the future of amazon.com - UConn School of Law

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SPECIAL REPORT
SEPTEMBER 23, 2013
THE FUTURE OF AMAZON.COM
REPORT HIGHLIGHTS
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AMZN Is Our Top Pick Among Internet Stocks
Market share projections (p. 7).
Key metrics estimates (p. 10).
Potential sales & margin impact of emerging efforts
(p. 11).
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Price comparisons: vs. competition (pp. 15-18), 1P vs.
3P (pp. 33-34) vs. Quidsi (pp. 55-56) vs. Zappos (pp.
57-58), AmazonFresh vs. Safeway (p. 42), and vs.
Whole Foods (p. 42).
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Case
for/against
collecting
sales
taxes
For this report, we talked to more than 50 industry sources, encompassing public
and private companies, industry experts, and government-related entities.
Conducting the research for this report has increased our conviction on the name for
the following reasons:
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We have a greater understanding of Amazon.com’s strategy regarding sales
tax and greater appreciation of its efforts that could more than offset any
pressure on big-ticket sales, including adding fulfillment centers for expedited
delivery, lockers, AmazonFresh, and (perhaps) pickup points. In addition,
several third-party sellers will still be able to offer merchandise on
Amazon.com’s platform without having to collect sales tax, which should
allow Amazon.com to retain these sales and should be accretive to margins.
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We have a greater appreciation for the levers the company could pull to
increase its long-term consolidated segment operating income (CSOI)
margin, including increasing its proportion of third-party unit sales, converting
Amazon Prime into more of a membership model (similar to the warehouse
clubs), intensifying its advertising efforts, offering more private-label
merchandise, and leveraging its expanded fulfillment center footprint.
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A number of our industry sources suggest that Amazon cannot be disrupted
because it has been executing its strategy so effectively and has positioned
itself so well from a competitive standpoint.
affecting
Amazon.com’s revenues and potential impact (p. 24).
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Amazon.com vs. Walmart, by-state sales taxes (p. 28).
Who offered the most choices Super Bowl Sunday (p.
37).
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Online grocery services comparison (p. 41).
AmazonFresh SKU’s by category, Seattle vs. L.A. (p.
45).
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AmazonFresh buying experience (pp. 44-45).
Kindle Fire estimates (p. 47).
Kindle smartphone estimates (p. 48).
Amazon Local cities (p. 51).
Spectrum of shipping options (p. 62).
Fulfillment centers forecast vs. Wal-Mart (p. 63).
Emerging megaregions and FC footprint (p. 65).
Lockers locations (p. 67), retailers (p. 68), and
competition (p. 70).
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Pickup points analysis (pp. 71-72).
Stores analysis (pp. 72-79).
Same-day shipping analysis (pp. 80-86).
eBay Now has Amazon.com in its crosshairs (pp. 8586).
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We are increasing our 12-month price target to $400 from $370. Our new price
target is based on our free cash flow yield analysis, which compares our long-term
forecast for Amazon.com, including a 7.0% CSOI margin, against current valuations
of more mature retailers – Costco, Target, and Wal-Mart.
Amazon Instant Video content deals (p. 89).
Streaming video devices distribution (p. 90).
Amazon Studios pilots (p. 92).
Amazon Web Services analysis (pp. 94-102).
Margin Potential and Long-Term Outlook (pp. 103-107).
Who could Amazon.com disrupt and vice versa (pp.
108-116).
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How to compete against Amazon.com (p. 117).
Stock anchor points (pp. 118-121).
Long-Term Outlook and Valuation (p. 122).
