Amazon (AMZN, Financial) single-handedly rewrote the way retailers go about their business.
The ecommerce giant has spread its wings over more than 10 countries, and there is every reason to believe it will keep adding more regions in the next few decades because, at its core, Amazon is essentially a technology company with layers of regular retail operations such as procurement, warehousing and transportation on top. It has tasted success in a few markets, and the company definitely will try to repeat that model in as many regions as it can. It may not be successful in all the regions, like China, for example, but all Amazon needs is a few successful markets and to keep chipping away at markets where things aren’t that favorable to its model.
How much can Amazon grow from here?
Amazon can be divided into three parts: its North American retail operations, International Retail operations and its amazingly successful cloud business, Amazon Web Services. In terms of retail sales, North America is its biggest market, with revenue already nearing $20 billion every quarter. However, that’s still many years away from the $74.55 billion Walmart (WMT, Financial) recorded in sales in the third quarter from the U.S. alone.
The U.S. retail industry is expected to hit $5 trillion by 2018, and Amazon’s hold is less than 2% of the market. Clearly, there is plenty of room to grow for a company that wants everybody to use its platform to buy and sell its goods – both consumers and businesses. And it is now targeting a big segment of that market – groceries.
The grocery market is one area in which Amazon wants desperately to win, not just because this market is worth in excess of $600 billion in sales annually but also because that’s the Achilles' heel for any ecommerce company due to the time-bound logistics involved. Brick-and-mortar stores with established networks will always have a huge edge over new competitors, and Amazon’s lack of physical presence is a huge roadblock to its success in grocery operations. Nevertheless, Amazon has been slowly building its presence in that area, and there is always the possibility of Amazon adding Walmart-style “neighborhood” stores to expand its grocery network’s reach.
The entire retail market, along with the subset of groceries, is Amazon’s runway over the next few years in its home market alone. But the company will have to continue to take away customers from its competitors, just as it has done in the past. And Amazon Prime is its secret weapon. In an effort to get customers signed up to the Prime program, the company is incentivizing it from every angle – even adding a monthly option for people interested in seasonal deals.
As such, the growth of Amazon Prime’s user base within the country will make sure sales keep ticking up steadily over time until they are comparable to Walmart’s – and then exceed them.
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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