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One Number That Shows Why Amazon.com Inc. Is So Dominant

By Jeremy Bowman - Feb 7, 2016 at 1:33PM

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According to one analyst, Amazon claimed the majority of growth in the retail sector last quarter.

Amazon.com (AMZN 3.19%)sold off following its recent earnings report, but there were plenty of reasons for investors to cheer, too. Not least among them was the company's sales growth rate, which accelerated to a currency-neutral 26%.

A key reason for that strong growth was Amazon's dominance of e-commerce in its home market. In North America, the company's retail sales grew 24%, up from 21% in the previous year. In fact, the company's growth was so strong that analysts estimate the company grabbed a majority of the sales increase in the retail sector this past quarter. Wells Fargo analyst Matt Nemer believes the company accounted for 51% of all applicable growth in the sector during the fourth quarter and 42% for the year, up from 22% a year ago.

That's an impressive feat. Remember, while Amazon dominates e-commerce, its sales pale in comparison to brick-and-mortar operations like Wal-Mart (WMT 0.97%) which logged more than four times the revenue that Amazon did last year. Even Costco Wholesale (COST -0.13%)tallied more annual revenue than Amazon, yet the e-commerce giant managed to outgrow all its competitors in the U.S. combined. For an industry with such low barriers to entry, that is not an easy feat.

Crunching the numbers
Amazon's North American net sales grew by $4.2 billion in the quarter. Assuming per-capita spending in Canada is similar to the U.S., that would leave a $3.8 billion increase at home. According to the Census Bureau, non-automotive retail sales grew by just 1.2% or $15 billion in the fourth quarter, though that figure is weighed down by falling gasoline prices. While that means that Amazon accounted for about 25% of the total non-automotive retail growth in the country much of that growth was in segments that Amazon has little or no involvement with, including building supplies, healthcare, and groceries. Sales at general merchandise stores, such as department stores, warehouse clubs, and supercenters, only grew 0.8% last year, or $6 billion. At electronics stores, sales were down 2.4% for the year or about $2.5 billion. It is these categories that Amazon is most directly taking share from.  

We can't make direct comparisons with other major retailers yet as none have reported fourth quarter earnings, but Amazon's strength likely put a dent in growth at rivals like Wal-Mart and Costco.

The power of Prime
What is Amazon doing to drive such consistent sales growth? It's more than just size and brand awareness. After all, Wal-Mart and nearly every other brick-and-mortar retailer are pouring money into their e-commerce platforms and omnichannel strategies, but Amazon is still beating them.

Its Prime membership program plays a big part. Amazon refuses to reveal the number of Prime members it has, but according to Consumer Intelligence Research Partners, the company now has 54 million members in the U.S. By offering free two-day shipping and a host of other bonuses like Amazon Prime Video and access to the Kindle Lending Library, Amazon has created a program that purportedly drives double the annual spending and has a retention rate of over 90%. 

The company's investments in dozens of warehouses near major cities have made fast delivery easier and also enabled services like Prime Now, which offers delivery within an hour or two.

Convenience plus value
Not only has Amazon committed to being the low-cost provider in retail, but shopping online is often more convenient than in-store, and Amazon continues to win high marks for its customer service.

That combination of benefits is hard for traditional retailers to compete with. Wal-Mart, which has received low customer service scores for years, has made efforts recently to spruce up its stores, but its decision to raise wages in order to do so has cut sharply into profits. As Amazon has eroded Wal-Mart's price advantage, the superstore chain is left with little to claim as a competitive advantage other than the ubiquity of its supercenters.

Costco has done a better job of staving off the threat of Amazon as its own membership system offers protection, but Prime now has more members than Costco. The warehouse model has proven successful, but it may work best for those shopping for families or who have the space to keep bulk goods. Costco customers also regularly complain about long lines at its stores, indicating that an online experience may be more convenient.

Amazon consistently outshines the competition as well, adding new devices, enhancing technologies, and improving its Prime Video service each quarter. That's a sign that it should continue to lead the retail sector and possibly grab an even larger share of industry growth going forward.

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$113.06 (3.19%) $3.50
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$123.82 (0.97%) $1.19
Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$485.15 (-0.13%) $0.61
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$39.63 (-0.72%) $0.29

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