Amazon (NASDASQ:AMZN) CEO Jeff Bezos delivered his annual shareholder letter last week, which helped boost the stock. Bezos explained the growth narrative tied to Amazon’s e-commerce channels, AWS, future expansion into new areas through an iterative approach, and efforts to make smart bets to remain innovative, but also the willingness to lose money if in the event an experiment doesn’t work.
The founder of Amazon has managed to keep an innovative culture going while they continue to disrupt e-commerce. Bezos anticipates that Amazon can continue to grow its e-commerce footprint in various markets outside the United States where there has been minimal market penetration of e-commerce in general.
Amazon stock is hovering just under $1T and remains stuck in a tight range. Earnings could catalyze the stock near-term, but what remains important is the visionary stature of the company when compared to various other technology peers.
While, there have been a number of publicity failures tied to Amazon’s HQ search this past year, Bezos made no mention of the HQ search in his annual letter, but instead directed much of the focus on their ability to grow their e-commerce business, AWS and the minimum wage increase to $15.
Jeff Bezos mentions in his shareholder letter the importance of 3rd-party sellers and how it has contributed to its total e-commerce revenue and volumes when compared to eBay:
Something strange and remarkable has happened over the last 20 years. Take a look at these numbers: Third-party sales have grown from 3% of the total to 58%. To put it bluntly: Third-party sellers are kicking our first party butt. Badly. And it’s a high bar too because our first-party business has grown dramatically over that period, from $1.6 billion in 1999 to $117 billion this past year. The compound annual growth rate for our first-party business in that time period is 25%. But in that same time, third-party sales have grown from $0.1 billion to $160 billion – a compound annual growth rate of 52%. To provide an external benchmark, eBay’s gross merchandise sales in that period have grown at a compound rate of 20%, from $2.8 billion to $95 billion.
Not to point daggers at anybody, but Bezos basically stated that their third-party retail sales (which is very similar to eBay’s listing marketplace) grew at annual growth rate of 52% versus eBay at 20%, and it’s representative of 58% of Amazon’s total retail sales. These are the key metrics that define Amazon’s e-commerce growth narrative, and it’s likely where Amazon will continue to invest resources, so they can attract more third-party retail sales at the detriment of eBay.
It’s likely that Amazon’s 3rd-party retail will continue to dominate in comparison to eBay (where historically that wasn’t always the case) but has now become an established reality given Amazon’s 3rd-party retail represents $160 billion in sales on the platform versus eBay at $98 billion in total platform sales.
The divergence in narrative between Amazon and eBay will continue, as eBay as a stand-alone website property hasn’t gone much further into enhancing features for eBay sellers. What has helped Amazon at beating eBay? Well, Bezos explains in his letter:
We helped independent sellers compete against our first-party business by investing in and offering them the very best-selling tools we could imagine and build. There are many such tools, including tools that help sellers manage inventory, process payments, track shipments, create reports, and sell across borders – and we’re inventing more every year.
This paints a somewhat gloomy narrative both by the numbers but also the internal efforts to supply core competencies tied to Amazon’s distribution and ecosystem that eBay cannot provide. While its been a well-established fact that Amazon can continue to execute, there was one more hint or clue in the annual shareholder letter that points to Amazon’s future.
Bezos believe that further expansion into global retail will require a combination of e-commerce and brick-and-mortar initiatives:
Amazon today remains a small player in global retail. We represent a low single-digit percentage of the retail market, and there are much larger retailers in every country where we operate. And that’s largely because nearly 90% of retail remains offline, in brick and mortar stores. With Amazon Go, we had a clear vision. Get rid of the worst thing about physical retail: checkout lines. No one likes to wait in line. Instead, we imagined a store where you could walk in, pick up what you wanted, and leave.
What’s interesting about Bezos is the fact that he believes that Amazon is “small player in global retail.” What this points to though, isn’t the fact that he thinks Amazon can service every customers with online-only sales, but how he transitions the idea to Amazon Go, where he believes that a technology-driven approach to checkout lines, and a seamless buying/selling experience could be globally disruptive and it’s where Amazon could continue to deploy resources (where they only have 10 stores in the United States in Seattle, Chicago and San Francisco).
The brick-and-mortar transition for Amazon has been slow, and more iterative in nature. But it could play into Amazon’s global ambitions of being a relevant retailer both online and offline (which can also) be integrated into its online-based business. The execution on the AWS front has been strong, but efforts by Bezos to outline expectations tied to retail shouldn’t be ignored either, because this is Amazon’s bread-and-butter business.
If Amazon were to surprise shareholders with more efforts tied to retail, it would double-down on its incumbency advantage. Based on the dialogue from Bezos within the shareholder letter, it’s safe to presume that on-going efforts to disrupt retail whether online or offline remains one of Amazon’s biggest priorities.
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