Tom Forte, CFA
212.584.4636 / [email protected]
James Cakmak, CFA
212.600.2803 / [email protected]
Please read the important disclosure and analyst certification information in the Addendum section of this report
SEPTEMBER 23, 2013
SPECIAL REPORT
CONTENTS
REPORT HIGHLIGHTS................................................................................................................................................................1
AMAZON.COM IS LEADING A RETAIL MOVEMENT ...............................................................................................................7
LONG-TERM MARGIN ................................................................................................................................................................8
DISRUPTION ................................................................................................................................................................................8
EMERGING EFFORTS ..............................................................................................................................................................10
SALES TAXES AND INCREASING ITS PHYSICAL PRESENCE ...........................................................................................11
INVESTMENT CONCLUSIONS .................................................................................................................................................11
AMAZON.COM – OUR TOP PICK AMONG INTERNET STOCKS .........................................................................................................11
INCREASING OUR 12-MONTH PRICE TARGET TO $400 FROM $370 ..............................................................................................12
OUR INVESTMENT THESIS ..........................................................................................................................................................12
PRICING PHILOSOPHY ............................................................................................................................................................14
SALES TAX: ONE OF THE MOST COMPLEX ISSUES FOR AMZN.......................................................................................19
INDEPENDENT OF FEDERAL LEGISLATION, AMAZON.COM IS COLLECTING SALES TAX IN MORE STATES..........................................21
FEDERAL LEGISLATION STILL HAS TO GET THROUGH THE HOUSE ...............................................................................................22
What Our Industry Sources Are Saying ..............................................................................................................................22
IMPLICATIONS: WE ESTIMATE THAT 21% OF AMAZON.COM’S US RETAIL SALES AND 10% OF ITS TOTAL REVENUES ARE AT RISK ..25
TABLES TURNED – COMPETITION WITH SALES TAX ADVANTAGE OVER AMZN .............................................................................27
AMAZON.COM RAMPING EFFORTS TO OFFSET POTENTIAL REVENUE DRAG ..................................................................................27
THIRD-PARTY SALES VIA AMAZON.COM DRIVE LOW PRICING .......................................................................................29
THIRD-PARTY SALES THROUGH AMAZON.COM DRIVE SELECTION ...............................................................................36
CATEGORY AND COUNTRY EXPANSION .............................................................................................................................38
AMAZONFRESH (GROCERY).......................................................................................................................................................40
Two Markets – Two Different Loyalty Programs: Big Radish and Amazon Prime for Prime Fresh ..................................43
Big Radish...........................................................................................................................................................................43
Prime Fresh ........................................................................................................................................................................43
AMAZONSUPPLY (B2B) .............................................................................................................................................................46
HARDWARE: E-READERS, TABLETS, AND SMARTPHONES .............................................................................................47
SET-TOP BOXES AND THE BATTLE FOR THE LIVING ROOM ...........................................................................................................47
SMARTPHONES – THE NEXT LOGICAL STEP FOR HARDWARE.......................................................................................................48
MYHABIT (APPAREL) .................................................................................................................................................................49
AMAZON LOCAL .......................................................................................................................................................................50
AMAZON GAME STUDIOS (SOCIAL GAMING) ................................................................................................................................52
ADVERTISING ............................................................................................................................................................................52
AMAZON PUBLISHING .............................................................................................................................................................53
SELLING MERCHANDISE OUTSIDE OF AMAZON.COM: QUIDSI AND ZAPPOS ..............................................................54
QUIDSI – AFTERSCHOOL.COM, BEAUTYBAR.COM, BOOKWORM.COM, CASA.COM, DIAPERS.COM, LOOK.COM, SOAP.COM,
VINE.COM, WAG.COM, YOYO.COM .............................................................................................................................................54
ZAPPOS ....................................................................................................................................................................................56
OTHER CATEGORIES .................................................................................................................................................................58
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> Telsey Advisory Group 535 Fifth Avenue, 12 Floor, New York, NY 10017 p 212 973 9700 f 212 973 9711 www.telseygroup.com
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FULFILLMENT – GETTING CLOSER TO THE CUSTOMER ...................................................................................................63
KIVA SYSTEMS AND FASTER PICKING .................................................................................................................................66
USING PHYSICAL LOCATIONS TO GET PRODUCTS TO THE CONSUMER FASTER .......................................................66
LOCKERS ..................................................................................................................................................................................66
