4 Basic Reasons for Amazon.com's Ongoing Success

By focusing on a few basic strength, Amazon.com continues to gain market share and disrupt the world of retail which has big implications for Wal-Mart Stores and Best Buy.

Jan 26, 2014 at 9:00AM

Amazon.com (NASDAQ:AMZN) has been on quite a run in recent years. By focusing on developing businesses as diverse as selling pet supplies and providing cloud computing services, Amazon.com has rapidly grown revenue at an astounding rate and is well on its way to surpassing Wal-Mart (NYSE:WMT) as the world's largest retailer within the next decade. As noted in the table above, Amazon.com is closing the gap on Wal-Mart through tremendous revenue growth rates:

AMZN Revenue (Quarterly) Chart

AMZN Revenue (Quarterly) data by YCharts

While Wal-Mart has grown revenue a respectable 77% over the past decade, Amazon.com has increased revenue in excess of 1,000% over the same period. There are remarkably simple forces behind this growth.

Market disruption
While brick-and-mortar retailers like Wal-Mart and Best Buy (NYSE:BBY) occasionally change the brands or product categories available in stores, the big-box retail concept has been largely stagnant over the past decade. In contrast, Amazon.com is constantly innovating and finding new ways to deliver product while simultaneously increasing customer satisfaction. Examples are numerous, including Amazon's flagship line of Kindles, Amazon Prime two-day shipping and video streaming (on a free, rental, and sale basis). Looking ahead, Amazon.com continues to find ways to make the consumer experience easier with experimentation in grocery delivery, anticipatory shipping, and even delivery by drone. CEO Jeff Bezos has a vision of a time when his company prepares to dispatch a drone to deliver products before you even realize that need to order them.

Continuous improvement in a competitive environment that is largely standing still provides a huge competitive advantage for Amazon.com.

Through heavy investment in expansion, efficient use of inventory thanks to a lack of brick-and-mortar storefronts, and thousands of third-party affiliates, Amazon.com has an unmatched array of brands and products. A customer looking for a diverse basket of goods including golf clubs, a big-screen television, gourmet jelly beans, and a designer handbag are going to be hard-pressed to find these items elsewhere with free shipping, let alone a single store that has each item and the ability to deliver it the next day. This variety and convenience makes Amazon.com the default place to start any online shopping.

Amazon.com benefits from a cost structure that does not require the ongoing operation of thousands of expensive storefronts. No need to staff, operate, and renovate stores that often come at a steep price for the best locations. Combined with the company's longer-term focus that isn't weighed down by short term margins, Amazon.com can offer the same products at equal or lower prices than the competition while still providing the convenience of fast delivery.

Very simply, this is the reason behind the plunge in Best Buy shares earlier this month. Best Buy went "all-in" on the holidays by offering price matching and inviting Amazon.com "showrooming" as a way to generate traffic. All signs point to this gamble backfiring on Best Buy in terms of lower margins outpacing any sales benefit.

Long-term focus
The brick-and-mortar origin of many retailers is accompanied by baggage in terms of cost, culture, and mentality. Rather than being tethered to quarterly margins and same store sales results, Bezos and Amazon.com's management team are focused on the long-term. This is evident not only in the billions of dollars spent investing in future expansion, but also in the company's philosophy. The annual letter to shareholders is a fantastic read, and in management's eyes the company is still in "Day 1" of its growth.

Customer focus
Disruptive products, selection, price, and long-term perspective are all strengths for Amazon.com. What the makes the company truly exceptional is the way in which Bezos and team bring these basic concepts together with a singular focus on the customer.  Bezos' most recent letter to shareholders captures how these strengths translate into a customer focus that keeps Amazon.com ahead of other retailers:

"One advantage – perhaps a somewhat subtle one – of a customer-driven focus is that it aids a certain type of proactivity. When we're at our best, we don't wait for external pressures. We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition. We think this approach earns more trust with customers and drives rapid improvements in customer experience – importantly – even in those areas where we are already the leader."

While some investors look at Amazon.com's sacrifice of short-term results with skepticism, the company's share price over the past decade shows just how much value the market places on this unique perspective:

AMZN Total Return Price Chart

AMZN Total Return Price data by YCharts

Foolish takeaway
If today is truly "Day 1" for Amazon.com, there is little reason to doubt that further market outperformance is in the company's future. With innovation, investment, selection, price, and service continuously improving the customer experience, Amazon.com is truly a one-of-a-kind retailer. Over the long-term, this value proposition to customers will continue to result in market share gains; while it may be secondary in the minds of management, this ongoing growth will translate directly to further share appreciation for investors.

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Brian Shaw owns shares of Amazon.com. 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.

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