Depending on your age, you might recall a time when shopping involved dragging yourself to a physical store. But the rise of e-commerce in the early 2000s changed all of that, and tech giant Amazon (AMZN -1.07%) was a big proponent of the shift to online shopping.
Retail continues to evolve, even today. Maintaining a nice website and advertising to customers isn't enough anymore, not even for a company as big as Amazon. Now, businesses have to meet customers where they like to spend their time, and that tends to be on social media platforms.
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The dawn of social commerce is upon us
If you use social media, you've likely come across a seemingly endless stream of ads that are specifically targeted to you based on your online habits. Plus, you've likely also noticed influencers promoting products to their followers.
Businesses of all sizes hire them to do this because it's a great way to target specific demographics. A skincare company, for example, might unlock significant value by using Kim Kardashian in one of their ads on Instagram.
Right now, social media ads simply serve as a facade for the business paying for them. When the user clicks on an ad, it takes them off the social media platform and to the business's website to make a purchase. Sometimes, this gives the user cold feet depending on the look and feel of the site, which reduces conversions.
But the dawn of social commerce is upon us. It involves social media giants allowing e-commerce companies to sell products directly from their platforms. So, when a user sees an ad, they can make a purchase without ever leaving the app.
According to data from Statista, social commerce could be a whopping $6 trillion opportunity by 2030. Therefore, it's no surprise every major social media platform is experimenting with it right now, including Meta Platforms' Facebook and Instagram, ByteDance's TikTok, and now, Snap Inc's Snapchat.
Alphabet's streaming platform, YouTube, has gone a step further. When a creator talks about a product, the viewer will be able to purchase it directly from their video, which eliminates the need to go and search for it externally. This is a trend I expect social media platforms will eventually adopt.
Amazon just inked deals with Meta and Snap
Amazon is the world's largest player in e-commerce. In the first nine months of this year, the company generated $161 billion in online sales. However, if it wants to maintain its dominance, it has to keep up with how consumers are shopping online.
Earlier this month, Meta Platforms announced it would allow users to link their Facebook and Instagram accounts to their Amazon accounts. It will drive a substantial upgrade over traditional ads because users will be able to see real-time pricing, Prime eligibility, and delivery estimates on those social media platforms. Plus, the user can complete the entire checkout process without leaving Facebook or Instagram.
More recently, on Nov. 14, Snap announced a similar deal with Amazon for its Snapchat platform. Snap is already involved in social commerce in its own unique way because it offers advertisers a slate of exciting new tools like augmented reality Lenses. Snap's technology can create digital renders of products that users can "try on" virtually using their smartphone camera, leading to a substantial uptick in conversions for businesses.
But Amazon's new deals will be a win-win for all three companies. Amazon and its independent sellers can deliver a shopping experience that involves less friction, which should drive conversions and sales higher. Meta and Snap, on the other hand, will reap the benefit of higher engagement because the user spends more time on their platforms.
Plus, if social commerce proves fruitful for sellers, I expect Meta and Snap to charge much higher rates for those ads over time.
Here's what it means for Amazon stock
Amazon is no longer just an e-commerce company, but the segment is still its single-largest revenue driver, accounting for 40% of the company's total in the recent third quarter of 2023 (ended Sept. 30).
It's difficult to put a number on how impactful social commerce will be in the short term. Amazon's flagship website, Amazon.com, currently generates 2.4 billion visits per month, and in the third quarter, the company's online sales grew at the fastest pace in more than a year.
Therefore, Amazon's e-commerce business isn't exactly struggling. I think the recent move into social commerce is designed to prepare the company for a critical shift in the way young people shop in the future. According to Statista, for example, over 80% of the online population in emerging economies like India and China are already social shoppers.
China-based social media platform TikTok developed a comprehensive social shopping platform called TikTok Shop, with tools for both sellers and creators. It wants to become a primary online shopping destination, which could threaten leaders like Amazon over the long term.
As a result, while social commerce probably won't boost Amazon's stock in the short term, it will help shield the company from a growing trend that could become a very real threat. That will be great for investors in the long run.
