Will Disgruntled Amazon.com Customers Turn to This Competitor?

Amazon's price increase is receiving bad press and made to look worse by a lawsuit. The door may be open to competition.

Mar 24, 2014 at 3:00PM

Amazon.com (NASDAQ:AMZN) just raised the cost of its Prime membership by $20, to $99 from $79. This is great for the stock and doesn't hurt consumers that much. For me, it's the price of one parking ticket at the mall. However, a lawsuit that is gaining traction and seems almost timed to coincide with the price increase may open the door to competition funded by Yahoo!'s Alibaba and American Express.

Double-dipping on shipping?
Amazon has been accused of double-dipping by encouraging its sellers to increase prices by the cost of shipping. According to the lawsuit: The "defendant encouraged vendors who use Amazon to ship its items, to mark up the prices of these items to ultimately include shipping charges. Furthermore, defendant provides these vendors priority by showing their items first in the Prime member's product search results."

The price increase definitely benefits investors, but after a UBS survey, analysts were "'negatively surprised by the results,'" according to Time.com. "Although 94% of Amazon Prime customers surveyed said they were likely to renew at the $79 level, 'these percentages dropped precipitously when price increases of $20 and $40 were introduced (to 58% and 24%, respectively).'"

What do you think? Does this change how you would use Amazon?

Shoprunner's foot in the door?
The bigger question to me is whether competitors can use this negative publicity to win a chunk of Amazon's customer base. Shoprunner went to the trouble of even setting up a separate page devoted to unhappy Amazon Prime customers. Shoprunner began offering a year of free two-day shipping after Amazon's announcement was made. With 85 partners, including prominent retailers like Babies R Us and GNC, Shoprunner might become a convenient place for former Amazon Prime customers to order their weekly supply of diapers, formula, and caffeine pills.

Financed by Alibaba and American Express
Shoprunner is a members-only service that is backed by Alibaba and American Express and led by Scott Thompson, former CEO of Yahoo!. In October 2013, Alibaba led a $210 million round of financing. You have to wonder, with an ex-Yahoo! CEO and backing from Alibaba, how the U.S.-based Internet pioneer fits into the equation of online shopping.

Fiona Dias, the company's chief strategy officer, sees Shoprunner as a conduit for existing brands. Dias said in an interview, "ShopRunner is about making online shopping easier without consumers breaking with their favorite brands" -- and Amazon does not carry goods from most of the other top 100 online retailers.

An Amazon armada?
In December, many Amazon customers were left present-less as UPS was unable to accommodate as many as 5 million last-minute orders. Amazon responded by offering gift cards to people whose packages did not arrive as promised. This might be catalyst for Amazon to build out its own fleet of delivery vehicles.

According to James Tompkins, who runs a Raleigh, N.C.-based consultancy, Amazon is planning to use an internally developed fleet to serve the top 40 markets, which accounts for half of the population in the U.S. Tompkins indicated that Amazon has a timeline for its rollout, but that he is unaware of the details. The service was planned before the Christmas season and was intended to be only for AmazonFresh, but in light of potentially increasing competition, this could be expanded at some point in the future.

Is a premium valuation still warranted?
After negative press from unfulfilled Christmas orders, Amazon is now being sued for possibly forcing customers to overpay for shipping. These problems are coinciding with Shoprunner's launch and may push customers to consider an aggressive second vendor. Going forward, if increasing competition causes growth to slow, Amazon's valuation, at 600 times trailing price to earnings, may come crashing down.

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David Eller has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, American Express, United Parcel Service, and Yahoo!. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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