In a recent GuruFocus article, Matt Winkler refuted allegations that Amazon.com Inc. (AMZN, Financial) does not pay taxes, is taking advantage of the U.S. Postal Service and is killing retailers.
Regarding that last claim, that Amazon is forcing many retailers out of business, I would add the e-commerce giant has opened the doors to perhaps millions of small (and some not-so-small) third-party businesses. In fact, I am one of them, selling my self-published books on Amazon (and through other major online retailers as well).
Exactly how many third-party sellers there are is a matter of conjecture; Amazon keeps much of its internal data, well, internal. However, this chart from Statista.com, using Amazon data, shows that third-party sellers now represent 51% of units sold:
Note the present number is almost double the number sold in 2007. Presumably, this proportion will grow over time, based on the premise that millions of entrepreneurs will generate more ideas than the few thousand professionals at Amazon.
So while Amazon’s creative destruction has knocked out many small businesses, it has also created opportunities for millions of new businesses to emerge. And entrepreneurs have responded; note how “Service Sales” (third-party, net sales) have increased over the past five years (from 10-K data here and here):
- 2013: 18.2%
- 2014: 21.3%
- 2015: 25.9%
- 2016: 30.0%
- 2017: 33.3%
Who are these retailers? For starters, there are authors and publishers who became third-party sellers when Amazon was still just a bookstore. I am one of them, having sold my own books through its system since 2000.
But there are many of other types of sellers now. For example, some entrepreneurs watch their local flyers; when they see deeply discounted products available in reasonable volumes, they buy them at their local store. They take the products home, list them on Amazon at a higher retail price, ship the orders as they come in and Amazon later sends them the proceeds (after taking its cut). Just about any product you can imagine is now being sold, or arbitraged, this way.
Speaking of arbitrage, here is another example, one I researched a few years ago: arbitraging textbooks. If I recall the details correctly, would-be sellers acquire new and used textbooks at a discount, then list them on Amazon. Sellers can even buy their texts on Amazon and then sell them back to Amazon or through Amazon, at a profit (these situations often exist because of Amazon Prime).
The company also pioneered the concept of affiliate marketing, which opened the doors to millions of boot-strapping entrepreneurs who promote name-brand products sold online and collect a percentage of the sale price. All told, affiliate marketing opened the door to a new generation of entrepreneurs; some of them have gone on to build million-dollar companies:
While the emphasis so far has been on entrepreneurs and small businesses (at least they started out that way), it is important to remember that thousands of bigger companies, including Fortune 500 companies, also sell on Amazon. This is an excerpt from Gillette’s “brand page” on Amazon:
Online platforms such as Amazon’s attract big businesses because they can sell directly to consumers. Yes, it brings in extra income, but in many cases, the key benefit is data that helps them better understand their customers; for example, in determining their customers demographics, what their preferences are and their sensitivity to varied price points. Of course, many also do this on other major shopping platforms as well, including Walmart (WMT, Financial).
Summing up this part of the story, we can say that while Amazon’s rise has led to the loss of many retailers, it also has fostered millions of new micro- and small businesses.
Why, then, do so many persist in believing Amazon is simply a destroyer of independent businesses? Look no further than Frederic Bastiat’s “That Which is Seen, and That Which is Not Seen,” or as it is also known, “The Fallacy of the Broken Window”. In 1850, Bastiat explained that while one merchant, the glazier, would get extra business when a shop window was broken (the seen), other merchants would lose an equivalent amount (the unseen). For us living now, we see the empty brick-and-mortar storefronts, but we do not see the new retail businesses emerging online.
Turning to the other point of the story, Amazon is known as one of the FAANG stocks, one of the hot technology stocks of the 21st century. Perhaps we should reconsider that labelling: we now know Amazon-the-portal, for other businesses, has been growing rapidly, almost doubling from 18.2% in 2013 to 33.3% in 2017.
But is it time to start thinking of it as something else? Perhaps it could be a retail index. It might make an interesting index because it includes not only the usual retail players, but also a good helping of micro-businesses, entrepreneurs who make only a few hundred or few thousand dollars a year. Collectively, these small businesses represent a significant—and growing—share of the retail industry.
Given Amazon’s robust worldwide sales, could we also call it an index in the sense that it reflects, to some extent, a mix of domestic and international business? Based on figures in the 10-Ks (here and here), these are the proportions of international net sales over the past five years:
- 2013: 40.2%
- 2014: 37.6%
- 2015: 33.0%
- 2016: 32.3%
- 2017: 30.5%
To round things out, it has other segments that help it broaden its indexing potential:
- It now offers a registry of home service providers and collects a referral fee, of course. It is entering the service sector and undoubtedly plans to grow it like it grew product sales.
- Amazon Web Services, offering cloud capabilities and storage and giving it a solid toe-hold in a fast-growing sector of the tech industry.
- Watch out Google (GOOGL, Financial) and Facebook (FB, Financial)—Amazon is muscling in on your customers. It sells advertising on its websites, just as the other two tech giants do, and with something of a captive audience: all the merchants who sell on Amazon. It has become of the largest search engines anywhere.
Conclusion
Amazon.com has been accused, like Walmart (WMT, Financial), of killing retail and retail jobs. That’s true of brick-and-mortar stores, but looking beyond the obvious, we see it is also creating a wave of new businesses.
Because of the diversity of those businesses—in size, service as well as products and international scope, we might say Amazon is becoming a proxy for the world’s retail activities. That might be a bit of stretch, but the online giant is getting there.
Many hedge fund managers use what’s called a “global macro” strategy, which means they can go anywhere in the world and use any financial instrument to try to generate alpha. Amazon is becoming a global macro stock, with a healthy dose of diversification.
This article is not intended as an assessment of Amazon as an investment, but as general observations about the company and how it fits into the broader world of retail and asset allocation.
Disclosure: I do not own shares in any of the companies listed, however, as noted, I operate a micro-business through Amazon and other online retailers.
