Amazon: Be Positioned for the Holidays
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While we have just barely made it through back-to-school, stores are already rolling out Christmas displays in preparation for the busiest retail period of the year. It is against this backdrop that one must place the news that Wal-Mart (NYSE: WMT) will no longer carry tablets and e-readers made by Amazon.com (NASDAQ: AMZN). This could prove to be good news for competitors Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) and Barnes & Noble (NYSE: BKS), all of which will continued to be sold by the retailer. Ultimately, while the move places a greater divide between the world’s largest online retailer and the brick and mortar experience, Amazon continues to be a solid holding for your core portfolio.
The Online Divide
Wal-Mart is not the first major retailer to stop selling the popular devices made by Amazon, but the move does underline an important trend in the space. As Amazon continues to attract customers by offering free shipping and, in many cases, saving online shoppers sales tax, the company has cut into the sales of other retailers. These advantages have created a growing rift between the company and those brick-and-mortar establishments that have provided the primary distribution network for the Kindle line of devices. The result has been that most retailers have decided to stop selling Amazon devices completely.
It is hard to blame companies like Wal-Mart for not wanting to aid in the destruction of much of their highest margin business. While consumers are unlikely to change their spending habits for daily necessities like household items, the savings available on large ticket items like televisions and major appliances is significant. These products provide the best margins for Wal-Mart and others, meaning that losing sales to Amazon are a real threat. It is likely that the high demand expected for Amazon’s new line of Kindles through the holidays – including the Kindle Fire HD – is the only reason Amazon has kept any relationships; this may change in the year ahead.
If Amazon loses all of its physical distribution options, the company may be forced to open its own locations in order to continue to promote Kindle sales. This move would have a significant impact on the company’s cost structure. It is unclear if consumers might be willing to buy a tablet without the opportunity to first see its capabilities demonstrated.
In the tablet space, Apple is the market share leader by a significant margin. The new Kindle Fire line is the first legitimate competition that the iPad has seen, although sales of the Google Nexus 7 are looking promising. Apple is rumored to be planning the release of a “mini-iPad,” but unless Apple departs from its typical pricing behavior, the price point of the device will likely favor the Kindle on price. Apple continues to compete on its first-mover advantage and the ease with which customers can integrate new devices into the Apple ecosystem. With the improved functionality of the new Kindle Fire line, Amazon is taking a different approach. Jeff Bezos, Amazon’s CEO, has made clear that the company’s aim is to make money with products delivered with the Kindle, not on the device itself.
While the Nook, the Barnes & Noble tablet entrant, is generally behind the technology curve, the company recently announced a video streaming service that should allow it to compete more directly with Amazon. This is a difficult market to break into, but may prove critical for the company moving forward. Amazon’s offering is a key differentiator from competitors because it gives customers both network and content access for a small fee and without the need of an additional subscription.
Heading into the holiday season, Amazon is well positioned to perform. Its new line of Kindles are poised to offer Apple its first legitimate challenge and the company has held onto enough retailer relationships that distribution has not yet become an issue. Monitoring these retail relationships will be important moving forward, but at present, Amazon should be able to attract enough business to put up big numbers. While the company may face challenges in the future, it remains a buy at current levels.
Know What You Own
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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, and Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.