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Amazon's retail dominance is in question

Brian Sozzi

No, Amazon isn’t the next Sears. But investors should be questioning whether Amazon is entering the next phase of its life in retail that is characterized by slowing growth thanks to healthy competition from big rivals and newcomers.

How Amazon confronts these fresh retail challenges will determine whether its market cap blows by $1.5 trillion in five years or hovers around $1 trillion. While Amazon’s strength in cloud services and advertising are important aspects to its story, the retail business is still the largest component to the business (69% of 2018 sales). As it goes, Amazon’s stock price goes.

Place your bets accordingly.

Yahoo Finance by the numbers: Amazon’s fourth quarter is evidence that the tech giant is starting to feel some pressure from better digital shopping experiences at Walmart, Target and even Macy’s. The tech giant reported Thursday that North America sales rose 18% year-over-year in the quarter, slowing drastically from the 42% a year ago. Sales in North America have now slowed for three straight quarters.

But one doesn’t have to look too far to hypothesize why Amazon’s retail growth slowed sharply during the holidays. Target, which has made a push in same-day delivery, had a strong 5.7% same-store sales increase in the November/December period. Online sales spiked 29% during that span.

Walmart is generally believed on Wall Street to have had a solid holiday season as it benefited from online grocery ordering, ship from store capabilities and more items available on its e-commerce site. Macy’s CEO Jeff Gennette told Yahoo Finance on Black Friday it was on track to achieve $1 billion in mobile derived orders in 2018.

Hat tip to the number crunchers at Amazon though. Even with sales in North America moderating and workers getting hourly raises, Amazon’s trailing 12-month operating profit margin for the business has trended up to 5.1% from 2.1% in the third quarter of 2017.

A steady stream of new Amazon Prime members has helped lift profit margins, too. Amazon mentioned that it saw “record” signups to Prime worldwide last year.

What’s going on: Amazon’s retail dominance over the past five years has spurred those retailers with strong cash positions to invest aggressively in their business. Where physical stores were once seen as an anchor, they are now viewed as a key strategic advantage in the war against Amazon (which only has Whole Foods stores).

Meanwhile, other compelling retail models have surfaced to challenge Amazon in certain categories.

Here’s a quick lay of the land:

Target’s Shipt shipping business, which it bought for $550 million in 2017, reaches 200 U.S. markets across 46 states with same-day delivery. Yahoo Finance’s sister publication TechCrunch reports the service plans to offer all major merchandise categories same-day delivery this year.

Walmart’s popular online grocery deliver service is available in more than 800 stores currently (4,300 total Walmart U.S. stores). Another 800 stores will reportedly be added to the mix in 2019. The retailer also continues to make inroads with its buy online, pickup in-store capabilities. More items for sale on Walmart.com have boosted customer perception, too.

Up and coming social commerce retailer Poshmark eclipsed $1 billion in total transactions processed in 2018. The company lets its 5 million-plus sellers (40 million users) buy and sell their wares, similar to eBay, except for clothing.

Again, just some of the examples of brands clawing away at Amazon’s lead.

The bottom line: Amazon remains the brand to beat online as consumers continue to see Prime membership as important to their lives. But an army of retailers — led by Walmart and Target — have begun to land successful strikes on Amazon. The formidable retail beast should consider using its $40 billion in cash to make another physical store acquisition.

Dare we say that Kohl’s makes sense?

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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