capabilities of a large company and the spirit and heart of a small one." The implication: The company can keep growing forever.

Of course, business doesn’t work that way, and neither does time. Amazon probably has plenty of good years ahead of it—maybe even trillion-dollar good—but as the company matures, it looks less like a tech company and more like an acquisitive retailer with some side businesses.

There was a time when Amazon's e-commerce engine made it unique, but Wal-Mart is increasingly intent on matching what Bezos has built. Last year, Wal-Mart paid $3.3 billion to acquire, the online discount retailer that styled itself as the Pepsi to Amazon's Coke. Since then, it has spent lavishly to buy up other online retailers and to court the third-party sellers who account for roughly half of the goods sold through Amazon.

To keep its leading position, Bezos's company, built on the premise that e-commerce would replace traditional stores, has been forced to expand into physical retail. It's opening small bookstores, which, as Chief Financial Officer Brian Olsavsky noted during the company’s earnings call last week, Amazon uses as a way to showcase its gadgets. (The gadgets themselves are a low-margin business aimed at selling more stuff.) Amazon has also recently opened a cashier-free convenience store and two drive-through grocery stores. And let’s not forget the proposed $14 billion acquisition of Whole Foods.

This is all very impressive—and if I worked for a regional grocery store such as Wegmans, I'd be concerned. But Amazon's push into physical retail stores won't be transformational in the way shareholders want Every time Amazon opens or buys another retail store, it'll look less like a fast-growing tech company and more like Wal-Mart, which is more profitable than Amazon, but not by much.

There is an exception: Amazon Web Services, which made more than $900 million last quarter—more than the rest of the companyon a mere $4 billion in revenue. But even though Bezos likes to talk up technological investment as a growth strategy, the idea being that an improved customer experience means more business, that dynamic may not work as well when it comes to cloud computing.

As Bloomberg's Sarah McBride wrote last November, big retailers have been increasingly hesitant to store their data on Amazon servers out of concern that they’d essentially be subsidizing their largest competitor. This problem could become worse as Amazon tries to expand into new categories. Netflix famously uses Amazon servers, but it’s hard not to think that as Bezos racks up Emmy awards, Reed Hastings might start figuring out how to take his business elsewhere.

There's another underappreciated risk posed by Amazon's size and ambitions: a regulatory crackdown. The idea has been floated recently by President Donald Trump, who has taken to complaining about Bezos's "no-tax monopoly" when he wants to vent about Washington Post articles. (On Friday, Treasury Secretary Steven Mnuchin suggested the government would scrutinize the company's sales tax collection practices.) And while Democrats have generally treated Amazon-level tech giants with relative deference, there’s evidence that may end, too. As my colleague Peter Coy put it last week, "a day of reckoning is inevitable."

Bezos is telling shareholders that Amazon is just as nimble and hungry as it's ever been, even as it gobbles up big companies and markets, thanks to the company's unusually broad ambitions and its singular relentlessness. This is a useful fiction, but even the most toned corporate physique eventually goes flabby. Day 1 will always turn into Day 2.

    Max Chafkin
    Bloomberg Businessweek Columnist
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