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What Exactly Is Stopping Retail From Catching Up to Amazon?

- By Sangara Narayanan

Amazon (AMZN) has firmly established itself as the leader in online sales in the U.S. Despite North America sales reaching $63.708 billion in 2015, Amazon added $16.07 billion to its net sales in 2016, or nearly 25% growth.

The competition has been well aware of how e-commerce is affecting current sales as well as future sales, and they have intensified their efforts to make sure that they survive the onslaught. Even then, they have barely made a positive impression on their own online efforts, let alone stunting Amazon's growth.


Catching up will not be easy.

Amazon is firmly in control of the market

According to Slice Intelligence , Amazon accounted for 53% of all online sales growth in the U.S. in 2016, and breezed off with 43% of revenues generated. Walmart (WMT), Costco (COST), Target (TGT) and Kroger (KR) have intensified their efforts, but even that has been unable to elicit any meaningful growth in their online sales figures.

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During the holiday season in 2016 Amazon accounted for 36.9% of digital sales with second-place Best Buy (BBY) coming in at 3.9%. Amazon not only has the lead, it is firmly in control of the e-commerce market.

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Amazon Prime is a huge value differentiator

Walmart and Costco aren't cash-poor companies. If they want to invest in the billions of dollars, they have enough strength on their books to do so. But Amazon may have already reached a position where these companies can't wrest control from it over the online retail space. And one of the drivers expanding that moat is Amazon Prime.

Amazon Prime is a huge value differentiator for the company and will strongly hold customers within the Amazon ecosystem.

The list of benefits offered by Amazon for its Prime customers keeps growing every year, and Amazon is relentless in reducing the time to delivery. According to estimates, Amazon Prime has nearly 65 million members. With Amazon adding benefit after benefit to Prime, these customers are going to stick with Amazon through thick and thin. Walmart's free two-day shipping is a decade too late, and even Costco's iconic membership model pales in comparison.

So, trying to steal customers away from Amazon - the same customers that Amazon basically took away from them - is now out of the question.

In e-commerce, the lead is everything

Amazon has all the technology it needs. It has more experience than any company in the world in running an e-tail business. But look at this: Despite entering China nearly 19 years ago, Amazon continues to remain a fringe player in the country. Alibaba (BABA) is firmly in control of the Chinese market, and Amazon is in no position to challenge it. Granted, the political situation is unfairly skewed against Amazon, but all its expertise, money and efforts have gone unrewarded.

Even if you disregard the political angle, when the majority of a particular market gets used to a technology platform or a format that subsequently becomes familiar ground, it is extremely hard to wean customers away from it. The more buyers frequent that platform, the more sellers are going to want to get in, until it becomes a self-feeding cycle.

Now, when a competitor comes in and offers a similar experience for essentially the same products, users see no reason to switch to the new platform.

That's why first mover advantage (FMA) is such a powerful force underlying many commercial situations. Amazon, most of all, knows this. That's why the Seattle-based icon is an immovable object in the realm of U.S. online retail. It's not that the competition doesn't have the resources to compete on a level playing field; it's more of an FMA phenomenon coupled with a relentless pursuit of growth.

Just like Amazon is in no position to catch up with Alibaba in China, none of the big box and wholesale retailers in the U.S. are in a position to catchup to Amazon in the online retail space.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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This article first appeared on GuruFocus.