Feasibility study:

Amazon Go

By Chantelle Walsh, David Caton, and Ammine Ait Abdeslam

Amazon Background:
Amazon is an American electronic commerce and cloud computing considered to be the largest online
retail store in term of revenue and market capitalization. It was founded by Jeff Bezos, the actual CEO, on
July 5, 1994. The company is mainly focusing in new disruptive technology such as: (Amazon - Investor
Relations - IR Home)

• Amazon Web Service: a powerful cloud computing that provide services in term of
Infrastructure, Platform and Software as a service
• Alexia: this electronic device is a virtual assistant that interact with humans and other
electronic devices
• Amazon Go: the first no self-checkout technology that allows customers to purchase
groceries without physically paying.

Strategy of Amazon:
The strategy of being cost leadership brought Amazon the competitive advantage that make its
competitors in a weak spot. Nowadays, not only Amazon is investing in online activities, but also in
technologies that change the way to consume and interact with electronic devices (Amazon - Investor
Relations - IR Home)

Vision of Amazon:
Amazon’s vision statement is “To be Earth’s most customer-centric company, where customers can
find and discover anything they might want to buy online.” (Amazon's global career site) Amazon is
determined to be the company of the future by concentrating their efforts on three objectives:

• Global Reach: it is about being an international leader

• Customer Prioritizing: Making the customer in the center of interest
• Widest Selection of Products: providing the best quality/cost choice of products

Mission of Amazon:
Amazon’s mission statement is “We strive to offer our customers the lowest possible prices, the best
available selection, and the utmost convenience.” (Amazon's global career site), The principal mission of
Amazon is to be at the disposition of its customers by providing the best services. This requires the
following objectives:

• Lowest Prices: Amazon has an excellent expertise in term of economic of scale that allowed
the company to influence the prices on the market for the sake of its customers
 • Best Selection: Amazon works close with its suppliers in order to get the best quality
products in the market
• Utmost convenience: Amazon strive to provide the best experience possible for its costumers

How Amazon Go works

Amazon go relies on their “Just walk out technology”. The technology uses sensor fusion,
computer vision, and deep learning algorithms. These technologies keep track of the items taken
off the shelves and returned as well as what is in your cart.

Computer vision technology

Computer vision technology is a computer system that enables computers to have “sight”. Not
only does the technology allow the computers to see what is going on, but it allows them to
process and provide output based on the input that is being received from their “sight”. It uses its
sight to recognize objects and perform high-level analysis. Computer vision is similar to artificial
intelligence in that the computer must think and provide an appropriate output. The goal of
computer vision technology is to “enable computers to perform the same kinds of tasks as
humans with the same efficiency”.

Some of the core technologies for computer vision technology used by Amazon Go (SRI
International 2018):

• -Image and video-based indexing/search

• -Object recognition
• -Event detection and recognition
• -Tracking
• -3D scene modeling
• -Computational imaging
• -Embedded processing
• -Video archiving and retrieval
• -Video text/recognition/extraction

Sensor Fusion Technology

Sensor fusion technology relies on multiple sensors. The multiple sensors sense sensory
information and when combined, create a more accurate interpretation of the information.
Each sensor has algorithms that tell them what the range is of normal. Every time the data loops
from the sensor, it improves the quality of the sensors judgement.

There are different filters that can be applied to the sensors to tune the sensors to different levels
of awareness. Some examples of these filters are:

• -Kalman filters- mathematical systems

• -PID filters-manually set filter
• -Customer Filters-hybrid between the Kalman and PID

Deep Learning Algorithms

Deep learning is also known as deep structured learning or hierarchical learning. It is part of the
machine learning movement that learns based on data representation. It can be supervised,
unsupervised, or semi-supervised. The deep learning algorithms are inspired by the human
nervous system and how it connects with the brain. The algorithms use inputs from the previous
level’s output to create a more complex assumption. The deep in deep learning refers to the
many layers of algorithms that information passes through.

How to Use Amazon Go

To start using Amazon Go, you will need to have a membership account on Amazon, a recent
version of either an android or iOS phone, and download the Amazon Go App. There is no cost
to download the app and it is simple and intuitive to use.

