Why Amazon Prime Is the Future

Anybody who knows me knows that I am a proud member of the Amazon Prime Cult. I only clean my house with products I can order through Amazon.com's (Nasdaq: AMZN  ) Prime service. In December, I chose holiday gifts for my family based on what I could order through Prime. I scoff at brick-and-mortar prices when I do make my way out into the world. And, dear Fools, I say this with as little bias as possible: You will one day join me. Convenience is king, and if history is any indicator of consumer shopping habits, Prime is the future.

Pioneers in retail: Sears and Roebuck
In 1888, Richard Sears released the first Sears, Roebuck and Co. mailer to sell watches and jewelry. By 1894, he had expanded the catalog's selection and declared it the "Book of Bargains: A Money Saver for Everyone." Eventually the company released specialized versions of the catalog, including the iconic Wish Book.

The company grew like a well-fertilized weed. By 1914, Sears' annual mail-order sales were over $100 million, doubled from $50 million just nine years before. With westward expansion, more Americans were living in rural areas. They were essentially cut off from the rest of the country -- no cars, no TV, no Internet. Sears, Roebuck and Co. (now Sears Holdings (Nasdaq: SHLD  ) ) disrupted the way people shopped, and gave them a new set of expectations. Thus the modern consumer was born.

Taking it to the next level: Wal-Mart
Next on the list to help mold consumers' expectations for maximum convenience coupled with low prices was Sam Walton and his big-box powerhouse, Wal-Mart Stores (NYSE: WMT  ) .

What's the only thing better than ordering your low-priced goods from the comfort of your own home and having them delivered weeks later? In the 1960s, it was going to a huge warehouse near your home and choosing your low-priced goods by hand for immediate gratification.

In less than a decade, the company grew from one store to 276 stores in 11 states. Today, they operate over 10,000 stores in over 28 different countries. According to the 2006 book The Wal-Mart Effect, 90% of Americans live within 15 miles of a Wal-Mart store.

Again, the company was able to disrupt the way people shopped and reframe their expectations. Immediate gratification had been introduced to the low-price game, and shoppers were hooked.

Taking it to the next next level: Amazon
In the book Influence: The Psychology of Persuasion, Robert Cialdini explains that humans are wired for efficiency. That's why consumers' shopping habits evolved in the direction of Sears catalogs and Wal-Mart stores.

Enter Amazon Prime, the new disruptive force that will once again redefine consumers' shopping expectations. Prime was launched in 2005, and four years later, it only had 2 million members. By 2011, though, that more than doubled to 5 million members. Take a look at how that growth has correlated both with the company's stock price and total revenue:

 

Keep in mind that even after these booms, Prime still only represents 4% of the company's total customers, is growing at over 20% year over year, and that Prime customers spend 130% more than regular Amazon customers.

Prime gives us everything we've been conditioned to appreciate and even expect: ordering without leaving the house, home delivery, and nearly instant gratification with free two-day delivery. And over the next decade I definitely see this shifting toward even quicker shipping times.

Other companies have caught on as well. In December, Google (NYSE: GOOG  ) announced a plan to partner up with other online retailers to offer low-cost next-day delivery. The war for impatient consumer loyalties has begun, and while Google may give it a run for its money, Amazon is still best positioned for victory.

Threats do exist from other more established retailers as well. If Wal-Mart or Best Buy could figure out a way to leverage their existing store locations to get same-day delivery, it would greatly threaten one of Prime's greatest benefits. But with the 17 new fulfillment centers Amazon opened last quarter, bringing its current total to 69, I don't see that happening. These fulfillment centers not only mean faster shipping for Amazon, but also lower shipping costs, making this an even more sustainable business model for Amazon in the long run, and an easy thumbs-up CAPScall for me.

Sears and Wal-Mart have proven that retailers can change the way people shop if they just pay attention to consumers' needs. Some of our top analysts have found another retailer ready to change the way people shop in Latin America. It's our top pick for 2012, and would make a great addition to your portfolio. To read more about The Motley Fool's Top Stock for 2012, click here.

Fool contributor Amanda Buchanan is not actually a member of a cult. She holds no position in any company mentioned. Click here to see her holdings. The Motley Fool owns shares of Best Buy, Amazon.com, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Amazon.com and Wal-Mart Stores. Motley Fool newsletter services have also recommended writing covered calls in Best Buy and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2012, at 2:42 PM, Thuddd wrote:

    I call for a moratorium on breathless Motley Fool Amazon articles for the rest of the day. If there is a traffic cop in house, please meter these stories at a less-than-cram down pace. Enough, already!

    I personally don't see any hope for Amazon as an investment at anywhere near it's present valuation. The constant shilling of this stock is straining the credibility of the whole Fool organization.

    And congratulations to Amazon for finally pulling their revenues even(well, almost) with the hopeless and doomed Best Buy.

