Amazon – The New Walmart
By David Nelson, CFA
July 5th, 1994. Not exactly a date many would remember. Earlier that year Bill Clinton delivered his first state of the union address. Kurt Cobain, legendary singer of Nirvana commits suicide and O.J. Simpson is accused of a double murder.
No, on July 5th deep in the confines of Seattle Washington a nondescript gentleman launches a diabolical plot to change commerce as we know it. His launch of a company called Cadabra goes unnoticed but the seeds of an empire are sewn. After one of his lawyers mistook the name as Cadaver the young CEO files papers changing it to, you guessed it AMAZON, a name today that strikes fear in the hearts and minds of retailers everywhere.
Jeff Bezos with a current net worth of approximately $87 Billion came up with a business model so powerful the largest retailers on the planet seem helpless as Amazon (AMZN) devours nearly everything in its path.
In its infancy, the internet was a new communications medium and after all Amazon initially was only a threat to book stores. Twenty three years later CEOs from every corner of retail are struggling to come up with a plan to keep from becoming irrelevant. Thursday last, Best Buy (BBY) and Home Depot (HD) shares fell hard on news that Sears (S) had capitulated announcing they would be selling appliances on Amazon.
Home Depot with its focus on home improvement and construction long thought to be immune to the Amazon (AMZN) threat was suddenly in its cross hairs. Earlier in the month, electronics retailer Best Buy (BBY) was hit with news that Amazon was launching a service similar to their successful Geek Squad.
Voices in support of Amazon are similar to Walmart defenders of year’s past. As long as the company generates low prices and or convenience, customer’s and America are better off. In Walmart’s early years there were few concerns but as the company expanded reaching into the very heart of the communities it served, voices of concern grew louder. Even academia weighed in pointing out there was a downside to a company saving us money.
Is Walmart Good for America – PBS transcript 2014
Amazon casualties continue to mount in much the same way as Walmart’s (WMT) march from Bentonville, Arkansas a half century earlier. Back then, mom and pop stores unable to match the everyday low pricing just couldn’t compete and many were forced into bankruptcy. It wasn’t just the community stores that couldn’t fight back but suppliers soon discovered they had lost control over their business models.
Washington vs Amazon
Amazon’s purchase of Whole Foods (WFM) hasn’t gone unnoticed in Washington. Attitudes are changing as can be evidenced by an FTC investigation of deceptive discounting at the internet giant. Even anti-trust concerns have been mentioned. Lawyers can weigh in but that would seem difficult given a business model that drives prices lower not higher. Never the less as Jeff Bezos invades an increasing number of industries, Washington is on high alert looking for Jeff’s next move.
In addition to retail, Amazon has become a leading force in entertainment with its Prime service while its Amazon Web Services battles technology giants like Microsoft (MSFT) for dominance in the cloud. Even partners like UPS and FedEx have to be nervous as it moves increasingly into logistics some of which is a business model similar to Uber.
Amazon revenue growth
Accusations of Amazon being a monopoly are difficult to defend. Projected 2017 sales of $167 Billion are dwarfed by its biggest competitor Walmart at close to $1/2 Trillion. However, if current projections of 20% annual top line growth continue, its dominance and influence may prove unstoppable.
Mr. Bezos and the company understand that their success has placed a target on their back. In just the last 3 years expenses related to lobbying have increased over 250%. In a recent CNBC interview Dave Leventhal of the Center for Public Integrity discussed Amazon’s lobbying efforts including net neutrality, tax reform, immigration, education even aviation as they want to put drones everywhere.
Jeff Bezos’ purchase of the Washington Post gives him a powerful lobbying tool with a long reach that can be used to fight off legislation he feels could hurt or slow down the empire.
Amazon’s power and reach continues to expand introducing consumers to the benefits of the modern age. Convenience, quality, advanced technology even entertainment are there for the asking and at a cost few can turn down. As long as the benefits outweigh the cost customers won’t care even if it does reach monopoly status.
A monopolistic force can be a tremendous benefit to society in much the same way a benevolent dictator can run a country. Unencumbered by bureaucracy and oversight the benevolent dictator keeps the trains running on time and food on the table. Of course all of that works right up until the time it doesn’t.
“Power tends to corrupt and absolute power corrupts absolutely” – Lord Action to Bishop Creighton (1887)