The Business drivers for the proposed system:

Amazon is a company that focus on innovation. Each year the company works on dozens of
projects that aim to change our daily lives. According to Deborah Weinswig, a Chartered
Professional Accountant and Manager Director at Fung Global Retail & Technology, Amazon go
is an opportunity for the company because it contributes to the success of Amazon in many ways
such as (Deborah Weinswig):

Data Analysis for better services:

Amazon has an incredible database regarding its consumer. It helped them to improve their
profits, customer satisfaction and customer retention. With Amazon Go the business analyst will
have the ability to gather data about customer’s behavior and preferences.
Synergy with other Amazon services:
Amazon is one of the biggest Cloud computing in the world. The strategy of Amazon is
providing Amazon Go as a complement to AWS for analytics and marketplace platform

Increase the profit margin of the grocery sector:

The market of the grocery sector has a unique financial characteristic of having small profit
margins, on average around 1.7%. Usually, the stores make up their profit on their ability to
rotate the stocks, which means the focus on quantity sold. Amazon Go can affect the traditional
component costs percentage and will likely to improve profit margins.

Disadvantages of Amazon Go:

Cost / Benefit of the project:
Amazon spends billions of dollars in Research & Development, in 2017 alone; Amazon spent
nearly $23 Billion. Amazon has been development the Just Walk Out technology since 2013.
They submitted 2 patents describing how the technology works. Amazon Go is a costly project
for the company that it will take years to be profitable with the adequate strategy.

Competitor’s reaction:
Amazon Go is competing with some giants of the retail industry that they have years of
experience and presence in the market. According to Rachel Kraus, a Journalist at Mashable
online business blog, the actual competitors such as Microsoft and Alibaba are developing a
similar technology by using the Radio Frequency Identification (RFID) technology for payments
that could help Walmart to compete with Amazon (Rachel Kraus).

Financial Analysis of Amazon Go

Amazon, as group, is one of the most profitable companies in the world. Since its Initial Public
Offering in 1997, Amazon’s market capitalization estimated at 889 294 M$ has increased by
53,040%. This stock performance reflects Amazon strategy to be positioned as a Technology
Stock rather than Production Stock. Amazon is ranked number one in the United Stated as the
company that spend the most in Capital Expenditure (CAPEX) and Research and Development
(R&D).

According to their CEO, Jeff Bezos (who is the richest person in the world with a net worth
estimated at 143.1 billion USD), the reason for the success of Amazon is its ability to put
innovation as its core activity which drives a higher return for the company.
Amazon Go, the latest technology developed by the group, is seen by the market analyst as the
new disruptive technology that will not only make Amazon a sustainable company, but also it
will impact the economic activity. The technology launched in 2018, after more than 9 years of
development. Currently, there are no financial studies or reports from Amazon as the technology
is still too new to accurately predict profitability.

Amazon Go Analysis
Threat of New Entrants:
Just Walk Out has not been on the market because there is technological barrier that existed.
Amazon not only has the budget for the research & development, but also the expertise necessary
to develop a high technology. The new entrants need to be innovative enough to bring a new
experience to the current customer. With the acquisition on Whole Food in 2017, it provided
Amazon a strategically position in the market

Threat of Substitute Services:

The only existing substitute is a cashier system or the self-checkout. According to National
grocers Association 75% of customers and 90% of retail stores are not willing to change the
system of payment services.

Bargaining Power of Buyers:

Due to the presence of a large numbers of convenience stores in the cities, the customers have
the choice to shop wherever they want. The buyers have an important bargaining power that
Amazon go will try to attract them by using the same strategy which is being a cost leader and
providing best quality product.

Bargaining Power of Suppliers:

The purpose behind Amazon-Whole Food merger was to integrate a major supplier within the
supply chain. Amazon Go has the exclusivity over the 360 brand products with a lower cost.

Rivalry between Existing Firms:

Amazon has introduced into a market that has been already taken by big multinational companies
such as Walmart and Costco. Amazon Go is catering to a niche market by targeting busy
professional people working in urban areas and providing a rapid sale for customers.
Financial Feasibility study:
To perform a Financial feasibility study for Amazon Go, we had to undertake the subject in a
creative way to gather, analyse and forecast the financial impact of this technology Just Walk
Out over its feasibility. Our study will focus on the following areas:

Financial Strategy:
Financial Ability of Amazon to develop technology and making them ready to use

Forecasting Analysis:
Forecasting the financial contribution of Amazon go with the actual strategy of the group

Alternative financial stream:

Suggesting a new stream of revenue that will position Amazon at a safer place

Financial Strategy:
Their financial strategy is the major reason why Amazon can develop expensive technologies,
invest in different market, and buy well-known company such as Whole Foods it is due to its
ability to generate Cash even with a small net profit of 1.7%

