Is Amazon Invincible?

Store-Based Retailing at Tipping Point

In the minds of many investors and industry pundits, an existential battle is playing out across the retail sector that could potentially reshape the shopping landscape and displace some storied chains that seem stuck in a 20th century marketplace.

Equity markets have long rewarded Amazon.com, Inc. (“Amazon”) for expected growth it had yet to achieve but have only recently begun to penalize traditional retailers for anticipated market share losses that have yet to fully materialize. The market sell-off in the retail sector has been steep — far beyond what would be considered a reasonable reaction to sluggish sales and earnings — with valuation multiples for many large retailers currently at levels last seen during the Great Recession.

More than ever, Amazon remains the primary catalyst for change in a traditionally staid retail industry, as it extends its reach into additional product categories and finds new ways to alleviate the pain points of online shopping. Yet despite its impressive scale and track record of innovation, Amazon directly (first party or “1P”) accounts for just 2% of U.S. retail sales (excluding autos and gas) and about 4%, including third party sales (“3P”) via Amazon Marketplace. Moreover, the failure of several retail chains since 2016 is far more attributable to issues of specific underperformance, excessive leverage or redundancy rather than the encroachment of the online channel. So it might seem reasonable to ask if the perceived threat posed by Amazon and its growing online influence is exaggerated.

Amazon wins market share because it can be more price competitive than store-based retailers without undermining its business model, which generates huge profits from ancillary retail services. Quite simply, gross profit from product sales doesn’t matter as much to Amazon as it does to conventional retailers.