Amazon.com (NASDAQ:AMZN) has grown to a value of over $130 billion with barely any profit, largely due to its dominance of online retail. With a 23% market share of online retail sales, the company does more e-commerce business than its next 12 largest competitors, which includes the likes of Staples and Wal-Mart (NYSE:WMT).
Without profits to underpin its share price, Amazon's tremendous market value has been predicated on its dominance of retail's biggest growth category as e-commerce sales increased 16% in the third quarter of 2014. According to conventional wisdom, Amazon's lack of physical stores gives at an advantage over the big box chains like Wal-Mart and Best Buy. Because Amazon does not have the expense of brick-and-mortar stores, the thinking goes, it can offer shoppers lower prices and therefore a better value proposition.
But what if that wasn't true?
The revenge of the big boxes
A recent report by the think tank L2 Inc. looked at 64 big-box chains, and uncovered some surprises in the industry.
Despite Amazon's mammoth growth over the last decade, conventional retailers are now stealing e-commerce market share from the leader. In the first quarter of last year, Home Depot saw online sales jump 54%. Costco's increased 48%, and Macy's and Wal-Mart saw a 31% and 30% increase in the category, respectively. Meanwhile, Amazon's retail sales grew just 20%.
Amazon's dominance of the space owes more to the relatively small size of e-commerce rather than traditional retailers' ineptitude. Despite its growth, e-commerce only makes up 6.6% of all retail sales, and volume sales are still growing four times slower than in physical stores. In the most recent quarter for which data's available, e-commerce sales totaled $78 billion, while total retail sales in the U.S. were $1.18 trillion.
The reason why the big boxes ignored e-commerce for so long was simply because it wasn't worth it. The vast majority of sales still take place at physical stores, but e-commerce has reached a tipping point where retailers have realized it's beneficial to invest and grow sales in the space. As they've improved their e-commerce platforms, the big boxes have found some surprising advantages.
Amazon spent $6.6 billion on shipping costs last year, while it collected just $3.1 billion in shipping fees. Brick-and-mortar retailers can offer in-store pickup thanks to their physical locations, an option 19% of Internet shoppers have used.
Similarly, "showrooming," the practicing of browsing in a store, and buying online was supposed to seal the fate of the big boxes. Now, it seems that "webrooming," or browsing online but buying in the store, has become popular as an Accenture survey said that 78% of respondents they had "webroomed," while just 72% had showroomed.
As the competition has intensified, many big boxes have lowered prices to match or beat Amazon, and several sources have reported that Amazon is no longer the default champ of rock-bottom online prices.
Where this is battle is going
Amazon has spent the last several years building out dozens of distribution centers near metropolitan areas to help it achieve its goal of same-day deliveries. But the big boxes already have a huge foothold in cities and suburbs, with thousands of stores that should present a potentially huge advantage over Amazon. Though, it may require a change in systems, it shouldn't be very difficult for retailers to ship from stores as long as the economics justify it. Google Express has also taken on Amazon in the delivery race, and has partnered with retailers to offer same-day delivery to customers in some cities. A strategy like this one may be the easiest way for big boxes to undercut Amazon's delivery proposition.
Traditional retailers still have a lot of improvements to make in the e-commerce space, but expect them to increasingly leverage their physical real estate in the battle against Amazon. While Amazon may offer a better online shopping experience, it's not about to open a network of hundreds of stores to match the presence of its competitors. Therefore, companies like Wal-Mart can continue to use propositions like in-store pickup, ship-from-store, and others, as a selling point over Amazon and a way to keep shipping costs down.
In the coming years, the most successful retailers will have to become masters of the omnichannel. They will have to offer shoppers an equally rewarding experience both in-store and online, and be able to combine those capabilities for optimal delivery of the purchase, whether that's in store or to the home.
Amazon will continue to grow as the e-commerce channel expands, but this surprisingly strong competition from brick and mortar names should continue to claw back market share. If that happens, questions about Amazon's lack of profits will only loom larger, and the stock could take a major hit.
Jeremy Bowman has no position in any stocks mentioned. 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.