Cash Conversion Cycle

The Cash Conversion Cycle (CCC) or the Working Capital is financial measurement that shows
how long it takes for an organization to convert its resource to cash (Amazon Cash Machine
Business Model Explained). It takes into consideration three financial elements:

• Days inventory
outstanding
• Days sales outstanding
• Days payable outstanding

Due to its bargaining power,

Amazon can negotiate the best
contractual terms that impact
favorably its Cash matters

In the last three months ending as of December 2017, Amazon had 26.92 days to use cash for
investing and financing activities.
Financial performance:
According to Amazon’s Annual report 2017, the group has reached the best financial
performance of its history. This was due to some successful investment such as Amazon Web
Service and Amazon Prime that confirms Amazon is in the right track to achieve their goals
(AMAZON.COM).

Income Statement
The following table shows Amazon Actual and Estimated income statement.

From the table above, we can notice the following elements:

• The sales are increasing with an average of 21% and they will triple by the end of 2020
• The Operating Costs represents on average 97% of the sales for which we will break it
down for more clarity
• The Operating Profit represents on average 3% which small for company as Amazon

The reasons behind those numbers:

• Amazon generates sales from diverse activities such as Retail Products, Retail third-party
Seller Service, Retail Subscription Services, Amazon Web Service and Others
• Amazon is a multi-national company that generates 33% of revenues from international
segments and 67% from the United-States.
• The new technologies that are ready to be deployed such as Amazon Go and other are
only in phase of growth such as Amazon Web Service
Profitability analysis:

Amazon financial strategies only focus on activities that are highly profitable, all other activities
that shows a bad financial performance are left behind

The following tables shows the profitability performance of the group

Amazon Go must meet those requirements and must show a high profitability in a near future.

CAPEX and R&D strategy:

The sustainability and the growth of a company
are based on how much CAPEX and R&D a
company spends. In the case of Amazon, the
company is ranked number one in term of cash
spent for development.

As shown on the graph, Amazon spent $34

Billion of their revenue on R&D and CAPEX
which represents 18% of their revenue. It is one
of the reasons why their net profit is small.

Amazon is investing in those activities:

AI/Automation, Behavior Analytics,
Cybersecurity, Hardware, Could Computing, and Unmanned Aerial Vehicles. Conversely, they
did not show any interest on investing in Mobile or Virtual Reality where Google and Microsoft
have an interest on those segments.
 According to the Ángel González,
Journalist at the Seattle Times, 75% of the
Capital spending goes to the development
of Amazon Web Service, 15% goes to
Alexia and 10% to other projects. (Ángel
González)

Therefore, for our study we assume that

Amazon will use 3% of the budget for the
development of Amazon GO.

The 5% will represent a total investment of 1.62B over 6 years.

In conclusion:
The company uses the financial means necessary to undertake any technological development
due to its ability to generate cash, profitability and high investment in CAPEX and R&D.

Forecasting Analysis:
To run the numbers, we need to understand the financial performance of the Grocery Retailing
sectors and the reason why Amazon would want to invest in that sector.

The potential size of sector:

This sector considered one of the safest areas to invest due to its estimated size in 2016 of $600
Billion in the United States, which 1% of this sector represents 10% of Amazon revenue.

Amazon started investing in this sector with the recent acquisition of Whole Food in 2017 for
$13.7 Billion. The company has an objective of opening 2000 store by the end of 2025 and
becoming the leader of the sector; however, the grocery market is highly competitive where
Walmart and Costco have already 25% and 13% shares of the market respectively with a history
behind. According to Bloomberg, there are currently about 38.441 grocery stores in the U.S.

The Technology investment:

Amazon wants to provide a new experience of grocery shopping with their Just Walk Out
technology. This sector is noticing an important volume of investment in technology for
remaining competitive, improving efficiency and connecting with shoppers. Among the type of
technologies: Mobile Payment, Apps, E-Commerce, Social-Media, Loyalty Programs, Big Data
etc. Amazon has already developed some technology in house that can be used in this sector (CB
Insight).

