Amazon (NASDAQ:AMZN) has its fair share of critics these days. From bearish investors complaining about the e-tailer's lack of profitability to concerns over the company's international growth prospects. However, one thing that shareholders aren't complaining about is Amazon's nearly impenetrable competitive edge over big box rivals such as Target (NYSE:TGT) and Wal-Mart (NYSE:WMT).
Amazon has taken considerable risks over the years, much to the dismay of insiders. Yet, these risks have transformed Amazon from merely an online retailer into a robust logistics company, thereby affording it a competitive advantage that brick-and-mortar retailers may never be able to rival.
The Amazon advantage
Amazon's willingness to think long-term has enabled it to build a world-class fulfillment and logistics network that is largely unrivaled today. At the end of fiscal 2014, Amazon boasted 109 state-of-the-art fulfillment centers worldwide, up from just 13 in 2005. Most of these warehouses are more than 17 football fields in size. For comparison, Wal-Mart has only recently begun building out its e-commerce fulfillment centers and plans to open four such centers in the U.S. in fiscal 2016.
Amazon's transition into a logistics giant really took hold in 2012 with the e-tailer's acquisition of robotics firm Kiva Systems, which it purchased for a cool $678 million in cash. This was the online retailer's second largest acquisition behind its 2009 purchase of Zappos. Using this robotic technology, Amazon is able to get packages to customers at nearly double the speed of many of its rivals in the retail space today.
Additionally, Amazon Robotics has now unleashed more than 15,000 robots throughout its fulfillment centers to help streamline everything from stowing and retrieval of products to packaging. This has helped Amazon significantly increase efficiency while also cutting down costs.
Fulfillment by Amazon or FBA is another important competitive advantage for the online retailer. You see, unlike brick-and-mortar retailers such as Wal-Mart and Target, Amazon hawks goods from third-party sellers. This gives Amazon the added advantage of offering consumers one of the most diverse and extensive product catalog's on the planet, with a much broader selection of vendors than its competitors.
Fulfillment by Amazon also creates another reoccurring revenue stream for the e-tailer thanks to the monthly fees it charges sellers for its distribution services. A Pro Merchant account, for example, starts at $39.95 per month followed by $29.95 for an Advantage account -- this is on top of additional inventory stocking fees that Amazon charges for items that don't immediately sell.
This strategy has worked well for Amazon, making it the worldwide leader in online retail sales today. In fact, Amazon generated nearly $89 billion in online sales last year, compared to just $12 billion in e-commerce sales for its closest brick-and-mortar rival, Wal-Mart.
Primed for success
Making it even harder for rivals to compete is the ongoing success of Amazon Prime. Not only do the e-tailer's fulfillment centers boast proprietary software to manage inventories, receipt, stowing, and shipment ... But they also integrate Prime shipping for third-party sellers participating in FBA. This helps incentivize more merchants to sell with Amazon, while also offering Prime shipping for consumers on an ever-increasing number of items.
Further distancing itself from brick-and-mortar retailers is Amazon's recently launched Prime Now, which offers Prime members free two-hour delivery on tens of thousands of items. The offering is currently available in NYC, Brooklyn, Miami, Baltimore, Dallas, Atlanta, and Austin. This is yet another way in which Amazon is creating an impenetrable competitive moat -- particularly because it takes away the one thing brick-and-mortar stores such as Wal-Mart currently have which is that consumers can achieve instant gratification by shopping in their physical stores.
Amazon plans to roll its Prime Now service out in more cities in the months ahead.
Faster, more affordable shipping
The immense volume of products from both Amazon and its third-party partners enables Amazon to offer some of the fastest and cheapest shipping options in the world today. Amazon's head start in this regard has made it nearly impossible for rival retailers to compete. However, that hasn't stopped them from trying.
Wal-Mart is in the early stages of testing an unlimited Prime-like delivery service that would cost half the price of Amazon Prime. And both Target and Wal-Mart have repeatedly tried to match Amazon's prices during the all-important holiday shopping seasons. However, these efforts have done little if anything to stall Amazon's dominance in the online shopping arena.
Amazon's technology, scale, and status as a leading logistics company today have made it nearly impossible for brick-and-mortar chains to compete. With no costly overhead needed to invest in physical store locations, Amazon can afford to continue focusing its immense resources on its fulfillment centers. Looking ahead, this could make it so that even economies of scale titan Wal-Mart isn't able to compete with the e-tailer.