The COVID-19 pandemic has been a boon for online retail stocks and Amazon (NASDAQ:AMZN) has been one of the biggest beneficiaries. But something has changed at the tech giant over the last few years and it should be troubling for investors. Prime products are harder to find now that third-party sellers are growing on the platform, prices seem to have gone up, and competition from across the internet is more compelling than ever.
What do these observations suggest? I want to outline why Amazon's best days may already be behind it and why, on a fundamental level, other companies are better suited to grow long-term in online retail.
Prime isn't what it once was
I've been a Prime member for most of the last decade, but I recently changed my settings to not auto-renew my membership. I used the service constantly when COVID-19 hit, and Amazon has been surprisingly disappointing in its selection, pricing, and delivery times. Not only is it hard to find what I want on the site, but the two-day delivery that is the biggest perk of Prime also seems to be less and less common, so what's the point?
The reason Prime has become less valuable comes down to the online strategy Amazon has spent more than a decade building. Instead of holding inventory itself, the company has moved more sales to third-party operators who rent space in Amazon warehouses or ship directly from their own locations. This reduces the capital Amazon needs to grow and reduces customer service that Amazon has to handle, but also means Amazon is losing control of the customer experience.
To put the impact of the strategy and its impact on Amazon's financials into perspective, Amazon said that third-party businesses sold 60% more during Prime Day this year than a year ago and reached $3.5 billion in sales. Digital Commerce 360 estimates that Amazon's total sales rose to $10.4 billion during Prime Day. Amazon doesn't release detailed Prime Day numbers, but if those figures are true, then Amazon's non-third-party sales rose just 39%, meaning third-party sellers are an increasing share of sales.
The push to third-party sales is naturally going to have an impact on the Amazon shopping experience because the company loses control of everything from inventory to pricing to Prime benefits. And that undermines Amazon's entire shopping experience because it used to be a great place to order everything from everyday items to obscure products. This is anecdotal, but a few days ago, I searched for an outdoor heat lamp for my patio and the first (sponsored) product wasn't a heat lamp at all, and nothing on the first page of my search was eligible for Prime shipping. That's a semi-obscure item, but not uncommon in Minnesota, where I live, so if I need to go to Home Depot (NYSE:HD) or Target (NYSE:TGT) to get a common heat lamp what's the point of having Amazon Prime?
Amazon may see benefits from not having to hold inventory or decide on pricing, which it can now leave to third-party sellers. But it loses the customer experience and in the last year, I've definitely noticed the experience is going downhill.
Retailers have found their niche
As the Amazon experience has slipped, retailers like Target have gotten better. Services like Drive Up and Shipt are commonly used in my household, whether we are looking for a few items for the day or a big grocery order.
Drive Up, in particular, feels like the future of retail to me. With a few clicks, we can order what we want and when we pull into the Target parking lot the items are waiting and someone will even load the car without us getting out. And the number of available items is growing.
I've picked Target as a company that I think has adjusted well to the realities of online shopping and COVID-19, but retailers like Best Buy and Home Depot have also adjusted and begun focusing on online sales and curbside pickup for their businesses. This allows brick-and-mortar retailers to leverage their physical locations to offer convenience that Amazon simply can't. And when even two-day shipping is in question it may be better to shop at a brick-and-mortar store.
Direct retailers are now a huge threat
It's not just big-box retailers who are coming for Amazon, either. Just a few years ago, Amazon had a big advantage over smaller retailers because it had more inventory, single-click checkout, free shipping, and was simply easier to use than most online stores. But with platforms like Shopify and Square and payment options like Apple (NASDAQ:AAPL) Pay, Shop Pay, PayPal Checkout, and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Pay, the convenience advantage has faded. And some customers (like me) prefer working directly with a retailer.
In a lot of ways, direct retail makes a lot more sense than Amazon's store with everything under the sun. From a supply chain perspective, it's more efficient to go directly from the product producer to the consumer, rather than having Amazon's warehouse in the middle. Going direct to consumers can also lower shipping costs in the value chain over going through Amazon. Companies that sell directly to consumers can also build a direct relationship with those customers. That's incredibly valuable in building repeat business.
The other thing to consider is how companies can now directly reach customers through Facebook, Instagram, Snapchat, Google, and other social media and advertising platforms. Innovations like Instagram shops make it simple to start an online store and reach customers and with checkout options like Apple Pay it's easy to go from ad to purchase with just a few clicks. For new businesses, going through Amazon isn't their first option anymore.
Amazon isn't the future of retail
The bullish case for Amazon's stock is that the company will keep growing indefinitely in retail and until now that has happened. But it's apparent that Amazon's flaws are starting to show. The company is leaning harder on third-party sellers, which means it's giving up control of the shopping experience, and at the same time the direct-to-retailer marketplace is growing rapidly.
It's taken time for threats to emerge against Amazon and the company has always found ways to stay on top by crushing competition (diapers.com) or buying them out (Zappos). With small shops now growing online and platforms like Shopify, Instagram, and Apple Pay making it easier to build a store and sell to consumers, I think the threat is only going to get stronger. And that's a compelling case against Amazon stock.