The financial characteristic of the sector:

According to a financial Benchmark conducted by the National Grocers Association in 2014
about the retailing sectors, they came up with the following financial characteristic of the sector:

Sales and transactions:

• Weekly Sales per store: Average $305,105 and Ranges from $30,600 to $1,641,000
• Average annual sales per square foot: $1,725 per sq. ft. weekly sales
• Weekly Transaction per store: Average 11,211 and Ranges from 2,147 to 29,477
• Transaction Size: Average $27.65 and Ranges from $14 to $58
• Sales and transaction by checkout: Weekly store sales by checkout $29,194 and Weekly
transaction by checkout 1,241
• Sales growth: increase yearly on average by 1.5% with an inflation of 0.2%
• The gross margin: it is virtually flat at 56.48%
• The net profit: showed a significant improvement, but it still low at 1.65% for Publicly
Traded companies and 4.01% for Profit leaders

The components of the cost and their percentage:

• The Cost of the products: 55% which the largest cost of the sector that Amazon will
primarily use the 365 everyday value products of Whole Foods
• Labor and Benefits: 33.85% which is the cost that Amazon wants to reduce it with
Amazon GO
• Rent: 1.87%
• Utilities: 1.48%
• Inventory Shrinkage: 1.44% also Amazon go will play a major role to reduce it
• Supplies:1.32%
• Advertising:1.24%
• Depreciation: 0.9% this will be increase by the use of the technology
• Repair and maintenance: 0.84% this also will increase due to the technology that will be
installed
 • Interest: 0.32%

Forecasting financial performance of Amazon Go:

To perform a forecasting, we will use the financial indicator from the Benchmark analysis
coupled with the Amazon Strategy.

Revenue forecasting:
To estimate the revenue, we can use one of the two indicators such as the average weekly sales
or the sales per sq. ft. for the store opened at Seattle with 1,800 sq. ft. and for the next 2,000
stores that Amazon intends to open in the next few years.

Seattle Annual
Indicator Sales units Sales Strategy Strategy Annual Sales
Weekly sales $ 60,000 53 $ 3,180,000 2,000 $ 6,360,000,000
$
Ft. sq 1800 $ 3,105,000 2,000 $ 6,210,000,000
1,725

Notice: We did not take into consideration the number of the customers that will be attracted
by Amazon Go

Change the components cost:

Amazon Go has a great potential for costs saving that the company will focus on such as:

The labor costs:

The labor cost represents the highest costs percentage in the retail sector of 34%; with Amazon
Go the company wants to eliminate the portion that represents the Cashiers and the security
guards which represents 14% of the total costs.

According to researchers at Oxford University in 2013, there is a 97% chance cashier jobs will
be automated. This scenario is likely to happen.

Depreciation costs:
Amazon go is 100% based on IT technology such as: Wireless sensors, Apps, Artificial
intelligence, Image Recognition, QR Code and so on. These IT technologies are more accessible
and cheaper. Thus, we estimate that the depreciation expenses will increase by 4%. According to
Analytics Retails Existing self-checkout machines are already known to cause loss rate of 4%
Repairs and Maintenance:
As with any technology, there will be an increase on costs for updating the software, replacing
the sensors, fixing bugs and so on. We estimate the costs at 2%

Inventory Shrinkage:
According to the Ndayishimiye Boaz, who works for NRF, inventory ‘shrinkage’ amounts to
1.44% or close to $50 billion annually. That number is comprised of (Ndayishimiye Boaz):

• Shoplifting/external (including ORC) = 36.5 percent

• Employee theft/internal = 30 percent
• Administrative and paperwork error = 21.3 percent
• Vendor fraud or error = 5.4 percent
• Unknown loss = 6.8 percent

Amazon GO will be able to save 0.96% of shoplifting externally and/or internally.

Notice: we assume that the other costs will not be affects and we don’t consider the scalability
of the stores

Forecasting the annual income:

Financial Elements % Seattle Strategy
Average Sales 100% $ 3,142,500 $ 6,285,000,000
Cost Of Good Sold 55% $ (1,728,375) $(3,456,750,000)
Gross Margin 45% $ 1,414,125 $ 2,828,250,000
Labor and Benefits 20% $ (628,500) $ 1,257,000,000
Rent 2% $ (58,765) $ 117,529,500
Utilities 1.48% $ (46,509) $ 93,018,000
Inventory Shrinkage 0.48% $ (15,084) $ 30,168,000
Supplies 1.32% $ (41,481) $ 82,962,000
Advertising 1.24% $ (38,967) $ 77,934,000
Depreciation 4.00% $ (125,700) $ 251,400,000
Repair and maintenance2.00% $ (62,850) $ 125,700,000
Interest 0.32% $ (10,056) $ 20,112,000
Total Operating Costs 33% $ (1,027,912) $ 2,055,823,500
Net Profit 12% $ 386,213 $ 4,884,073,500