Why Consumers Appreciate Lockers. ................................................................................................................................68
DHL and Lockers ................................................................................................................................................................68
Google Positions Itself for Lockers with Buffer Box Acquisition .........................................................................................68
Staples: If You Can’t Beat ’Em, Join ’Em ...........................................................................................................................69
Walmart’s Efforts.................................................................................................................................................................69
USPS’s gopost Effort ..........................................................................................................................................................70
Why Lockers May Enable Amazon.com to Avoid Opening Its Own Stores .......................................................................70
PICKUP POINTS .........................................................................................................................................................................71
STORES ....................................................................................................................................................................................72
Best-Case Scenario: Apple.................................................................................................................................................74
Microsoft – Not Apple, but Not Bad ....................................................................................................................................75
Worst-Case Scenario, Practically Everyone Else ...............................................................................................................76
Store Within a Store – Best Buy .........................................................................................................................................77
Kiosks/Pop-Up Stores .........................................................................................................................................................78
Outlet Stores .......................................................................................................................................................................79
TWO-DAY SHIPPING ................................................................................................................................................................79
NEXT-DAY SHIPPING ...............................................................................................................................................................80
SAME-DAY SHIPPING ..............................................................................................................................................................80
CONSUMER DEMAND FOR SAME-DAY SHIPPING IS UNCLEAR .......................................................................................................80
EXPEDITORS STILL DEVELOPING BUSINESS MODELS FOR SAME-DAY SHIPPING ...........................................................................81
LOGISTICAL CHALLENGES FOR SAME-DAY SHIPPING ARE SIGNIFICANT ........................................................................................81
AMAZON.COM’S SAME-DAY SHIPPING EFFORTS..........................................................................................................................82
THE COST OF OFFERING SAME-DAY SHIPPING ...........................................................................................................................82
AMAZON’S SAME-DAY EFFORTS VS. EBAY’S AND GOOGLE’S .......................................................................................................83
Google Shopping Express ..................................................................................................................................................86
AMAZON PRIME .........................................................................................................................................................................87
AMAZON INSTANT VIDEO ...........................................................................................................................................................87
LOVEFILM ..................................................................................................................................................................................91
THE EMERGENCE OF ANYTIME AND ANYWHERE VIDEO CONTENT CONSUMPTION .........................................................................91
MONTHLY AMAZON INSTANT VIDEO OFFERING............................................................................................................................91
FUTURE COMPETITION AS MORE SERVICES BECOME UNTETHERED .............................................................................................91
PIRACY .....................................................................................................................................................................................91
AMAZON STUDIOS .....................................................................................................................................................................92
AMAZONFRESH – ANOTHER MECHANISM FOR SPEEDY DELIVERY ................................................................................................93
JUST-IN-TIME INVENTORY AND 3D PRINTING ..............................................................................................................................93
KEY TAKEAWAYS FROM 2013 AWS SUMMIT SERIES ...................................................................................................................99
AWS AND CAPITAL EXPENDITURES ............................................................................................................................................99
INCREASING INNOVATION SHOULD DRIVE SALES .........................................................................................................................99
LOW PRICES ARE ALSO PART OF AWS’S VIRTUOUS CYCLE ......................................................................................................101
AWS AIDING INTERNET STARTUPS AND LARGE, ESTABLISHED FIRMS, ALIKE. ............................................................................101
CULTURE .................................................................................................................................................................................104
INCREASING PROPORTION OF THIRD-PARTY UNIT SALES ..........................................................................................................104
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WAREHOUSE CLUB MEMBERSHIP ............................................................................................................................................105
ADVERTISING .........................................................................................................................................................................106
