Overview: The hits and misses in recent retail sales and earnings releases (Part 8 of 9)
Taking on the mammoth of e-tail
U.S. e-commerce sales have grown at a compounded annual growth rate (or CAGR) of ~19% over the period 2000–2013 and were estimated at ~$263 billion in 2013 (Source:U.S. Census Bureau). Amazon (AMZN) has been the dominant player in online retail by far, although the company doesn’t disclose specific U.S. sales numbers. Its 2013 global online retail sales were estimated at $67.9 billion—more than that of the next nine retailers on the list, which included Apple (AAPL) at #2 and Wal-Mart (WMT) at #4 (Source: The Internet Retailer, Mashable, Statista).
All three companies are part of the S&P 500 Index, which is composed of the 500 largest, publicly-listed U.S. companies by market capitalization. Investors can gain exposure to S&P 500 Index companies by investing in ETFs like the Vanguard S&P 500 ETF (VOO), which tracks the S&P 500 Index.
The Walmart (WMT) advantage: Click-meets-brick
Walmart (WMT) has reported a 27% jump in global e-commerce sales in 1Q14, which has outpaced Amazon (AMZN) for growth, whose worldwide sales grew at ~23%. Admittedly, Amazon’s (AMZN) sales base is much bigger, so moving the needle on sales would be harder for the company. One of Walmart’s (WMT) key advantages is its store and warehouse network that can be leveraged to double as fulfillment centers.
Another feature that Walmart (WMT) may introduce in the future, and which will utilize its physical resources, is click-and-collect. Customers can order online and physically collect purchases from Walmart’s (WMT) stores—a trend that is becoming increasingly popular for groceries. The company has recently tested this service in parts of Denver and may look to provide this service nationwide. The company could also pose a credible challenge to Amazon (AMZN) for same day and Sunday deliveries in the future. Walmart’s vast network of stores and warehouses nationwide, give the retailer a natural logistical advantage.
The Amazon (AMZN) advantage
While Walmart (WMT), Target (TGT), and other retailers play catch up with Amazon (AMZN), the latter is looking at diverse strategies like business-to-business (or B2B) online sales and AmazonFresh, that will enable the company to maintain its leadership position. It also recently introduced its first video streaming device, Kindle Fire TV, which gives users access to content from Netflix and Hulu Plus among others, besides Amazon Instant Video and Prime Instant Video content. The company also widely publicized its intention to test unmanned drones for delivery—an initiative that may or may not takeoff due to various logistical and regulatory bottlenecks.
Amazon (AMZN) is also aggressively ramping up its network of fulfillment centers, especially for new initiatives like AmazonFresh—its online groceries business. Last year, Amazon (AMZN) hired over 20,000 new workers at fulfillment centers all over the U.S.
Sales tax for online purchases
One factor that may adversely impact Amazon’s (AMZN) sales going forward, is the sales tax requirement. Legislation at the state level that charges sales tax on online purchases, will erode the competitive price advantage that Amazon (AMZN) and other e-tailers have enjoyed. Amazon (AMZN) collects sales tax in only 21 states currently, including Florida, which started to collect the tax on May 1. A recent study conducted by the National Bureau of Economic Research (or NBER) estimated the impact of sales tax on Amazon’s (AMZN) sales at ~10%. For larger purchases (greater than $300), the impact was estimated at ~24%.
To learn about some of the value drivers that will impact retail sales, please continue reading the next part of the series.
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