To study the graph of Amazon’s stock performance in 2015
is to witness a series of stepwise lurches toward commanding new
heights. Over all, the stock market has been flat this year, and
technology companies, as a group, haven’t fared much better.
Then there’s Amazon, which slipped the atmosphere. Shares of Jeff Bezos’s
company have doubled in value so far in 2015, pushing Amazon into the
world’s 10 largest companies by stock market value, where it jockeys for
position with General Electric and is far ahead of Walmart.
There
is a simple explanation for Amazon’s rise, and also a second, more
complicated one. The simple story involves Amazon Web Services, the
company’s cloud-computing business, which rents out vast amounts of
server space to other companies. Amazon began disclosing A.W.S.’s
financial performance in April, and the numbers showed that selling
server space was a much bigger business than anyone had realized. Deutsche Bank estimates
that A.W.S., which is less than a decade old, could soon be worth $160
billion as a stand-alone company. That’s more valuable than Intel.
Yet the disclosure of A.W.S.’s size has obscured a deeper change at Amazon. For years, observers have wondered
if Amazon’s shopping business — you know, its main business — could
ever really work. Investors gave Mr. Bezos enormous leeway to spend
billions building out a distribution-center infrastructure, but it
remained a semi-open question if the scale and pace of investments would
ever pay off. Could this company ever make a whole lot of money selling
so much for so little?
As
we embark upon another holiday shopping season, the answer is becoming
clear: Yes, Amazon can make money selling stuff. In the flood of rapturous reviews from stock analysts over the company’s earnings report last month,
several noted that Amazon’s retail operations had reached a “critical
scale” or an “inflection point.” They meant that Amazon’s enormous
investments in infrastructure and logistics have begun to pay off. The
company keeps capturing a larger slice of American and even
international purchases. It keeps attracting more users to its Prime
fast-shipping subscription program, and, albeit slowly, it is beginning
to scratch out higher profits from shoppers.
Now
that Amazon has hit this point, it’s difficult to see how any other
retailer could catch up anytime soon. I recently asked a couple of
Silicon Valley venture capitalists who have previously made huge
investments in e-commerce whether they were keen to spend any more in
the sector. They weren’t, citing Amazon.
This
week I also asked several stock analysts if they could see any
potential competitive threat to Amazon’s online sales dominance. Some
literally laughed at the question.
“The
truth is they’re building a really insurmountable infrastructure that I
don’t see how others can really deal with,” said Ben Schachter, who
studies Amazon for Macquarie Securities.
It
may be no exaggeration to say that at least in North America and
Europe, e-commerce as an expansive category of Internet exploration is
on the wane. Mr. Bezos has already won the game.
Continue reading the main story
There
are many who will lament that Amazon has reached these heights, and not
just its retail competitors. As with Walmart before it, Amazon’s rise
engenders fears of economic and cultural totalitarianism — which are reasonable concerns, even if often overblown. Many critics are worried, too, about how the company treats its workers (Amazon has argued that they’re treated well) and how it affects local and national economic activity (a matter of constant dispute), among many other issues.
And
while we’re in the to-be-sure part of this column, let’s note that
Amazon also faces a wider set of competitive threats internationally.
Although it has reported increasingly brisk sales in India, the company
has had a difficult time breaking into the lucrative Chinese market,
where Alibaba dominates the shopping scene. Indeed, Alibaba’s sales and
profits dwarf Amazon’s. On Singles Day, held in China on Nov. 11 to
celebrate the proudly unmarried (as best as I can tell), Alibaba rang in more than $14 billion in sales, which is more than Americans will spend both offline and online over the entire post-Thanksgiving weekend.
Even
domestically, competitors aren’t sitting idle. Over the last year,
investors have poured hundreds of millions of dollars into Jet.com, which aims to become a discount competitor to Amazon. The firm’s odds of success, though, have always looked long, and seem to keep getting longer.
Walmart, which on Tuesday published earnings that came in slightly above analysts’ expectations, is also spending billions to slow Amazon’s roll.
But Walmart said that in its latest quarter, e-commerce sales had grown
only 10 percent from a year ago. Amazon’s retail sales rose 20 percent
during the same period.
Why
is Amazon so far ahead? It is difficult to resist marveling at the way
Mr. Bezos has built his indomitable shopping machine, and the very real
advantages in price and convenience that he has brought to America’s
national pastime of buying stuff. What has been key to this rise, and
missing from many of his competitors’ efforts, is patience. In a very
old-fashioned manner, one that is far out of step with a corporate world
in which milestones are measured every three months, Amazon has been
willing to build its empire methodically and at great cost over almost
two decades, despite skepticism from many sectors of the business world.
Now
those investments are beginning to bear fruit. It’s happening in
fulfillment, which is the business term for filling and shipping orders.
Amazon has built more than 100 warehouses from which to package and
ship goods, and it hasn’t really slowed its pace in establishing more.
Because the warehouses speed up Amazon’s shipping times, encouraging
more shopping, the costs of these centers is becoming an ever-smaller
fraction of Amazon’s operations.
Amazon’s investments in Prime, the $99-a-year service that offers free two-day shipping, are also paying off. Last year Mr. Bezos told me
that people were increasingly signing up for Prime for the company’s
media offerings — the free TV shows, music and movies that come with the
subscription, and which Amazon has been spending vast sums to produce.
Mr.
Schachter, of Macquarie Securities, estimates that there will be at
least 40 million Prime subscribers by the end of this year, and perhaps
as many as 60 million, up from an estimated 30 million at the beginning
of 2015. He argued that Amazon’s investments in giveaways will help make
Prime more attractive to people in lower-income groups. As a result, he
predicted that by 2020, 50 percent of American households will have
joined Prime, “and that’s very conservative,” he said.
Growth
in Prime subscriptions matters because Prime alters the psychology of
shopping. Once you’ve prepaid for shipping, you tend to start more of
your shopping excursions at Amazon. According to some estimates, people
spend three or four times as much with Amazon after they sign up to
Prime.
Because
Amazon is still expanding madly, its expenses remain enormous and its
retail profits tiny. In its last quarter, its operating margin on the
North American retail business was 3.5 percent, while Amazon Web
Services’s margin was 25 percent.
But
this “Prime effect” is key to Amazon’s long-term profitability.
Analysts at Morgan Stanley reported recently that “retail gross profit
dollars per customer” — a fancy way of measuring how much Amazon makes
from each shopper — has accelerated in each of the last four quarters,
in part because of Prime. Amazon keeps winning “a larger share of
customers’ wallets,” the firm said, eventually “leading to a period of
sustained, rising profitability.”
Of course, many other retailers could build services like Prime; in fact, many are. But it could take them years to catch up.
“The
thing about retail is, the consumer has near-perfect information,” said
Paul Vogel, an analyst at Barclays. “So what’s the differentiator at
this point? It’s selection. It’s service. It’s convenience. It’s how
easy it is to use their interface. And Amazon’s got all this stuff
already. How do you compete with that? I don’t know, man. It’s really
hard.”
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