SHIPPING .................................................................................................................................................................................107
PRIVATE LABEL .....................................................................................................................................................................107
WHO COULD BE DEVOURED BY AMAZON?.......................................................................................................................108
BANK OF AMERICA ..................................................................................................................................................................110
DISNEY ...................................................................................................................................................................................111
FACEBOOK..............................................................................................................................................................................111
FEDEX AND UPS ....................................................................................................................................................................112
WHO COULD DISRUPT AMAZON? .......................................................................................................................................113
GOOGLE .................................................................................................................................................................................114
WAL-MART .............................................................................................................................................................................114
EBAY ......................................................................................................................................................................................115
UBER......................................................................................................................................................................................115
NO ONE..................................................................................................................................................................................116
SALES GROWTH: PRIMARY ANCHOR POINT ..............................................................................................................................118
UNIT GROWTH ........................................................................................................................................................................119
GROSS PROFIT GROWTH.........................................................................................................................................................119
AWS’S SALES GROWTH ..........................................................................................................................................................120
MARKET SHARE ......................................................................................................................................................................121
OUR METHOD FOR ESTIMATING AMAZON.COM’S GMV, THIRD-PARTY SALES, AND THIRD-PARTY CSOI ............123
AMAZON’S AVERAGE SELLING PRICE .......................................................................................................................................124
AMAZON.COM’S TAKE RATE .....................................................................................................................................................126
AMAZON.COM’S GMV ..............................................................................................................................................................128
GROSS MARGIN ASSUMPTIONS ................................................................................................................................................129
OPERATING EXPENSES ESTIMATES ..........................................................................................................................................130
HISTORICAL PERFORMANCE VS. GUIDANCE AND OUR ESTIMATES ............................................................................130
SHOPRUNNER ........................................................................................................................................................................131
TRACKING AMAZON.COM SHIPMENTS ..............................................................................................................................131
A DASHBOARD ON AMAZON’S OPERATING RESULTS. ...................................................................................................133
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SPECIAL REPORT
HOW WE ANALYZED AMAZON.COM
To maximize our understanding of this complex subject, we spoke with representatives of
public companies, privately held firms, trade organizations, industry experts, and governmentrelated entities, including the following:
Public Companies: Ahold, Amazon.com, Angie’s List, AOL, Apple, Barnes & Noble,
Carrefour, comScore, DHL, eBay, Facebook, FedEx, Google, Groupon, HSNi, Liberty
Interactive Corp., LinkedIn, Loblaw, McDonald’s, Metro AG, Millennial Media, Netflix,
OpenTable, Overstock, Pandora, Rakuten, Sport Chalet, UPS, Woolworths, XO Group, Yelp,
Zillow, and Zynga.
Privately Held Companies: Box, LaserShip, LJM Consultants, Mogreet, MomentFeed,
Mouth, OnTrac, PushPoint, Relay, Tesco, Trunk Club, and Village Ventures.
Trade Organizations: Direct Marketing Association, Performance Marketing Association, and
the Retail Industries Leaders Association.
Industry Experts: Wharton Professor David Bell, Forrester Research, University of
Connecticut Professor Richard Pomp, and University of Arizona Professor John Swain.
Government-Related Entities: New York Office of Tax Policy
SOURCES FOR THIS REPORT – PUBLIC COMPANIES
Source: Company websites and TAG research.
SOURCES – PRIVATE COMPANIES
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SOURCES – TRADE ORGANIZATIONS
SOURCES – INDUSTRY EXPERTS AND GOVERNMENT ENTITIES
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EXECUTIVE SUMMARY
Amazon.com Is Leading a Retail Movement
In the history of the retail sector, combinations of innovative business models and mavericks
have created retail movements that had an enormous impact on consumers, businesses, and
the economy. At the top of the list are Wal-Mart and Sam Walton. Among retailers, Wal-Mart
is in a class by itself with more than $1B per day in sales. Other innovators/mavericks include
McDonald’s and Ray Kroc, Starbucks and Howard Schultz, and Costco and Jim Sinegal.
The force of the Amazon.com movement, led by Jeff Bezos (founder, president, CEO, and
chairman), is massive, and although the company may not reach the $1B in retail sales per
day level until 2023 (based on gross merchandise volume – GMV – generated on its platform,
which assumes a 16.0% CAGR after 2012), its impact on consumers, businesses, and the
economy is tremendous. For this report, we have analyzed the future of Amazon.com, which,
in some (but not all) instances represents the future of e-commerce and retail.
