Amazon Earns the Trust of Online Consumers
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the age of readily available data, consumers have learned some pretty valuable lessons when it comes to uploading personal information. Identity theft, online bullying, and other forms of insane (and oftentimes criminal) behavior have prompted consumers to become very choosy about which companies to share shopping preferences and other personal information with.
And while this new wave of cautious behavior has helped protect people from becoming online victims, retailers meanwhile have to find new ways to ensure that information shared will not be compromised. The unfortunate part is that even if a company invests in the best online security protection, never sells consumer information to third parties or abuses consumer trust in any way, it's the consumers that have the final say in who they entrust their information. In most cases, it will probably come down to trusting established brands with a positive track record for customer service and discretion.
According to a recent survey conducted by Harris Interactive, out of 2,262 US participants, 66% of those polled felt comfortable sharing shopping and other related information with online retailer Amazon (NASDAQ: AMZN). The survey also revealed that 41% of consumers felt secure sharing information with Google (NASDAQ: GOOG) while 30% felt comfortable sharing information with Facebook (NASDAQ: FB). Beating out internet giants like Google and Facebook should feel pretty good, even for a company as large as Amazon.
Over the years, suggestive marketing, which offers product and service recommendations to consumers based on previous purchases or website searches, has become an integral part of online business success. Amazon relies heavily on suggestive marketing by sending product suggestions, updates, and new arrival announcements via email, while customers are browsing the site and when customers log into their accounts. I believe if the company hadn't taken the time to build these trusting relationships, Amazon probably would not be as successful as it is today.
One of Amazon's strengths is its ability to connect with consumers without having to spend a lot on advertising and marketing. Because it has an established reputation as an online retailer, breaking into new markets is much easier. It is also easier to build trusting relationships with people in these markets as the Amazon brand is so well known. For example, it will be much easier for Amazon to break into the smartphone market than a young start up with little or no reputation.
Investing in the Future
Amazon has been in business since 1994, launching its website in 1995. Over the years, the company has evolved to offer streaming movies and television, portable computing and e-reader devices, and web server access for small businesses. Earning consumer trust is a critical part of its continued success.
Building a successful, long-lasting brand requires time, patience, and money. I feel that Amazon has taken the steps necessary to build its brand by reinvesting time and time again into its customer service, marketing, and branding divisions. In addition to expanding into new markets by providing a wide variety of products and services, the company continually spends money to improve its infrastructure.
According to its 2011 cash flow statement, the company reinvested $1.93 billion in fixed assets (warehouse space, equipment, etc.), net assets from acquisitions, and the purchase/sale of other investment ventures. This is a good sign that the company is using its profits to build and maintain its brand by expanding into other markets.
Currently trading at $234 per share, investors should feel as comfortable investing in Amazon as consumers feel entrusting the company with their personal information. With free cash flow totaling $2.09 billion, the company has no problem maintaining a strong and profitable business. In fact, the company has maintained steady free cash flow for several years ($1.18 billion, 2007, $1.36 billion, 2008, $2.92 billion, 2009, $2.52 billion, 2010).
Maintaining high free cash flow allows Amazon to continue to grow and expand. I would be cautious if these numbers suddenly dropped, but since they've remained steady over the past few years, investors should have very little to worry about in terms of lowered stock values anytime soon.
Continued Growth and Expansion
What's amazing about Amazon is its ability to continue to explore new markets without compromising consumer trust. From entering the e-reader device market to manufacturing its own smartphone, the company strives to further its brand in order to remain profitable and well-known all over the world. According to the company's 2011 income statement, Amazon spent $2.91 billion in research and development. This is up from the $1.73 billion it spent in 2010. This is another reason why I think investors should stick with Amazon.
Fortunately or unfortunately, whenever a company experiences growth and expansion, it may also see increased competition. Companies like Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) both provide ample competition for Amazon. With the success of Amazon's Kindle Fire, Apple is in the process of designing a smaller iPad. Microsoft plans to launch its own tablet called Surface by the end of 2012.
But since Amazon is so diverse, if it doesn't perform well against these two companies, it still has many other income streams to rely on. Investors do not have to fear losing money as the company seems to have a good grasp on its debt payment and reinvestment strategies.
Earning the trust of consumers can yield some serious rewards. Not only does Amazon remain profitable, its stock price remains steady. From an investment perspective, it really can't get any better. I think one of the many overlooked keys to success in online retail is consumer trust. While abstract terms like 'consumer loyalty' and 'brand awareness' are thrown around by analysts, marketers, and industry insiders, at the end of the day, it's who consumers trust the most. Trust leads to loyalty which lends itself to the strength of the brand.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Facebook, Google, and Microsoft. 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.