(Bloomberg Intelligence) — Alexa, ads and cloud will likely play an increasingly key role in Amazon’s growth, in our view, as Covid-19 accelerates the e-commerce giant’s taking leading share in target end-markets we estimate now total $3.1 trillion across segments. Amazon’s long-term bets have typically paid out over a period of 8-10 years in terms of market share, revenue growth and profit, though the pandemic’s stay-at-home work and lifestyle trends likely hasten the timeline going forward.
The e-commerce, cloud and advertising markets that Amazon targets will grow by double digits to exceed the $3 trillion mark in 2025 — a year earlier than our previous calculation made in 2018, which called for $2.9 trillion by 2025. E-commerce, the largest piece, may expand at about a 10% compound annual rate, bolstered by the impact of Covid-19 on retail. Cloud services is the No. 2 market, with 17% growth. Together with steady market-share gains, this can push Amazon’s net revenue to above $700 billion by 2025 from $233 billion in 2018, a 17% annualized growth rate. While e-commerce makes about 90% of Amazon’s end markets, growth in higher-margin advertising and cloud services would mean faster profit growth. Our estimates exclude China, where Amazon faces regulatory and competitive barriers.
Amazon can participate in retail segments that amount to about 16% of global GDP, excluding China, or $11.5 trillion this year. Its penetration rate in this broader market is 3.7%, vs. 2.7% in 2017, based on gross merchandise volume with a higher rate in nonfood retail segments. Amazon has a lot of room to increase sales, given the overall e-commerce penetration rate in retail is less than 15% globally, based on BI analysis and U.S. Commerce and eMarketer data. This compares with a 10% penetration rate three years ago, according to our estimates.
Amazon’s market share in global e-commerce, minus China, is about 25%, and over 40% in the U.S. The e-commerce penetration rate is significantly higher in segments like books and consumer electronics, and just around 10% or below for home furnishing, health care and groceries.
Grocery is the largest retail segment, and has the lowest e-commerce penetration. Faster adoption bolstered by pandemic-induced habits gives Amazon a chance to make headway, while physical stores may take longer to scale. Amazon was the most-used groceries retailer, with 62% of eMarketer’s U.S. survey respondents indicating they relied on Amazon during April. Walmart and Target came next, at 42% and 25%. While this will taper with stores reopening, a lasting impact on customer behavior is likely as they’ve shown repeat purchasing once they cross the line to try online grocery shopping for the first time. Users show high willingness to purchase pantry staples and packaged goods online. Amazon’s efforts such as increased hiring to meet surging demand will pay off in terms of customer experience, which will aid retention.
Amazon relies on four countries — the U.S., U.K., Germany and Japan — for 89% of its retail sales, highlighting the opportunities for international expansion in the next decade. Globally, the e-commerce penetration rate may surpass 19% by 2025, with adoption accelerated by the lasting impact of social distancing measures from Covid-19. The global e-commerce penetration rate for the markets Amazon can target is about 8% this year, based on BI research and eMarketer data.
This penetration rate excludes auto sales, event tickets, restaurants and travel sales, providing a clearer representation of Amazon’s end-market. E-commerce penetration globally, excluding China, for non-food retail is estimated at about 20% in 2020 vs. 6.7% for food, based on BI analysis.
For Amazon, consistent revenue growth and market-share gains will hinge on expansion in verticals where its penetration is relatively low. These are led by groceries, health care and home furnishing, where e-commerce is just around 10% of segment sales. Consumer electronics, books and media penetration are at near-peak levels, while apparel and office supplies have room to grow. Accelerated gains in grocery may rely on Amazon’s ramp-up of its last-mile delivery network, as competitors such as Walmart are fiercely defending U.S. share and other players like JioMart and Alibaba-backed Big Basket are fighting for share in India.
The Fulfillment by Amazon program should increase penetration in key areas. Amazon’s home services and augmented-reality push should also aid vertical expansion.
Amazon’s near-term gains in health care may come from larger agreements for delivery of medical supplies, such as its partnership with the Canadian government struck during the pandemic’s peak. Furthering progress in last-mile delivery will be crucial. An opportunity that Amazon is eyeing with PillPack is the prescription-drug market, which surpassed $500 billion in the U.S. PillPack is positioned to disrupt the pharma supply chain over time as current efforts are focused on partnerships with major health insurers. Alexa became HIPPA-compliant in 2019, and Amazon has rolled out medication management features via the digital assistant. Current offerings work with third-party pharmacies, but Amazon may eventually roll out its own pharmacy services. Amazon filed for trademarks of the name Amazon Pharmacy in several countries.
To contact the analyst for this research:
Jitendra Waral at