One way to measure Amazon.com’s disruption is to look at its market share. (We also believe
market share is the best determinant of its long-term share price.) We project that
Amazon.com’s US e-commerce market share (based on our estimates of its GMV) will
increase to 24.0% in 2015 from 18.5% in 2012 and 10.8% in 2009 and that its share of total
US retail sales will reach 1.7% from 1.0% and 0.4% over the same timeframes. We project
that Amazon.com’s international e-commerce market share will be 4.0% in 2015 vs. 4.3% in
2012 and 3.9% in 2009 and that its share of total international retail sales will reach 0.6% from
0.5% and 0.3% over the same periods. We estimate that Amazon.com’s global e-commerce
market share will grow to 7.7% in 2015 from 7.3% in 2012 and 5.7% in 2009 and that its share
of total global retail sales will reach 1.0% from 0.7% and 0.3% over the same timeframes. (In
the appendix, we illustrate our method for estimating GMV.)
AMAZON.COM INCREASING MARKET SHARE, 2009–2015E
CAGR
2009-2012
CAGR
2012-2015E
77,768
323,554
4,712,807
24.0%
1.7%
38.4%
15.8%
6.3%
23.2%
12.8%
2.7%
56,398
1,417,246
8,688,149
4.0%
0.6%
31.6%
27.5%
4.3%
14.6%
18.0%
6.4%
32,136
79,061
134,166
561,440
1,088,800
1,740,800
10,000,000 11,576,250 13,400,956
5.7%
7.3%
7.7%
0.3%
0.7%
1.0%
35.0%
24.7%
5.0%
19.3%
16.9%
5.0%
($MM)
US
Amazon US GMV
Total US Online Sales
Total US Retail Sales
Amazon (% of Total US Online Sales)
Amazon (% of Total US Retail Sales)
2009
2012
2015E
15,714
145,260
3,627,628
10.8%
0.4%
41,627
225,609
4,354,610
18.5%
1.0%
International
Amazon International GMV
Total International Online Sales
Total International Retail Sales
Amazon (% of Total International Online Sales)
Amazon (% of Total International Retail Sales)
16,422
416,180
6,372,372
3.9%
0.3%
37,434
863,191
7,221,640
4.3%
0.5%
Global
Amazon Global GMV
Total Global Online Sales
Total Global Retail Sales
Amazon (% of Total Global Online Sales)
Amazon (% of Total Global Retail Sales)
Source: Company reports, US Census Bureau, eMarketer, and TAG estimates.
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In this report, we look at the drivers behind Amazon.com’s retail strategy (low prices, large
selection, and fast delivery). We answer the two questions we receive most from investors:
(1) What is the company’s long-term margin? and (2) Which companies are most at risk to be
devoured by Amazon.com? We also turn the second question around and discuss which
companies we believe could disrupt Amazon.com. We examine the sales and margin
potential for a number of the company’s emerging efforts, such as AmazonFresh in the
grocery category. We analyze the potential impact on its retail sales from collecting sales tax
in more US states, including the potential for its growing physical presence to offset the
pressure on big-ticket items. Furthermore, we analyze anchor points for the stock – single
data points that are likely to have the greatest influence on the performance of its stock.
Long-Term Margin
Should Amazon.com choose to do so, we believe the company could increase its CSOI
margin to 7.0% over the long term – vs. our estimate of 3.9% in 2015, 2.7% in 2012, 6.4% in
2009, and its high-water mark of 7.1% in 2004 – through a combination of increasing its
proportion of third-party unit sales, converting Amazon Prime into more of a membership
model (similar to the warehouse clubs), intensifying its advertising efforts, offering more
private-label merchandise, and leveraging its expanded fulfillment center footprint.
Disruption
Based on a straw poll of industry experts, we believe that Best Buy, Barnes & Noble, and
Walmart are the retailers most at risk of being devoured by Amazon.com and that Google,
Wal-Mart, and e-Bay have the best chance of disrupting Amazon.com. In addition, beyond the
consensus selections for which companies could be devoured by Amazon.com, in this report,
we discuss a few more provocative picks: Bank of America, Disney, Facebook, FedEx, and
UPS.
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AMAZON.COM 2009/AMAZON.COM 2012/AMAZON.COM 2015 IN PICTURES
2009
2012
2015E
Emerging
Efforts
Physical
Presence
Hardware
Acquisitions
Source: Company websites, The Dallas Morning News, The Digital Reader, GeekWire, and TAG research.
