Amazon.com Is Taking Over the World… Is Any Company Safe?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon.com (NASDAQ: AMZN) is well known for its assault on retailers of books and consumer electronics. This blog series has been designed to highlight the numerous other ways in which Amazon is disrupting the world of retail during its quest for dominance, including the following:
- Pet supplies - competing with PetSmart, Wal-Mart, and others.
- Streaming video - competing directly with Netflix and Apple.
- Daily deals - competing with Groupon, LivingSocial and others.
- Groceries - competing with discounters such as Wal-Mart, warehouses such as Costco Wholesale, and organic specialists such as Whole Foods Market.
- Cloud computing - competing with Google, Rackspace Holdings, VMware and others.
- Small business e-commerce - competing with eBay.
- Apparel - competing with Macy’s, Nordstrom, Urban Outfitters, and many other companies.
But wait … there’s more!
What is perhaps most amazing about the diverse set of growth initiatives listed above is that this list is the tip of the iceberg. Here are even more aspects of retail that Amazon.com has recently invested heavily in:
- Health and Personal Care – Amazon competes directly with drugstores such as Walgreens (NYSE: WAG) with thousands of items sold on Amazon.com’s Health and Personal Care site, Soap.com, BeautyBar.com, and Diapers.com. A serious entry into the realm of prescription drugs could put a massive dent into the appeal of drugstores such as Walgreens to consumers.
- Toys – The company has also proven to be a fierce competitor in the toy industry, competing with privately held Toys R Us through a combination of Amazon.com/Toys and Yoyo.com. On the video game front, Amazon offers not only a superior selection than video game specialists such as GameStop (NYSE: GME), but also provides the convenient, hassle free opportunity to trade in old games for store credit that GameStop has used to attract customers for years.
- Sporting Goods – The same formula that has proven successful in competing with big box retailers ranging from Best Buy to PetSmart is also being leveraged against sporting good retailers such as Dick’s Sporting Goods (NYSE: DKS). Amazon's assortment is simply huge, as illustrated by the 40,000+ items listed by Amazon and its affiliates within the baseball section of Amazon’s Sports & Outdoor site alone. In addition to being competitive on price, Amazon often offers its renowned free shipping, even on larger items like treadmills and boat motors.
- Home – Bed, Bath & Beyond (NASDAQ: BBBY) and other retailers of goods for the home have to contend with a multi-faceted offering from Amazon that includes not only the typical array of thousands of items on Amazon.com, but also Casa.com as well as private label brands such as Amazon’s Pinzon brand.
- Specialty – A number of sectors in the retail space have remained relatively free from industry consolidation caused by the entrance of large public companies. Examples include everything from the sale of consumer goods such as wine, fabric, and SCUBA equipment to industrial and scientific supplies. Well, Amazon.com has entered each of these markets (and many more) with the rollout of Amazon Wine, Fabric.com, Amazon Diving & Snorkeling, and Amazon Supply.
So why does this matter?
At this point, the portion of the investment thesis for Amazon relating to the unparalleled diversity of its retail business should be apparent. The combination of Amazon’s track record of successful expansion and the massive total addressable market for the sum of the retail spaces in which Amazon seeks to compete provides a strong case that Amazon’s revenue growth story is nowhere near over.
While the saying “past performance is no guarantee of future results” is often used in the investing community, the tremendous opportunities for Amazon to both gain market share and ride a wave of market growth in each of the businesses listed above are so large that the ability to replicate the growth experienced over the past decade, as illustrated below, over the next decade seems very reasonable.
As noted in an Internet Retailer Magazine article in 2012, replication of the revenue growth rates in the table above over the next decade will place Amazon in a position to pass Wal-Mart as the largest retailer in the world by revenue.
Today is “Day 1”
As Amazon CEO Jeff Bezos has been saying in his annual letter to shareholders each year, today is still “Day 1” for Amazon and the company’s growth story. With Bezos' track record for rapidly and successfully creating new revenue streams, there's little reason to doubt this statement. The opportunities are enormous, especially when international growth is layered onto the discussion of the market opportunities noted above. For investors, it is important to focus on this proven track record and obtain an understanding of exactly why Amazon has been so successful.
Just as it has done over the past decade, Amazon will continue to grow over the long term simply because it leverages the disruptive competitive advantage inherent in the e-commerce business model. Quite simply, investing in Amazon is an investment in the premise that a well run e-commerce retailer has a cost structure advantage over brick and mortar retailers that is insurmountable.
Whether it is Walgreens, Dick's, GameStop, Bed Bath & Beyond, or any of the other companies mentioned above, the cost of operating and staffing physical storefronts across the country (and world) is higher than the cost of operating centralized fulfillment centers with only online interaction with customers. To illustrate the power of this advantage, here's a comparison of each company on the basis of TTM revenue, store count, and employee count:
|TTM revenue (in millions)||$57,260||$70,790||$5,640||$8,890||$10,250|
|Revenue per store (in millions)||N/A||$8.82||$9.71||$1.34||$6.99|
|Revenue per employee (in millions)||$1.02||$0.41||$0.54||$0.52||$0.21|
|Source: Yahoo! Finance - 1/3/13|
Amazon generates between two and five times more revenue per employee than this diverse sample of retailers. As long as the fulfillment costs for Amazon, which include net shipping costs that have hovered around 5% of total sales in recent quarters, remain lower than costs incurred by brick and mortar retailers to operate physical store locations, Amazon will continue to succeed. As it experiences success, efficiencies generated from Amazon's growing scale will continue to add to Amazon's advantage over traditional retailers. This repeating cycle will continue to fuel Amazon's growth as it further expands selection and offers lower prices in both its existing business lines and those that aren't even contemplated in analysts' models today.
So is Amazon a buy?
Based on the strength of the business and the opportunities that Amazon is poised to seize, Amazon is a clear buy for the long term. The question that has lingered for almost all of Amazon's existence is whether its current valuation allows for market beating returns going forward. Investors that have looked at the big picture and not focused on historical valuation metrics have been rewarded in the past, while many have sat on the sidelines and criticized the stock as "too expensive" while watching AMZN shares increase in value by over 1,100% during the past decade.
Looking at the past is only a portion of the story. The final blog in this series will take a look at Amazon's current valuation and will endeavor to provide a plain English explanation of the premium valuation placed on the company.
BrewCrewFool owns shares of Amazon.com. The Motley Fool owns shares of Amazon.com, Dick's Sporting Goods, and GameStop. Motley Fool newsletter services recommend Amazon.com, Bed Bath & Beyond, and GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!