Online retailing powerhouse Amazon.com (AMZN) didn’t become a $150 billion gargantuan of modern industry by playing nice. Quite the opposite: Founder and CEO Jeff Bezos is notorious for his aggressive pricing techniques — a strategy that has driven competitors both small and big out of business for years.
And if anyone needed definitive proof of Amazon’s cutthroat pricing, they have it.
A recent survey by William Blair looked at 4,000 random items at 40 retailers, and found that comparable items were available on Amazon.com for an average of 6% less. When buying more than one item, the discounts reached 8% on average, and in states where AMZN isn’t required to collect state sales tax, the savings averaged 12% to 13%.
Amazon’s low prices are no secret. They’re the weapon that put several multibillion-dollar companies out of business or on the ropes. Borders and Circuit City? Dead. RadioShack (RSH)? Writing its last will and testament. Barnes & Noble (BKS)? On the ropes and bleeding heavily. Best Buy (BBY)? Dramatically weakened and potentially unsustainable.
You get the idea.
But You Can’t Kill ‘Em All
That said, AMZN shareholders shouldn’t order the champagne and confetti just yet.
Walmart (WMT) and Target (TGT) aren’t going anywhere anytime soon, and both are boosting their online presences in an effort to combat Bezos and his e-commerce empire.
Even companies not traditionally thought of as retailers — most notably search engine giant Google (GOOG) and transportation newcomer Uber — constitute legitimate threats to AMZN’s quest for retail dominance.
Obviously, online shopping is already convenient, but Amazon isn’t happy with mere convenience. AMZN is increasingly emphasizing its same-day delivery service, which Amazon hopes will further entrench the company as the top dog in retail.
As you might imagine, this is an expensive strategy, and Amazon’s desire to keep prices at rock-bottom levels while supplying top-notch additional services has put a low ceiling on AMZN profits. In fact, Amazon.com hasn’t enjoyed a net profit margin above 1% since the fourth quarter of 2011.
In turn, AMZN stock has declined 17% in 2014 while the S&P 500 is up more than 7% as investors have started to tire of the company’s profitability issues.
Amazon’s era of low margins will be tough to end if it hopes to remain so fiercely competitive. After all, the folks in Mountain View, California aren’t just passively twiddling their thumbs. Google is testing “Google Shopping Express,” a service which offers same-day and overnight delivery of products from nearby retailers.
Similarly, Uber — which has already upended the traditional taxi industry as we know it — is venturing into the delivery arena with projects like UberRUSH, and is expected to continue its commercial ground transportation efforts into the future.
So, while it’s probably good long-term news for AMZN stock that Amazon.com’s offerings remain ruthlessly price-competitive, Amazon’s current situation is a mixed bag for shareholders.
On one hand, consumers won’t easily be swayed by competitors thanks to Amazon’s price advantage, and AMZN is doing everything it can to make its experience as seamless, easy and quick as possible.
On the other hand, Amazon doesn’t have a monopoly on convenience, and its inability to drum up big profits through its offerings is starting to wear thin with investors.
As of this writing, John Divine was long GOOG and GOOGL.
