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Amazon.com, Inc. (AMZN): Big and Getting Bigger

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Amazon.com, Inc. (NASDAQ:AMZN) presents a credible threat to brick and mortar retailing, and many retail and consumer investors still do not fully appreciate the fact that Amazon.com is the biggest threat to retailers and the most transformative force in recent history.

Eighth largest retailer

Amazon.com, Inc. (NASDAQ:AMZN) became a top 25 retailer in 2010, in 2012 the company moved up the ranks to 11th largest, and with projected 2013 domestic retail sales of $41 billion this would move the company up to ninth on the list according to a report by Keybanc. Amazon.com generates even more in gross merchandise value (estimated around $68 billion) which implies that Amazon.com is right behind Target Corporation (NYSE:TGT) as the fourth largest retailer based on gross merchandise value.

If Amazon.com, Inc. (NASDAQ:AMZN) continues to maintain a positive revenue trajectory, sales at brick and mortar retailers will be under pressure. Target Corporation (NYSE:TGT) is trying to fight back by integrating the in-store and web experience, something that Amazon.com consumers can’t benefit from. Until 2011, Target outsourced its online store to Amazon.com, but now management has ended this agreement controlling all aspects of the technology and the end user experience.

The threat to Target Corporation (NYSE:TGT) from Amazon.com, Inc. (NASDAQ:AMZN) is real, and according to experts, Target’s price matching program is more of a marketing gimmick that will ultimately result in consumer frustration giving them the impression that they will save money.  To take advantage of a price matching guarantee, a consumer will have to show identical SKUs, and the fact that many retailers have their own unique SKUs will make it virtually impossible to fulfill this requirement.  Target’s price matching guarantee is “unlikely to cause a slowdown in the shift from offline to online sales” according to these analysts.

Retailers fighting back

As mentioned in a previous blog, certain retailers have adapted a price matching guarantee, which is seen as a near term positive. Customers can undertake a 5 minute process to have a sales associate price match Amazon.com, Inc. (NASDAQ:AMZN), which can be easily done from a smartphone. Furthermore, retailers are ramping up investments in their website, IT data-centers, and distribution facilities. Retailers are right to fight for sales and market share against the Amazon.com beast, but an overhang on margins remains as brick and mortar stores clearly have much higher overhead costs to operate their stores.

Competitive advantage since day one

Amazon.com, Inc. (NASDAQ:AMZN) has a unique philosophy that translates to a huge advantage over its competitors. Management often cites that its investment horizon is seven years, which is a longer-term horizon than most companies. Amazon.com is willing to make these larger and longer investments that will drive growth over the long term. In fact, Amazon.com’s first shareholder letter was entitled “It’s all about the long term.”

A three year time horizon puts Amazon.com, Inc. (NASDAQ:AMZN) against a lot of competitors, while a seven year horizon puts it in a league of its own. Since day one, Amazon.com has also focused on three key pillars: low price, broad selection, quick delivery.

Largest ‘showrooming’ target fighting back, but will it last?

A study has shown that shoppers are more likely to purchase a product from Amazon.com, Inc. (NASDAQ:AMZN) after seeing it first hand inside a Bed Bath & Beyond Inc. (NASDAQ:BBBY), a concept known as ‘showrooming.’ Shoppers can use a smartphone to scan a product barcode and instantly purchase the product online from Amazon.com.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) has been fighting back by offering coupons which put the prices on par with Amazon.com, Inc. (NASDAQ:AMZN). Analysts were initially optimistic with Bernstein saying that gross margins can beat expectations for the company’s first quarter 2013 results as a result of an aggressive couponing campaign.

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