- Last year Amazon took the market cap crown from Wal-Mart in the retail segment.
- Wal-Mart is now taking the inorganic route to deal with the “Amazon Effect”.
- This year Amazon’s margins are better, giving them the leverage for continued growth.
Amazon.com Inc. (NSDQ:AMZN), the world’s largest retailer by market cap, has stolen the march over all other retailers in the world. With revenue growth continuing unabated, the recent expansion of retail margins in the North America segment and the solid bottom line numbers that Amazon Web Services keeps coming out with has only emboldened the risk-taking mentality of the company.
There are several factors that will make sure Amazon is able to continue its remarkable top line expansion in the short to medium term. Let’s analyze three of the more significant ones.
Amazon the Risk-taker
Amazon has always been ready to take risks. Amazon’s device push has been sort of a hit and miss, for example. One can argue that their Kindle sales are growing at a steady pace, which will allow the company to keep expanding its hardware credentials. But even Amazon would agree that compared to the success of their e-commerce business and AWS, their device projects have been a huge let-down.
But that hasn’t stopped the company from continuing to try different things. Amazon knows very well that if you want profitability, you need size and scale in the market you are operating in. The more gross merchandise you are able to move, the better your prospects are of having something filter down to the bottom line.
For Amazon, that means getting to the top of the retail pecking order in every country it enters. And it also means taking a risk. They took a risk in China and it was disappointing; they took a risk on India and it’s starting to pay off, even if that success currently seems like a small gain against the bigger picture.
Amazon the Disruptor
Their entire Amazon Web Services foray into cloud infrastructure is a clear example of how the disruptive mentality can indeed breed success, and Amazon did that when its retail business was bleeding money in all regions. Amazon launched AWS in 2006 when their total sales were at $10.711 billion with an operating income of $389 million. But that never stopped them from stepping up and steadily investing into AWS which has now become a ten billion dollar revenue segment for the company.
Now that the company has two profitable units, their North America segment as well as their web services, Amazon is likely thinking double-time about how to spend the money now flowing into their coffers - and maybe spend even more if needed. This makes Amazon an extremely fast moving target for its competitors, who will find it increasingly difficult to catch up with them.
Case in point is Wal-Mart's (NYSE:WMT) recent decision to buy Jet.Com and think of a possible investment in Amazon’s formidable India competitor Flipkart. Wal-Mart spent billions of dollars to roll out its own e-commerce platform but realized that it wasn’t moving anywhere. In Q2, Wal-Mart's e-commerce sales expanded by 11.8%, compared to Amazon’s near 30% growth in retail sales.
Wal-Mart’s e-commerce sales are, of course, much smaller than Amazon’s, which means the company should ideally be looking to grow at a faster rate than its bigger competitor. Unfortunately, that never happened. The ‘bigger and badder’ competitor is still able to grow two to three times faster than Wal-Mart is, in this segment.
In an attempt to counter that problem, Wal-Mart did the smart thing by taking the inorganic route to bring in talent through its Jet.com acquisition and by considering an investment in the one company that has been able to stand up to Amazon India - Flipkart.
Better Margins Give Amazon More Firepower
The increasing margin numbers are only going to push Amazon to try and grow even faster, and you can see the telltale signs in the form of the company adding more and more services to their Amazon Prime offering. They’ve already got a truckload of freebies that Prime members can take advantage of, they’re nurturing the Prime Now service that offers one-hour, two-hour and same-day deliveries, and they’ve just added Prime Reading to their list of free services for Prime members.
Amazon is clearly running away with the market and, as long as the company holds onto its disruptive mindset, it’s going to remain the company to beat in retail. Better margins simply give them even more leverage with their investors, who have long supported Jeff Bezos’ retail philosophy. Expanding margins alone are a huge validation of the faith that investors have put into Amazon’s business model over the years, but that is not the end goal.
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