Amazon: Past Its Prime

The New Yorker recently featured a story on Amazon (NYSE: AMZN) titled ‘Is Amazon Unstoppable?’ The piece positions Amazon as a process company, not a retailer, stating that “last year, it collected a hundred and twenty-two billion dollars from online retail sales, and another forty-two billion by helping other firms sell and ship their own goods. The company collected twenty-six billion dollars from its Web-services division, which has little to do with selling things to consumers, and fourteen billion more from people who sign up for such subscription services as Amazon Prime or Kindle Unlimited. Amazon is estimated to have taken in hundreds of millions of dollars from selling the Echo. Seventeen billion came from sales at such brick-and-mortar stores as Whole Foods. And then there’s ten billion from ad sales and other activities too numerous to list in financial filings.” I used to describe Amazon as a transaction platform. In reality, about a third of their revenues and a much higher percentage of their profits are coming from activities outside their core online retail transaction engine. As the New Yorker article states, “No other tech company does as many unrelated things, on such a scale, as Amazon.”

The fundamental question is: Is Amazon’s core retail business actually continuing to thrive? Our recent study, “Amazon: Past Its Prime,” found that Amazon may be beginning to lose its luster with consumers.

Amazon benefits from a significant advantage over many of its competitors, and it’s coming from an unexpected source: the U.S. government. The U.S. tax credits and exemptions Amazon receives are key to supporting its juggernaut growth. According to Vox, Amazon is masterful in managing their tax burden by investing their profits back into their business for future profit. As Amazon told the Wall Street Journal last year, “Because we are in a low-margin industry and invest in innovation and infrastructure, we don’t make as much pretax profit as other tech companies, so our taxes are lower.”

Investopedia highlights a 2016 analysis by The New York Times and S&P Global Market Intelligence revealing that from 2007 to 2015, “Amazon paid taxes at an average rate of 13%, nearly half of the 26.9% average for the S&P 500 companies.” Amazon keeps profit and free cash flows low by investing money right back into its business, whether that be in the form of capital expenses like building data centers and physical warehouses, upgrading supply chain networks, or investments in their own delivery logistics services. These investments are tax deductible, and the funds come directly from their profits, which means Amazon doesn’t incur interest costs.

The results of First Insight’s recent consumer study may come as a surprise, indicating that the frequency of consumers shopping on Amazon is dropping. According to these surveys, the percentage of consumers shopping six or more times per month on Amazon fell from 49 percent in September 2018 to 40 percent in September 2019. Conversely, the percentage of consumers that never or very rarely shop on Amazon is increasing, with 39 percent of consumers stating that they shop on Amazon infrequently (twice a month or less), compared to 33 percent in 2018.

As the Amazon prime subscription cost continues to climb, Prime membership rates are dropping. Our survey echoes other reports on this phenomenon: 59 percent of consumers surveyed in 2018 reported that they were Amazon Prime subscription members, compared to 52 percent in 2019.

As further evidence that Amazon is losing steam, our study found that the number of purchases made by consumers on Amazon is slowing down. In 2018, 56 percent of consumers surveyed stated that their number of purchases made on Amazon was on the upswing, compared to 2019 results where only forty-eight percent of consumers said their number of purchases was increasing. Comparatively, for 2019, 12 percent of consumers surveyed stated their number of purchases on Amazon was decreasing, up from eight percent in 2018.

According to Captify, searches for "Canceling Amazon Prime" were 18 times higher during Prime Day’s July 15 sale, compared to the day before. Data on Google Trends back this up. People were signing up, getting their deals and cancelling their memberships.

Dropoff’s annual consumer survey reported that Amazon shoppers aren’t committed to purchasing solely from the online retail giant. Sixty-five percent of consumers who shop at Amazon say they would order from other retailers that offer the same delivery options. As competition begins to heat up from retailers like Walmart (NYSE: WMT) and Target (NYSE: TGT), our study confirmed that the percentage of consumers surveyed who say they check Amazon.com for products/pricing before looking/buying elsewhere dropped year-over-year, from  sixty-six percent in 2018 to this year’s rate of sixty-one percent.

Meanwhile, Amazon faces increasing heat from competitors. A Bloomberg article reports that, as a response to an offer Amazon rolled out this past summer, Walmart has introduced a program to temporarily lower the price consumers pay for some items on its marketplace site, where third-party vendors pay Walmart a fee to list their goods. The merchants selling on the site will be paid the same amount that was listed before the cuts, with Walmart subsidizing the difference. Walmart confirmed that the price reductions won’t affect shipping fees.

Walmart is looking towards the future of retail, investing in innovative ways to reach customers. With their heavily-publicized acquisitions of digitally-native brands like Jet.com, Hayneedle.com, Shoes.com, Moosejaw, Modcloth.com, and Bonobos, it’s very clear that Walmart is committed to becoming a key e-commerce player. Their strategy of buying key players and technologies is enabling them to move quickly to get hyper-connected to the younger, more affluent generation of millennial consumers. Walmart is striving to offer differentiated products, in innovative ways, to set themselves apart from the competition.

The First Insight study confirmed that U.S. consumers, when asked whether they prefer to shop at Walmart - online, in-store or both - versus Amazon, the majority of consumers (55 percent) prefer Walmart, a flip from a year ago (47 percent). The frequency of in-store visits at Walmart is also increasing slightly year-over-year. The percentage of consumers that shop in-store at Walmart more than 4 times a month has increased from fifty-eight percent in 2018 to sixty-three percent this year.

As Amazon continues to grow and evolve, they’ve got stiff competition with Walmart, Target, and others making major strides against the online behemoth. Unlike Walmart, Amazon espouses a build-vs-buy strategy for new technologies and models.  This supports their tax-minimization strategy described above, but will it allow them to evolve fast enough to stay ahead? As projected in my 10 Predictions for Retail in 2019, prime memberships are beginning to plateau. Now let’s see if my next prediction for Amazon will come to fruition. I project that Amazon will leverage its vast data lakes to identify which products and categories are less price sensitive, and begin to increase prices there. Because they can. Competitors like Walmart and Target would be wise to tune in to their customers’ willingness to pay and take advantage of situations where Amazon may miss the mark. Even if Amazon is savvy enough to identify and exploit opportunities to jack up prices, this is unlikely to be enough to enable them to cut through the headwinds of increasing competition and changing consumer sentiment. Geoffrey Chaucer famously said, “All good things must come to an end,” and it appears that Amazon may be past its prime.