CB Insights - Amazon Disruption Industries PDF

The 7 Industries
Amazon Will
Disrupt Next 2019
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Table of Contents
THE 4 INDUSTRIES AMAZON WILL DISRUPT IN THE NEXT 5 YEARS
Pharmacies: Making drugs a low-margin commodity 6
Small business lending: A direct, data-driven source of financing 16
Online groceries: Faster delivery and better logistics 27
Payments: Giving small merchants a cheaper option 36
THE 3 INDUSTRIES AMAZON COULD GO AFTER NEXT
Mortgages: Owning the distribution end 43
Home & garden: Capitalizing on supply chain expertise 45
Insurance: Bundling value into the shopping experience 48
The 7 Industries Amazon Will Disrupt Next 2

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.
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.

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.

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.

Flush with cash, more startups than ever before are choosing to
forgo the public market and stay private for far longer than in
years past.
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.
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 on 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.

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.

WHERE IS ALL THIS DATA FROM?
The CB Insights platform

has the underlying data
included in this report
CLICK HERE TO SIGN UP FOR FREE

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The 7 Industries

CB Insights is a tech market intelligence

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THE 4 INDUSTRIES AMAZON WILL DISRUPT IN THE NEXT 5 YEARS

Pharmacies: Making drugs a low-margin commodity 6

Small business lending: A direct, data-driven source of financing 16

Online groceries: Faster delivery and better logistics 27

Payments: Giving small merchants a cheaper option 36

THE 3 INDUSTRIES AMAZON COULD GO AFTER NEXT

Mortgages: Owning the distribution end 43

Home & garden: Capitalizing on supply chain expertise 45

Insurance: Bundling value into the shopping experience 48

The 7 Industries Amazon Will Disrupt Next 2

Jeff Bezos once famously said, “Your margin is my opportunity.”

Throughout the 2000s, Amazon’s e-commerce dominance paved

The 7 Industries Amazon Will Disrupt Next 3

The tech giant has acquired a brick-and-mortar grocery chain, and

Last June, it acquired the online pharmacy service PillPack. Now,

On its own Amazon Marketplace, the company is using its sales

On calls with investors in 2018, executives of public American companies mentioned

The 7 Industries Amazon Will Disrupt Next 4

The 7 Industries Amazon Will Disrupt Next 5

Pharmacy chains like Walgreens and CVS have already seen

Amazon’s interest in disrupting the drugstore is decades old. In

In 2018, Amazon made another move towards gaining footing in

The 7 Industries Amazon Will Disrupt Next 6

Image source: AlphaStreet

Amazon’s acquisition of a $100M+ business with pharmacy

WHY AMAZON IS GOING AFTER PHARMA

Convenience: The process of filling a prescription at a typical

Customer experience: Complaints from users of specialty

The 7 Industries Amazon Will Disrupt Next 7

Partnerships: Amazon is working with holding company Berkshire

Pre-existing customer base and distribution capabilities: CVS has

Physical stores: When Amazon acquired Whole Foods in 2017,

Amazon has also announced plans for a new grocery chain,

The 7 Industries Amazon Will Disrupt Next 8

The pharmaceutical supply chain involves all kinds of middlemen,

In broad terms, patients pay pharmacies for drugs, which pay

The 7 Industries Amazon Will Disrupt Next 9

Virtually every insurance provider outsources its drug procurement

In the long-term, Amazon’s skillset and scale could give it the

The 7 Industries Amazon Will Disrupt Next 10

PillPack delivers users’ medications directly to their homes.

PillPack’s reach is limited by its distribution licenses. Companies

The 7 Industries Amazon Will Disrupt Next 11

In the future, these capabilities could lead to Amazon getting into

As Amazon continues to put its money and influence to work

The 7 Industries Amazon Will Disrupt Next 12

Today, Amazon’s efforts in the pharmaceutical space mainly point

The current process of picking up a subscription is time-consuming

Retail pharmacies’ main defense against disruption is the fact that

Pharmacy benefit managers (PBMs)

In the longer-term future, Amazon could use these capabilities to

Three PBMs make up around 80% of the market in the US — CVS

These top three PBMs brought in $10B in profit in 2015, including

The 7 Industries Amazon Will Disrupt Next 13

Amazon does not rely on pharmaceuticals to drive its profits, so