This past week, Amazon.com (NASDAQ:AMZN) delivered its fourth quarter earnings to mixed reaction, sending the company's stock retreating from its all-time highs. Since the earnings release, stock prices have fallen over 12%. During the conference call, Amazon.com further shocked the market with an announcement that the company is now considering increasing the price of its Prime membership service by $20 to $40 within the U.S.
Would higher Prime membership prices be the opportunity that traditional brick & mortar retailers like Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT) have been waiting for to close the gap on the online retail giant? Or, has Amazon.com already distanced itself enough from brick & mortar retailers? Who really benefits if Amazon.com increases its Prime membership costs?
Amazon.com earnings and conference call highlights
Fourth quarter earnings for Amazon.com revealed revenues of $25.6 billion – a 20% increase from the same quarter a year ago. However, despite increasing 146% to $239 million or $0.51 per share, net income came in below consensus expectations of $0.66 a share.
The earnings report also showed an increase in Prime Instant Video movie and TV show selections from 33,000 to 40,000, a change in FAA policies where over 20 airlines now allow customers to use their Kindles gate-to-gate, and overall improvements in customer response times. Future Kindle tablets and expansions of smaller Amazon.com segments were also featured.
The possibility of higher Prime membership fees was one of the biggest takeaways from the conference call. Amazon.com cited higher fuel and transportation costs as well as more frequent usage of the service among Prime members as the main reason for the possible price hike.
One possible scenario of higher Prime memberships
Amazon.com values its estimated 20 million Prime members because they spend almost twice as much as nonmembers. It is inevitable that the near-term backlash may cost Amazon.com some members. Several polls in recent days have shown a large percentage of respondents claiming they would not pay more than the current $79 fee for the membership.
However, there is another possible long-term scenario that may occur. Prime members that stay and pay the higher prices will be that much more likely to maximize the use of their membership, giving them a stronger reason to avoid brick & mortar retailers like Best Buy or Wal-Mart whenever possible.
Amazon.com is still more convenient for browsing a wide variety of unrelated items at the comfort of your home. Even with higher membership prices, gas prices may prove to be the bigger enemy for customers in the end. Gas prices have trended upwards the past decade, and despite being lower than their 2008 peak past $4/gallon, the national average is still above $3.25/gallon .
Best Buy, Wal-Mart, and other retailers
Does Amazon.com have to worry about customers that don't have Prime memberships? Not necessarily.
Annual growth in retail sales for online stores has increased since 2010. In contrast, department stores have seen negative annual growth the past six years, while electronics and appliance stores have fallen in three of the past six years. These trends don't bode well for Best Buy or Wal-Mart.
Best Buy recently reported lackluster 2013 holiday results where comp sales dropped 0.8% for the nine weeks ending Jan. 4, 2014. In the same period last year, the company's comp sales declined 1.7%. CEO Hubert Joly blamed the competitive pricing environment and the company's decision to defend market share by offering low prices.
Despite Best Buy's strategy to overhaul its stores, promote the store-within-a-store format, and price match, the company is still seeing a drop in traffic.
Last week, Wal-Mart updated its expectations for their fourth quarter and fiscal year 2014 earnings. Original guidance for the fourth quarter and the year were undercut below the $1.60-1.70 and $5.11-5.21 earnings per share ranges, respectively.
One of the reasons that Wal-Mart cut its guidance and now expects flat comp sales in the near-term was the reduction in U.S. government's Supplemental Nutrition Assistance Program (SNAP). The second reason was winter storms across the nation that resulted in store closures and traffic reduction.
Wal-Mart also has a growing problem with labor force strikes. Protests on low wages and working conditions could eventually result in Wal-Mart conceding and increasing wages. This would force the company to eventually raise its prices and give Amazon.com another advantage.
In the end, reduced store traffic at brick & mortar locations like Best Buy and Wal-Mart has a long-term consequence of shifting pricing power to online retailers. In the fourth quarter, consumer spending increased 3.3%-the best since 2010. Consumers are spending money in retail, and it is likely that a lot of them are choosing online vendors like Amazon.com.
If the interest was there at $79 when Amazon.com added more than a million new Prime members in the third week of December , there is a good chance that it doesn't completely disappear if that fee increases to $99 or even $119 a year. The added perks of an expanding Prime Instant Video library, the subscribe & save program that hurts retailers like Wal-Mart on consumable goods, and not having to get in your car all adds more value to the Prime membership.
However, the number of people that are willing to pay even more for a Prime membership may end up being the most alarming number of all to brick & mortar retailers.
With all that said, are there any retailers that look strong?
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Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.