Comments on the forecasting annual income:

• Amazon GO has a tremendous potential to generate a cash flow that will reimburse the
amount spent in the R&D and acquisition made from 2009 to 2018
• Amazon needs to start the application of its strategy within the next two years if they
want to get a higher return on investment
 • Amazon must reduce the costs of Repairs and maintenance
• If Amazon opts for buying stores rather renting, they will have an increase on
depreciation and a decrease on rent. In our opinion, it will be better if they rent the stores
because those stores are small and they are very expensive in urban areas.
• The store is variable factor because the more we increase the ft. sq. the more the cost will
increase in term of depreciation

Forecasting the Net Present value of Amazon GO

We performed two scenarios about the Net Present Value of Amazon to show the sensitivity of
project and the reason why the company is willing to open 2,000 stores by the end of 2025.

Pessimist scenario
In this scenario we used a WACC of 12.34% provided by GuruFocus, a financial website that
estimated Amazon discount by using the Capital Asset Pricing Model (Amazon.com WACC %)

Prior 2018 2018 2019 2020 2021 2022 2023 2024 2025
Number of stores 1 8 50 150 280 380 480 651
Cumulative # of stores 1 9 59 209 489 869 1349 2000
Discount 12.34%

Cash-Flow $ 511,913 $ 4,095,306 $ 25,595,663 $ 76,786,988 $ 143,335,710 $ 194,527,035 $ 245,718,360 $ 333,255,526

Cumulative CF $ 511,913 $ 4,607,219 $ 30,202,882 $ 106,989,869 $ 250,325,579 $ 444,852,614 $ 690,570,974 $ 1,023,826,500
Discounted CF $ 2,271,575,175 $ 455,682 $ 4,101,139 $ 26,885,243 $ 95,237,555 $ 222,828,538 $ 395,987,729 $ 614,715,128 $ 911,364,162

Investment
Technology $ (50,000) $ (400,000) $ (2,500,000) $ (7,500,000) $ (14,000,000) $ (19,000,000) $ (24,000,000) $ (32,550,000)
Store equipment $ (320,000.00) $ (2,560,000.00) $ (16,000,000) $ (48,000,000) $ (89,600,000) $ (121,600,000) $ (153,600,000) $ (208,320,000)
Total additional Investment $ (370,000) $ (2,960,000) $ (18,500,000) $ (55,500,000) $ (103,600,000) $ (140,600,000) $ (177,600,000) $ (240,870,000)

Discounted Additional Investment $ (658,714,616) $ (329,357) $ (2,634,858) $ (16,467,865) $ (49,403,596) $ (92,220,046) $ (125,155,777) $ (158,091,508) $ (214,411,608)
R&D + CAPEX $ (1,620,000,000.00)
Total Investment $ (2,278,714,616)

Net Present Value $ (7,139,442)

Positive scenario:
 In this scenario we used a discount of 8.74% provided by AmigoBull, a financial website that
estimated Amazon discount by using the Weighted Average Cost of Capital (Virendra Chauhan)

Prior 2018 2018 2019 2020 2021 2022 2023 2024 2025
Number of stores 1 8 50 150 280 380 480 651
Cumulative # of stores 1 9 59 209 489 869 1349 2000
Discount 8.74%

Cash-Flow $ 511,913 $ 4,095,306 $ 25,595,663 $ 76,786,988 $ 143,335,710 $ 194,527,035 $ 245,718,360 $ 333,255,526

Cumulative CF $ 511,913 $ 4,607,219 $ 30,202,882 $ 106,989,869 $ 250,325,579 $ 444,852,614 $ 690,570,974 $ 1,023,826,500
Discounted CF $ 2,346,779,061 $ 470,768 $ 4,236,913 $ 27,775,319 $ 98,390,536 $ 230,205,609 $ 409,097,493 $ 635,066,189 $ 941,536,233

Investment
Technology $ (50,000) $ (400,000) $ (2,500,000) $ (7,500,000) $ (14,000,000) $ (19,000,000) $ (24,000,000) $ (32,550,000)
Store equipment $ (320,000.00) $ (2,560,000.00) $ (16,000,000) $ (48,000,000) $ (89,600,000) $ (121,600,000) $ (153,600,000) $ (208,320,000)
Total additional Investment $ (370,000) $ (2,960,000) $ (18,500,000) $ (55,500,000) $ (103,600,000) $ (140,600,000) $ (177,600,000) $ (240,870,000)

