Blame post-holiday lethargy: It's the last week of the year, and U.S. stocks are lower in early Monday afternoon trading, with the Dow Jones Industrial Average (^DJI 0.30%) and the S&P 500 (^GSPC +0.50%) down 0.45% and down 0.56%, respectively, at 12:15 p.m. EST. Shares of Amazon.com are outperforming, up 0.70% after the e-tailing behemoth issued a long press release describing what appears to have been a hugely successful holiday shopping season.
Amazon fulfillment center. Image source: Amazon.com.
What a year it's been for Amazon! The company's shares have more than doubled, for a current market value of $311 billion, making it the 6th largest U.S. company (up from 27th at the end of 2014).
That advance is not just the product of investor enthusiasm: Early results from this holiday shopping season suggest the underlying business momentum is terrific.
Last week, this column highlighted some of the signs that Amazon is preparing to enter the delivery market. With the e-tailer reporting that over three million people joined Amazon Prime in the third week of December, it's worth taking a quick look at this remarkable innovation.
(Amazon Prime is the company's "all you can eat" two-day shipping program, but it also includes Prime streaming video and a number of other services. Full disclosure: I'm a very satisfied Prime member.)
Amazon launched Prime almost 11 years ago, in February of 2005. That month, according to BusinessWeek, CEO Jeff Bezos laid out the rationale behind the service at the Churchill Club, a Silicon Valley business and technology forum:
If you pay $79 for a membership, then you'll say, well, if I want to buy a digital camera, maybe I'll look at Amazon. It gets people to start checking across categories.
It may be difficult to imagine from our current vantage point, but back in 2005, even people who were already buying a lot of books, music, and video on Amazon weren't aware that it also sold electronics:
They say, "You don't have an electronics store." We tell them we've had one for five years, and they'll argue with us.
In its first month, "tens of thousands" of customers signed up for the service. A decade later, four out of five of those early joiners remained members under their original account. That equates to an annual churn rate of just 2.2% (these were Amazon die-hards, mind you, but there is good reason to believe the renewal rate in the U.S. is at or above 90%, perhaps even 95%).
Amazon discussed Prime in its last annual report (my emphasis):
We expect our net cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate [note: "shipping offers" is code for Amazon Prime], our product mix shifts to the electronics and other general merchandise category, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services.
We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing placement of fulfillment centers, negotiating better terms with our suppliers, and achieving better operating efficiencies. We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers.
Despite the company's outlook for the net cost of shipping, as a percentage of net sales, that cost has remained stable over the past several years: 4.7%, 4.8%, and 4.7% for 2012 through 2014. For the nine months ended Sept. 30 of this year, the ratio was 4.8%, down from 5% over the same period last year.
Prime has met -- or, more likely, exceeded -- its original expectations: By one estimate, the average Prime member spends $1,500 annually, more than double the spend of an ordinary customer. It's just one of the innovations that has made Bezos the Sam Walton of the Internet generation.
