Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How Amazon Is Becoming the New Retail Showroom

In May, I dropped my Prime membership for (NASDAQ: AMZN  ) when the company decided to raise its price to $100 per year. But that didn't deter me from using the site regularly, particularly on my mobile devices.

However, today, my Amazon experience has changed from my Prime days. It's more about browsing for goods I may or may not buy somewhere else than it is about buying things from Amazon. In fact, whereas Best Buy may have been a showroom for Amazon for years, it may now be Amazon that is showrooming for everyone else. 

Amazon ships millions of items per year, but that selection makes it a destination for comparison shopping.

The curse of massive selection
My realization that I was using Amazon as a showroom came from a fairly mundane item I needed: a bug zapper for my new home. I assume that my local hardware store carries a perfectly good bug zapper, but I always like to do some research before shopping, so I went online. But where do you start when looking for bug zappers? I Googled "bug zappers," but I also opened a window with After all, Amazon has everything.

And there lies both Amazon's opportunity and its curse. It has everything, so it's a first-stop shop for consumers, but it's also a price-comparison tool for those same consumers. Amazon has to have the lowest price or risk losing business to improving sites from competing retailers and the very manufacturers of the products it sells. And that's where I see the biggest challenge long-term.

Amazon's emerging margin problem
I'm sure that Amazon would be happy that I'm searching for new items on its site, but the problem is that it doesn't always have the best prices. In fact, I've found Amazon's prices increasingly uncompetitive with manufacturers' prices, and that makes sense at the end of the day.

For years, retailers have been trying to gain a price advantage by cutting out unnecessary pieces of the value chain. Wal-Mart was known for eliminating distributors and going straight to product manufacturers because with its scale, the distribution network simply wasn't necessary.

Amazon has forgone the sales floor for warehouses where manufacturers can directly ship their products. Eliminating the cost of a brick-and-mortar store and eliminating shipping from distribution centers to stores saves costs -- although some of that cost comes back in the form of shipping costs:

One problem with Amazon's business model is that shipping costs continue to rise, squeezing margins. Source: Amazon earnings releases.

But the even more efficient model would be to ship products straight from the manufacturing line to a customers doorstep. It's not impossible; it just wasn't the way these businesses were set up. Yet that too may be changing.

More and more manufacturers are setting up websites with competitive prices and even free shipping. If they can get even close to Amazon's efficiency in inventory and shipping, they'll be able to compete because as the manufacturer, their cost of goods is lower.

The problem then for Amazon is that it'll have to keep costs low, meaning lower margins, and may not be able to use its scale to squeeze higher margins from manufacturers. Below, you can see how, despite higher margins in recent years when you include shipping and technology costs, the company's margins are flat, which is why it's still reporting little to no net income.

Amazon's margins including shipping (what I've called the "Real Gross Margin") have been flat over the past three years, despite Amazon's growth in scale. Source: Amazon earnings releases.

If Amazon is constantly being compared to other online retailers, it'll have to have lower prices by definition to compete. If manufacturers start to ship their own products more efficiently, that model will come under even more pressure.

Amazon's core long-term problem
The biggest challenge for Amazon long-term is that it's built a business that sells itself by having lower prices than competitors. But if they choose to become retailers, manufacturers of goods should have the lowest costs because the supply chain is shorter. If product companies continue to improve their online retail offerings, it's Amazon that will become the showroom. Long-term, that will be bad for investors. 

Dividends are a better way to beat the market
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (2) | Recommend This Article (4)

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 July 17, 2014, at 7:42 AM, JamesCage wrote:

    nteresting article, retailers need to ensure they stay competitive in their pricing vis- a-vis online stores having an online presence will help brick and mortar retailer’s combat showrooming . New developments such as this will ease the pressure on the retailers. I work for McGladrey and there's a very informative whitepaper on our website that readers of this article will be interested in. @ Count, manage and move: Warehouse inventory control strategies

  • Report this Comment On July 17, 2014, at 9:06 AM, CraigWPowell wrote:

    Amazon Has Been Flexing Its Muscle And This Assertiveness Will Reward Shareholders:

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3030482, ~/Articles/ArticleHandler.aspx, 9/2/2015 2:48:57 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Travis Hoium

Travis Hoium has been writing for since July 2010 and covers the solar industry, renewable energy, and gaming stocks among other things.

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 3:59 PM
AMZN $496.54 Down -16.35 -3.19% CAPS Rating: ***