Discounted Additional Investment $ (680,522,347) $ (340,261) $ (2,722,089) $ (17,013,059) $ (51,039,176) $ (95,273,129) $ (129,299,246) $ (163,325,363) $ (221,510,024)
R&D + CAPEX $ (1,620,000,000.00)
Total Investment $ (2,300,522,347)

Net Present Value $ 46,256,714

Comments:
• The cash flow is based on the Net profit plus the depreciation
• Both scenarios provide two different plausible result based on two different methods for
calculating the discount
• Under the CAPM discount the project is not profitable and should be abandoned
• Under the WACC discount the project is profitable and should be pursued
• There will be additional investment relating to the stores such as Technology used and
Equipment of the grocery. We used the Total Cost of Ownership to determine the gross
value of the acquisition by store.

In conclusion:
The grocery retailing market is risky for the company due to the following elements:

• The market has a small average net profit

• Difficulties to switch costs from a traditional grocery retail benchmark
• Sensitivity of the project regarding the discount
• The obligation of the company to open 2,000 stores within 7 years

Due to those elements, we suggest Amazon to look for an alternative solution to increase their
profit and have a positive return
Alternative Financial Stream
Instead of only using the Just Walk Out technology for themselves, Amazon should sell the
technology to other retailer stores to increase their profits. According to Bloomberg studies, there
are 38,441 groceries stores in the U.S. that are a potential market for Amazon.

Gene Munster, head of research at Loup Ventures in Minneapolis, said that this is the future for
the checking out market which is worth $50 billion.

Among the potential market, Amazon can get at least 5% of the market shares especially with
convenience stores, groceries stores and pharmacies. With a 5% of shares Amazon can do
business with 2,600 stores.

To estimate the potential revenue of this new stream, we used a benchmark from the existing
self-checkout that are on average sold at $125,000 fee for the installation.

#Stores %Shares # Target stores Fee Forecasting revenue

38441 5% 1922 $125,000 $240,256,250
38441 10% 3844 $125,000 $480,512,500

Forecasting the new financial stream:

This market has a great potential which can generate at least $240million with only 5% of market
shares

Forecasting the annual income

The annual income is forecasted Financial Elements % 5% of the Market share

by using 5% of market shares and Average Sales 100% $ 240,256,250
Cost of Good Sold 35% $ (84,089,688)
the Cost of Goods Sold is based Gross Margin 65% $ 156,166,563
on the same estimate for the Labour 25% $ (60,064,063)
Other costs 15% $ (36,038,438)
additional technological
Total Operating Costs 40% $ (96,102,500)
investment to be made in the Net Profit 25% $ 60,064,063
main strategy seen above

Comments:
With this actual strategy, Amazon could improve their profit by generating a New Cash Flow
worth annually $60million. It reduces the pressure over the Net Present Value of the main project
and contribute to achieve their overall strategy.

In conclusion:
Regarding the financial feasibility of the project, we conclude that Amazon GO is a financially
plausible for the following main reasons:

• Amazon has a great financial cushion due to its cash strategy

• Amazon spend 40% of its financial resource for the innovation
• The main strategy of using the technology in house by opening 2,000 stores is feasible,
but it has some risks
• The company can sell the project for other sectors to increase their profit.

Amazon Go timeline
December 5th, 2016-Beta store opened to employees in Seattle.

January 2018-Store open to general public in Seattle.

Business insider claims that Amazon will open 2,000 storefronts for Amazon Go in the next 10
years. Amazon claims this is not true and insists they are still learning.

The business insider claims Amazon is to open 20 stores in the next two years.
Later in 2018, Amazon Go expects to open a total of 6 locations.

