Don't Count Amazon Out Yet

Has the Amazon.com (NASDAQ: AMZN  ) retail threat been defanged? Looking just at some of the stocks that the company ravaged last year, you might think so.

Take Radio Shack (NYSE: RSH  ) . After falling by 80% in 2012, shares are up more than 50% this year. And Best Buy (NYSE: BBY  ) is doing even better, notching a double so far in 2013. By comparison, Amazon's stock hasn't budged.

RSH Chart

RSH data by YCharts.

Which way to the showroom?
Sure, traditional retailers have some cause for optimism. For one, the dreaded "showrooming" effect -- where customers shop inside a bricks-and-mortar store to check out a product before buying it for less online -- hasn't actually turned out to be The End of Physical Retailing. After all, Best Buy and Target have both been guaranteeing prices against Amazon for months, and it hasn't destroyed their profit margins. Best Buy even told The Wall Street Journal, "We love showrooming."

The online-vs.-offline price gap is closing by other means, too. Amazon now collects sales taxes from a much bigger slice of the U.S. population.  And a national law could soon bring all online sellers into the state sales-tax pool in one swoop. But federal law or not, the writing is on the wall. The sales-tax advantage that Internet retailers have enjoyed over their local competitors is ending.

Tide isn't turned
But I wouldn't be so quick to count Amazon out. Its small tax loss also came with a big gain. The online seller can now build massive new warehouses as close to shoppers as it wants. That means that it can offer even cheaper -- and faster -- shipping to its growing ranks of customers.

And that feeds into the real threat that should have Amazon's retail competitors worried: its Prime membership service. These are the subscribers who get unlimited two-day shipping on most Amazon products for a $79 yearly fee.

While the company doesn't share membership figures, independent estimates have put the count at more than 10 million strong. That's great for Amazon, because once shoppers become subscribers, they tend to buy a wider range of products from the e-tailer. And Prime members spend much more at the site, logging better than twice as much in annual spending over non-Prime customers.

Foolish bottom line
Physical retailers such as Best Buy and Radio Shack can breathe a little easier knowing that showrooming isn't going to kill their businesses anytime soon. But they'd be crazy to let their guard down now. Amazon's physical footprint is growing along with its subscriber base, making its retailing threat as strong as ever.

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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 April 06, 2013, at 3:45 PM, mistacy wrote:

    I am glad you made the AMZN case. Because with the BBY rally frenzy, it seems everyone has put AMZN to the sideline. Amazon the company is very aggressive & has massive advantages against its competitors. Amazon shopping is just practical & easy. More people prefer the convenience over the physical relationship that a salesperson may offer. Earning reports are due. Shareholders of the companies mentioned here could be in for surprises.

  • Report this Comment On April 07, 2013, at 7:42 PM, inor35 wrote:

    Best Buy does not match prices with Amazon or other pure internet companies.. BBY will match prices only with companies that have a STORE FRONT... it is all a missleading compain...

    try and call BBY with a price from AMZN and you will see the truth...

    great short at $26............

  • Report this Comment On April 07, 2013, at 9:25 PM, mattmosa wrote:

    If Amazon decides to build massive warehouses, their cost structure will rise because Amazon would begin to become a bricks and mortar retailer. That won't necessarily lead to lower prices and faster service. To win that game Amazon would have to become as sharp as Costco, no small task.

    Amazon early on and perhaps to this point, has lead a charmed life. Virtual online retailing and its lower costs all the while enjoying brick retailers showcasing product to the public for consumer review.

    Its a disruptive business model but maybe unrealistic or unsustainable at least with some products.Manufacturers want their product showcased to the public and they also know that there are costs associated in doing so.

    Manufacturers of many products want and need public exposure and they will have it, even if they have to do it themselves. If all of the big retailers disappear they will do it themselves.

    This Samsung boutique deal with Bestbuy may be small but it may be significant in the bricks vs online sales wars. Gotta show that product in a retail enviroment, and somebodys' gotta pay for it.

    Now if Samsungs getting in on it, perhaps they'll start looking at the online pricing of their products to see who selling what and for how much. Some housecleaning maybe.? Maybe boutique and samsung direct online sales?

    Amazon isnt going away any time soon but the sales tax issue and the reality of physically showing product will make for a more challenging sales arena for Amazon.

  • Report this Comment On April 08, 2013, at 7:07 AM, TMFSigma wrote:

    @inor35 - best buy does match prices against pure online companies. Here's what the policy says "If you find a lower price on a qualifying product at a local retail competitor's store or a designated major online retailer, we will match the price."

    on that list of "designated major online retailers" is amazon.com, buy.com, and tigerdirect.com

    @mattmosa - Those are great points, and I think the comparison to Costco is a good one. Subscription retailing is a really hard model to pull off. But Amazon's Prime service is looking like a real competitive advantage that should grow as new warehouses allow for more products to be shipped under the free 2 day shipping deal.

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