Amazon (AMZN -0.66%) Prime is a large contributing factor to the company's continued growth in online retail. Amazon posted a 24% year-over-year increase in net sales in North America last quarter, which is massive for a company that dominates e-commerce as much as this tech company does.
By next year, over 50% of Americans will have access to a Prime subscription, according to estimates from eMarketer. That's more than two-thirds of the online shopping population.
But membership growth is slowing. Prime members will grow just 9.4% this year, down from a 20% increase in 2017. eMarketer expects just 4.3% growth in 2021 as Amazon faces pressure from saturating the market.
Prime members, in general, spend more than non-members. So the continued growth of Prime has naturally led to outsize revenue growth for Amazon. But with over half of its biggest market already subscribed to Prime, growth will have to come from increasing spend per Prime member.
Image source: Amazon.
Amazon isn't alone in that challenge. The entire e-commerce industry is facing saturation. Total digital buyers increased just 2.6% this year. "To keep growing at double-digit rates, future channel growth will increasingly rely on continued strong gains in the spending rate per buyer," eMarketer analyst Andrew Lipsman wrote.
But Amazon is already well-positioned to grow spend-per-shopper better than its competition.
The convenience of one-day shipping
Amazon's introduction of one-day shipping this summer resulted in an acceleration in revenue growth for the company. CFO Brian Olsavsky pointed directly to the response to one-day shipping as the driving force behind the acceleration.
Amazon's winning by making ordering from its marketplace more convenient than buying an item from anywhere else. If a shopper can order whatever they need for tomorrow from their smartphone before leaving work for the day, they're more likely to drive right past that Walmart (WMT 0.60%) without stopping on their way home.
One-day shipping comes with a significant cost, however. Fulfillment expenses increased 23% last quarter. That number is in line with the growth in revenue, but investors need to consider what Amazon's growth would have looked like with a smaller investment in fulfillment. Olsavsky expects the company's investments in one-day delivery along with a seasonal slowdown in revenue growth to cost the company about $1.5 billion in the fourth quarter.
Meanwhile, Walmart and Target (TGT -3.26%) are both working to keep up with Amazon. Walmart's rolling out its subscription same-day delivery service aimed specifically at online grocery shoppers, an area it's grown to dominate. Walmart's also expanding its NextDay delivery program, which offers free one-day delivery on select items without a subscription. Target's more focused on same-day fulfillment, specifically from its stores. Nearly all of its online sales growth stems from its same-day fulfillment options, including in-store pickup and its DriveUp curbside pickup program.
Getting Alexa into every home
Shopping on smart speakers is growing faster than analysts expected. Around 31 million Americans will shop through their smart speakers this year, up 31.6% year over year.
Amazon has successfully pushed its Echo smart speakers into consumers' homes. Its Echo Dot was one of the bestselling items on Amazon's marketplace on Cyber Monday.
Amazon Echo device owners historically spend more than the average Amazon shopper. As smart speaker adoption increases, Amazon should see a continued increase in average spend per customer thanks to the presence of Alexa in Prime members' homes.
Walmart and Target can't compete with Amazon's presence on smart speakers. Walmart launched a voice app on Google's Home devices earlier this year specifically for grocery ordering. That move follows a shuttered effort at integrating Walmart with Google Express which offered the ability to order general merchandise at Walmart through the Alphabet company's voice assistant. Still, voice shopping plays a very minor role in Walmart's e-commerce plans.
Amazon's done a great job of attracting a huge number of shoppers to Prime over the last decade. It's now focused on increasing how much those members spend on its marketplace. Its efforts in one-day delivery and voice shopping ought to help it continue outpacing the revenue growth of the rest of the industry while making growth more difficult for Walmart and Target, its biggest competitors.