Technical Considerations
The main technical considerations made with regards to this project were:

• The technology was created in house and patented to protect it, which lowers costs and
allows for licensing of the technology with a potential return of $850 million. (24)
 • Microsoft, Wal-Mart, Costco and Alibaba among others are developing similar
technology and are expected to reach Amazon’s level of technological proficiency within
a few years. (18)
• The technology required to access an Amazon Go store creates an “exclusive”
environment accessible only to the technologically savvy. (27)
• Amazon could use the customer information gained from Amazon Go shoppers to further
enhance the customer experience at Amazon and Amazon Web Services. (24)
• Testing of the software and machine learning are continuing as real time tests by
customers have shown it is possible to “purchase” items without paying for them. (26)

Depiction of Amazon Go Technology:

Operational Considerations
The main operational considerations made with regards to this project were:

• Not having to process transactions allows for less staff and/or a greater focus on customer
service and merchandising.
• The system for tracking purchases of goods means customer theft can be combated by
technology instead of staff. (26)
• Customers purchasing age restricted products. (29)
• Whether to continue producing fresh products on site, which causes higher operating
costs, or centralize fresh product production and ship it to stores to create operating
efficiencies.
• The possibility of partnering with Whole Foods to use their management, administration
and ordering systems to avoid developing their own.
• Stocking Amazon Go stores with products produced or carried by Whole Foods.

Economic Considerations
The main economic considerations made with regards to this project were:

• Setting up stores with this technology creates a high upfront fixed cost that will need to
be amortized over the life of the stores. (24)
• Amazon invested a large amount of money to create and perfect the Amazon Go concept
and is looking to monetize the development costs by setting up an estimated 2000 stores
by 2025.
• The technology and operating costs compared to the amount of revenue generated by the
average store annually which is estimated at $900K per store. (24)
• Finding and securing high volume locations frequented by target demographic groups.
(24)
• The cost of rolling out a retail network verses licensing the technology to other operators
in the retail sector.
• Competing against other retailers, such as 7-11, in the convenience store space and
against other retail concepts in general.
 • The net profit margin in the overall retail industry is 1-2% (24)
• This model presents the possibility of lower variable costs than the average retailer.

Risks Considered
The general risks considered with this project mainly flow from the TOE considerations:

• Wal-Mart, Costco and Alibaba among others are developing similar technology and are
expected to reach Amazon’s level of technological proficiency within a few years.
• The technology required to access an Amazon go store creates an “exclusive”
environment accessible only to the technologically savvy.
• Testing of the software and machine learning are continuing as real-world operations
have shown it is possible to “purchase” items without paying for them.
• The impact of downtime or closures when the technology is not operating correctly.
• Negative impact of potentially putting people out of work in the retail industry with this
technology.
• Concerns about privacy losing customer data in a hacking operation.
• Setting up stores with this technology creates a high upfront fixed cost that will need to
be amortized over the life of the stores.
• Competing against other retailers, such as 7-11, in the convenience store space and
against other retail concepts in general.
• The net profit margins in the overall retail industry is 1-2% which provides a small
margin for error in the operation of Amazon Go.

Recommendations
Based on the TOE and Risks considered, we would like to make the following recommendations:

• That Amazon grows its network of Amazon Go stores to reach breakeven, estimated at
2000 stores, and achieve economies of scale by 2025.
• That Amazon considers licensing its technology to non-competing retailers to enhance
the monetization and pay back from the initial investment to create the Amazon Go
concept.
 • That Amazon Go should be a subsidiary of Whole Foods to take advantage of its
management, administration and ordering systems and more quickly achieve economies
of scale.
• That the production of all fresh items be centralized and shipped to Amazon Go stores to
enhance operational efficiency.
• That Amazon should search for ways to make its retail concept more accessible to people
outside of its key demographics to enhance and create more viable areas to open stores
and enhance operating results.

While creating a store network involves a considerable capital investment, the efficiencies from
partnering with Whole Foods, possible Amazon tie ins and ability to capture and analyse
customer data to enhance the customer experience on all of Amazon’s platforms make Amazon
Go a worthwhile investment.

The forecasted revenue per store is at the low end of what could be considered sustainable, as
such, we recommend that Amazon follow a hybrid model of both licensing the technology to
non-competing retailers as well as rolling out its own chain of stores.

To enhance the operating results of Amazon Go, we also recommend that Amazon find ways to
make the stores more inclusive by finding ways around the member’s only limitation created its
technology. This would allow for a larger base of potential customers and open more areas where
locations would be viable. As well, we recommend that quick expansion of its store base to
achieve economies of scale with the breakeven number of stores estimated 2000. To further
enhance the operating results, Amazon Go become a subsidiary of Whole Foods to take
advantage of all of its expertise and operation facilities. Finally, we recommend that the
production of all fresh products be removed from the store and be centralized to take advantage
of a proven model used by many retails to enhance gross profit on those items shrink the
operating costs of the stores.
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