  • Report this Comment On February 07, 2012, at 5:19 PM, getoutngo wrote:

    does one honestly believe Amazon's financing structure is sustainable over hte medium or long term? They've raised their capital on the backs of their suppliers. I have my doubts this will go on forever, and when it doesn't, they will have to carry a significant amount of financed debt. They have been more focused on growing the top line and not paying enough attention to Net Income. If they do not address these issues, it will catch up with them, no matter how life changing the business model may seem. Until they have enough FU money in the bank to tell both suppliers and bankers they don't need them, when times get tough, they will be in a bind. My take is they need to pay more attention to their balance sheet and margins they earn, versus growing sales and the fixed infrastructure it takes for the sake of growing it.

  • Report this Comment On February 07, 2012, at 6:18 PM, RushingFool wrote:

    I find it disturbing that Prime members don't have equivalent access to Amazon's site. For example, Prime members are redirected away from certain, usually cheaper, items to more expensive similar ones. Non-Prime members are not redirected in this way. The difference is subtle but can be observed if you establish a non-Prime membership and then compare operation when ordering. I must assume this is intentional since it's been going on since at least summer 2011, and has been reported to Amazon numerous times, but remains problematic.

  • Report this Comment On February 07, 2012, at 6:45 PM, CromulentBrad wrote:

    the day people have to pay sales tax on amazon, they'll realize it's much more convenient to walk out of the store with product in hand instead of waiting 2 days for shipping.

    no internet sales tax is a major competitive advantage amazon currently has that will not alwasy be there.

  • Report this Comment On February 07, 2012, at 8:51 PM, proudnana wrote:

    Nothing impresses me more than convenience! Almost all of my shopping is online.

    When I was young, I did shop from the Sears catalog. Nothing is more tedious that driving to the store, finding a parking space and then having to wait in line to pay.

    Today I shop online for everything from gold to clothes. I rarely go into brick and mortar stores for anything and I am a senior citizen!...read "baby boomer"...we're still having an impact, you know.

    Many of my friends agree. Listen up business owners and investors. No one wants to deal with the hassle of shopping anymore, even if we have the time.

  • Report this Comment On February 08, 2012, at 12:42 AM, Ares07 wrote:

    I think Amazon prime would be a good thing if they allowed shipping to Alaska and Hawaii. They would undercut many businesses because of sales tax and the inherent cost of things here. I'll stick to buying things from other places for now and using ShopRunner, which offers 2nd day shipping and free returns also. If amazon had free 2nd day shipping to Hawaii I could see them charging just as much/more than ShopRunner (79.99/year). They just have to find a sweet spot in pricing.

  • Report this Comment On February 08, 2012, at 2:02 AM, saron1 wrote:

    Not sure this is sustainable. I do a lot of comparison shoping vs. brick-and-mortar and often find the prices to be nearly equal, i.e., Amazon+shipping = B&M+tax. That tells me, Amazon is entirely too dependent on avoiding tax.

    The convenience argument only works for products you don't need to see and touch (which are many luckily for Amazon). Otherwise, you go to BestBuy, Barnes&Noble, Bed, Bath and Beyond, Costco... ANYWAY and if their prices are comparable, you buy it on-the-spot - which is actually more convenient.

    Finally, they seem to be funding a lot of shipping and movies with Prime. Their cross-over point (where it would have been cheaper to charge for shipping) will go lower and lower as more and more people get "free" shipping with PRIME.

    In summary, Amazon does have a growth model for some products but their P/E of 134 assumes all products, no sales taxes and no cross-over point. This stock is more likely to adjust down than keep climbing from here.

  • Report this Comment On February 08, 2012, at 5:24 PM, flockof4 wrote:

    "I scoff at brick-and-mortar prices when I do make my way out into the world."

    I have no idea what she is scoffing at. After reading this article I went to Amazon to quickly compare pricing for a few household items: T.P., Windex, Napkins, trash bags, laundry soap. In all cases ordering on Amazon was significanly higher even with free shipping (which not everything was even available to ship Prime). Toilet paper was twice as expensive! I have done some shopping on Amazon over the years and have had free trials of Prime. It's nice when it works, but for household grocery/cleaning items she's crazy to say the better value isn't at your local store.

  • Report this Comment On February 08, 2012, at 5:26 PM, racchole wrote:

    Public sentiment is a hilarious thing.

    The Fool posts a couple Amazon articles and everyone is up in arms about it, declaring Amazon overpriced and questioning the very essence of its business model.

    Post a general tech article with one single mention of AAPL, and the Apple obsessors come out of the wood work and declare AAPL the King of the Free World.

    Objectively, Amazon has done a lot more for people (in a very general sense) than Apple ever has and ever will. It's just that the people who have surgically implanted iPods and cell phones onto their hands don't realize it, and probably never will.

    Hilarious.

  • Report this Comment On February 09, 2012, at 3:20 AM, Rowants wrote:

    Internet shopping isn't necessarily tax free. Nebraska has added a line to the income tax form where you are required to report and pay sales tax on all items purchased (internet/mail order) where you did not pay sales tax on them. Has been the law here since the late 1960's, buy they have only starting getting aggressive about it now due to budget problems. So-even if Amazon or whoever does not collect sales tax from you, you may still be on the hook to pay sales tax on those purchases. And I wouldn't be surprised if some day they (Amazon, etc) has to report your doings to your state IRS, similar to a 1099 tax form from your bank.

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