The Amazon.com Inc (NASDAQ: AMZN) stock price has been a terrific performer for investors but what comes next? As part of the FAANG stock series, Aoris’ Stephen Arnold takes a look at the era Amazon left behind and what’s next for the technology giant.
The era Amazon has left behind
Amazon owns online commerce. In the US, Amazon’s share has increased from 38.3% just three years ago to an extraordinary 47.0% today (Source: Statista). It is eight times the size of its nearest rival, eBay Inc (NASDAQ: EBAY), whose share has declined in each of the last two years. It is now the #1 online retailer in most countries in the developed world.
Not only does Amazon account for 65% of all books purchased online in the US, it accounts for 41% of all new book sales, period. It is the largest retailer of clothing in the US, period. Amazon has a market share in excess of 90% of online commerce in categories including home improvement, skin care, batteries, kitchen and dining, golf, and men’s athletic shoes. Amazon really is the ‘Everything Store’. Amazon owns online retail.
Amazon has successfully evolved its online retail business, starting with books and CDs. In building its position of total domination, Amazon has contributed to the failure and hollowing out of large swathes of the retail industry – Borders, Barnes & Noble, Angus & Robertson, Tower Records, HMV, Payless Shoes, Sears, Macy’s, Nine West, J. C. Penney, Southeastern Grocers, Toys “R” Us, The Limited, Vitamin World, Gymboree, Radio Shack and American Apparel are just some of the retail names that have been ‘Amazoned’.
Add to this the vacant shopping malls across the US. To cement its position in online retail, Amazon has acquired Audible (audiobooks), Abe Books and Goodreads, all in book retailing; online clothing and shoe retailer Zappos; Ring, which it purchased for US$839 million to make home deliveries easier; and online pharmacy retailer PillPack for US$753 million. In 2017, it acquired upmarket grocery retailer Whole Foods for US$14 billion.
The era Amazon has entered
Life in the Amazon is getting more competitive, the source of which is large brick-and-mortar retailers who have decided that they don’t want to join the retail roadkill. Walmart Inc (NYSE: WMT), the behemoth from Bentonville, earned revenue of more than US$500 billion in its most recent fiscal year.
It has two main advantages in its fightback against Amazon: the size of its retail store network, and its capacity to make the necessary investments to compete in ecommerce. Walmart operates 4,763 stores in the US and 90% of the population resides within 10 miles of one. It is using this store footprint as a key weapon in the battle to economically and speedily get online purchases into the hands of consumers. Improving on the standard approach of buy online and pickup in-store, by the end of this year Walmart will offer free kerbside pickup from 3100 stores in the US, saving shoppers the time of parking and entering the store.
Interestingly, according to market intelligence firm Numerator, the average spend for kerbside pickup orders is US$125, more than double the average spend per in-store visit of US$50. Walmart is rolling out free one-day shipping on all orders over US$35.
Target (NYSE: TGT), which once outsourced the online retail side of its business to Amazon, is likewise using its strength in brick-and-mortar retail as both a defensive and an offensive weapon in ecommerce. Its online sales grew 41% in Q1 and 80% of online orders are fulfilled from stores, one option of which is kerbside collect. A few years ago, it looked like Best Buy (NYSE: BBY), America’s largest consumer electronics retailer, would be another Amazon casualty, but it has staged a remarkable turnaround.
Best Buy is using its 1,000+ stores as showrooms where consumers can get a pre-purchase experience they can’t get from Amazon. Best Buy also has Geek Squad, an army of 20,000+ service technicians who will assist over the phone or visit a consumer’s home for free to help with installation, repair and advice.
Amazon is responding to increased competition in the fulfilment side of ecommerce retail by shortening the delivery time from two days to next day for Prime members, at an annual expense of about US$1 billion. The cost of competition is also reflected in the massive investment being made by Amazon, and Walmart, in warehouses, pick-and-pack automation, express freight and free returns. It is also being reflected in the cost of acquisitions.
Last year Walmart outbid Amazon to secure India’s leading ecommerce company, Flipkart, in a US$15 billion purchase.
Of course, Amazon is more than ecommerce, and cloud infrastructure (AWS) has become a massive business. But here too Amazon is facing rising heavyweight competition. While AWS held its market share in the year to December last year and remained the leader, Microsoft’s (NASDAQ: MSFT) share increased by 2.8% while Google’s (NASDAQ: GOOGL) rose by 1.9%.
You can read our full FAANG stock series on Rask Media by clicking here.
This article was written by Stephen Arnold, CFA, founder and Chief Investment Officer of Aoris Investment Management. Click here to download Stephen’s free Owner’s Manual for investing better.
Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Stephen Arnold, CFA