The Big Box Retailer in My Computer
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I never was a huge fan of Dr. Who. However, as I casually watched some of the episodes down through the years, one of the things that stood out was the British telephone booth that opened up into this huge time ship on the inside. Due to some sort of sci-fi multi-dimensional physics, the inside was way bigger than the outside. This is what I am reminded of when I think of Amazon.com (NASDAQ: AMZN). Amazon has essentially become a big box retailer in my computer and by simply typing Amazon.com into my address bar I can purchase virtually anything I want.
The Limitations of Brick and Mortar
As I was walking through our local Books-A-Million (NASDAQ: BAMM) a few months ago, I was looking for a set of sci-fi novels to buy my wife for her birthday. I was appalled that nothing on her list was in the store. I asked the manager why they didn’t sell these books, and he said something to the effect that they only send him books that the upper management deems will sell regardless of what local customers prefer. My assumption from this conversation is that shelf space is limited and Books-A-Million has to pick and choose what they send to their brick and mortar stores.
Because I am a typical guy I waited until the last minute to do the shopping. I rushed home and got on Amazon.com and found everything that was needed for her, but I had to pay extra for next day delivery. Fortunately they didn’t fail on that promise. It seemed like the doorbell was ringing to let me know that the package had arrived within minutes of clicking the order button. This is an exaggeration of course. It was almost exactly 24 hours though.
Electronic goods are no different. When I go into a typical Best Buy (NYSE: BBY) a huge number of my favorite sci-fi DVD titles are noticeably gone at their brick and mortar locations. I get knowledgeable help from the staff on computer items so they have an advantage there. My local Target (NYSE: TGT) has DVDs with the occasional competitive price but the selections in their brick and mortar stores are limited due to shelf space and the titles I typically purchase are available on a hit and miss basis. Wal-Mart (NYSE: WMT) has a wide selection of DVDs for a brick and mortar store, but their selections are also hit and miss in what I like to buy.
This experience was the opposite of when Amazon first came out. Back then I would look up what I needed online and then go to a local store to buy it. I wanted the item now and I didn’t want to wait a week for it to be delivered. I then realized that most items on Amazon are cheaper and decided to flip that habit. Since the brick and mortar stores typically have limited selections at higher cost I now by-pass them altogether.
The Evolution and Customer Service of Amazon.com
Amazon started out as merely an online bookstore. Now they sell everything from DVDs to watches and even groceries. In recent years I have bought more DVDs than books. Local brick and mortar retailers don’t sell what I want. It is convenient to type in what you want and there it is ready to be ordered, without having to go to the brick and mortar store to look for it only to be disappointed that it’s not there or that it’s way more expensive.
Jeff Bezos is famous for putting customers before anyone else which includes employees. I have observed numerous ways in which Amazon has made life easier for the customer. On my wish list I noticed that Amazon now compares the current price of an item on your wish list to the price that it was when you placed the item on the list even if it’s more expensive.
I also like the recommendations that it provides based on your purchasing history. When I click on an item it gives me similar items that complement my current selection and that I might be interested in. I’ll be honest; it has influenced my purchasing decisions. Amazon’s technologies pick up on what I typically buy and throw out recommendations accordingly. The only thing I don’t like about this feature is that if you buy an item or gift for someone in your family that deviates from your normal history, in my case a woman’s purse, it temporarily populates the main screen with recommendations based on the gift purchase.
A customer has the option of selecting the speed of delivery. I always select super saver shipping (unless I’ve waited until the last minute to shop). If a customer spends more than $25 dollars then they could have it shipped for free, but it takes a while longer. A few times when I used this option, I still received the item the next day even though it’s not guaranteed.
Amazon is also adding 18 distribution centers worldwide. This should help shorten delivery time between the warehouse and the customer. It might also help enhance the number of choices for the customer.
Amazon is benefiting from positive perceptions both from the customer and Wall Street. It is generally believed, at least in my circle of friends and family, that Amazon is cheaper than other places especially in electronics. While this is not always the case, it is usually the case based on my experiences. This common belief drives traffic to their site. Their reputation for customer service also enhances perceptions among the public. Many people I know think Best Buy is expensive so they shy away from them.
Looking at Amazon’s fundamentals one can easily see why Wall Street has awarded the company a 212% return over the past 5 years versus a loss for the S&P 500. Amazon’s operating cash flow has grown every year between 2003 and 2011, with the exception of 2006, at an annualized rate of 33%. Amazon’s free cash flow has declined in 2010 and 2011 due to increases in capital expenditures; however, the annualized growth between 2003 and 2011 is 25%.
I think Amazon’s focus on the customer will maintain if not enhance the reputation it has with the public. If Amazon keeps building new distribution centers, then same day delivery becomes more of a reality. Customers will be able to buy perishables as well as current product lines. Then, Amazon will truly become the one stop big box retailer in everyone’s computer.
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