Amazon (NASDAQ:AMZN) got to a trillion dollar valuation because of its online services. Now, the next trillion dollars in market cap will from the company’s offline push.
Bloomberg shook the markets on Wednesday when it reported that Amazon is planning on opening 3,000 cashier-less AmazonGo convenience stores by 2021. To put that number in perspective, there are less than 10 AmazonGo stores open today, and convenience store giant 7-Eleven has less than 10,000 stores in the U.S.
In other words, Amazon is planning on going from a nobody in the offline convenience-store world today, to the industry’s giant by 2021.
Amazon stock traded higher on the news. Shares of grocery giants Kroger (NYSE:KR) and Sprouts (NASDAQ:SFM) dropped on the news. But, they weren’t the only victims. The whole offline retail sector fell, with Walmart (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST) all dropping after the Bloomberg report.
Why? Because Amazon’s offline push is about much more than just opening 3,000 AmazonGo convenience stores. That might seem like an ambitious plan. On its face, it is. But, CEO Jeff Bezos and company have much bigger plans for Amazon. Anything this company does, they do with the intention of dominating, not just participating.
From this perspective, investors should look at the Whole Foods acquisition and AmazonGo expansion as the beginning steps of a much bigger offline push from Amazon. Inevitably, this offline push will power Amazon stock materially higher over the next several years.
AmazonGo Will Be Huge
With respect to AmazonGo, Amazon is tapping into a massive convenience store market in the U.S. that has 155,000 stores and $233 billion in net sales.
AmazonGo will eventually dominate that market. Right now, Bloomberg is reporting that the focus of AmazonGo is to solve urban “meal-time logjams” and that the stores will be opened almost exclusively in dense metro areas with the purpose of enhancing convenience for urban residents.
This is a smart first move. Because the stores are technology infused and cashier-less, there aren’t any lines. Until other convenience stores technologically upgrade themselves to compete, AmazonGo will hands down be the most convenient convenience store in America.
But, make no mistake. This is just the first move for AmazonGo. If the company can truly master cashier-less convenience stores with zero lines, then they will launch such stores all over the country. Considering Amazon’s often ambitious plans, it easy to see AmazonGo going from 10 stores today to 3,000 stores by 2021 to 10,000 and up stores by 2025 or later.
Amazon controls 50% of the e-commerce market. If this company truly masters the cashier-less offline experience, what is stopping them from nabbing 50% of the convenience store market in a decade? Nothing. From this perspective, I realistically think that AmazonGo presents a $100 billion-plus opportunity for Amazon.
Amazon Offline Has Tremendous Potential
Let’s put the AmazonGo expansion plans in context.
In late 2015, Amazon opened its first physical bookstore. In late 2016, Amazon launched its first cashier-less store. Then, in mid-2017, Amazon acquired Whole Foods. Now, Amazon is planning a huge expansion for AmazonGo.
In context, the AmazonGo expansion is just the latest and perhaps biggest move in Amazon’s offline push. The company has slowly realized that although online retail is a big and rapidly growing industry, there are certain parts of retail that will forever remain offline. As such, there is tremendous value in the offline world which Amazon isn’t tapping into.
If you think convenience and grocery stores are where this stops, you don’t understand Amazon at all. Bezos initially considered naming his e-commerce company Ruthless (ruthless.com still takes you to Amazon). Although he settled on Amazon, Ruthless fits the company’s description perfectly. Amazon is ruthless is everything they do.
Amazon didn’t just create an e-retail business. They dominated the e-retail world. Amazon didn’t just create a cloud business. They dominated the cloud world. Amazon didn’t just create a subscription retail service. They created the world’s biggest subscription retail service.
Extrapolate that out. In a decade, we will be saying that Amazon didn’t just open convenience and grocery stores. They dominated the whole offline retail world.
It is a tall order. Big companies like Walmart, Target and Costco reign supreme in the offline world, and have huge real estate advantages over Amazon. But, Amazon appears to have a distinct technology advantage with its cashier-less tech, an advantage that will lead to greater convenience and lower prices (without recurring payroll expenses, Amazon can price products below industry standards). Also, Amazon has 100 million Prime members who are already enjoy lower prices and love the Amazon shopping ecosystem. Those members will drive high traffic to any and all Amazon physical stores.
Overall, I think it’s silly to assume that Amazon’s offline push began with bookstores in 2015 and will end with 3,000 AmazonGo locations in 2021. Instead, this is a narrative that will unfold over the next decade. During that time, Amazon will likely open big-box stores, too, in pursuit of dominating the offline retail world like it has dominated the online one.
Disruption Is The Fuel For Amazon Stock
The financial worry here is that AmazonGo expansion will weigh on profitability.
That is true. These stores reportedly have high start-up costs due to their hardware. Thus, expansion will kill profits in the near-term.
But, lack of profitability has never stopped Amazon stock from going higher. Instead, Amazon stock runs on disruption fuel, not profit fuel. The more this company disrupts, the higher Amazon stock goes. Why? Because the Amazon playbook is to invest big in order to disrupt, sacrifice profits in order to grow market share, achieve market leadership position, and then dial down costs and ramp up profits on a huge revenue base.
It has worked time and time again. Amazon’s domestic e-commerce business wasn’t always profitable. Neither was Amazon Web Services. Today, both businesses are profitable on huge revenue bases, meaning the profits are huge, too.
The same thing will happen with offline retail. As such, because disruption is the fuel for Amazon stock, this stock will push higher as the offline expansion narrative unfolds over the next several years.
Bottom Line on AMZN Stock
Amazon stock is a long-term winner because of its ability to keep growing. This stock runs on disruption fuel, and offline retail is this company’s next big disruption. As such, Amazon’s offline retail push over the next several years will inevitably power Amazon stock higher.
As of this writing, Luke Lango was long AMZN, KR, WMT, and COST.