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AMAZON.COM KEY METRICS: 2009, 2012, AND 2015E
Gross Merchandise Volume (GMV)
2009
32,136
2012
79,061
2015E
134,166
CAGR
3-Years
Ending
2009
31.7%
CAGR
3-Years
Ending
2012
35.0%
CAGR
3-Years
Ending
2015E
19.3%
Sales
First-Party Retail
Third-Party Retail
Other North America
Other International
Total Sales
22,831
1,024
550
104
24,508
56,039
2,532
2,350
172
61,093
95,144
4,292
7,299
270
107,005
31.7%
31.7%
27.7%
73.2%
31.8%
34.9%
35.3%
62.3%
18.3%
35.6%
19.3%
19.2%
45.9%
16.2%
20.5%
Mix (% of Sales)
First-Party Retail
Third-Party Retail
Other North America
Other International
93.2%
4.2%
2.2%
0.4%
91.7%
4.1%
3.8%
0.3%
88.9%
4.0%
6.8%
0.3%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
By Geography
North America Sales
International Sales
12,828
11,680
34,812
26,281
67,970
39,035
29.8%
34.1%
39.5%
31.0%
25.0%
14.1%
Mix (% of Sales)
North America Sales
International Sales
52.3%
47.7%
57.0%
43.0%
63.5%
36.5%
NA
NA
NA
NA
NA
NA
Margin
North America
International
Total CSOI Margin
5.5%
7.4%
6.4%
4.6%
0.3%
2.7%
5.4%
1.3%
3.9%
NA
NA
NA
NA
NA
NA
NA
NA
NA
Other
Customers (MM)
Fulfillment Centers
Third-Party Units (% of Total)
105
39
29.8%
200
89
39.7%
285
110
41.0%
18.6%
8.0%
NA
24.0%
31.7%
NA
12.5%
7.3%
NA
Source: Company reports and TAG estimates.
Emerging Efforts
Amazon.com has a number of initiatives under way that could meaningfully affect its longterm sales growth and CSOI margin. We outline a number of them in this report and in the
following table, including the percentage likelihood of the company generating incremental
sales in 2015 akin to 1% market share for its various efforts. When considering
Amazon.com’s long-term margin opportunity from its emerging efforts, it is important to
consider the company’s ability to leverage its platform to offer consumers merchandise from
third-party sellers, which carry higher margins than first-party sales. Based on this analysis,
we conclude that the company’s efforts in grocery (AmazonFresh), B2B (AmazonSupply),
hardware, and apparel (such as MyHabit) could have the greatest impact on its sales growth
in 2015. Of the emerging efforts, we believe Amazon.com has the greatest chance of
generating an incremental 1% market share of revenue in 2015 from publishing (Amazon
Publishing), advertising, and apparel. And in our view, the greatest potential for a lift in its
CSOI margin from an incremental $1B in revenue lies in advertising, adding a smartphone to
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SPECIAL REPORT
its hardware lineup (though the company is highly unlikely to do so at a margin profile
comparable to Apple’s), and its Amazon Studios efforts.
AMAZON.COM’S EMERGING EFFORTS
AmazonFresh (Grocery)
AmazonSupply (B2B)
Amazon Smartphone
MyHabit (Apparel)
Amazon Local
Amazon Game Studios (Social Gaming)
Advertising
Amazon Studios
Amazon Publishing
2015
Total
Addressable
Market
($B)
648.9
592.3
442.1
364.7
340.3
222.8
146.2
54.0
17.4
2015
Sales
Lift from
1% Market
Share
(Basis Pts)
708
647
483
398
372
243
160
59
19
Odds of
Achieving
1% Market
Share
in 2015
10%
<5%
10%
33%
<5%
<5%
33%
<5%
75%
Market
Leader
Kroger
Home Depot
Apple
Macy's
Groupon
Zynga
Google
Disney
Bertelsmann
2015
Operating
Margin
2.8%
12.8%
27.5%
10.4%
10.0%
5.7%
39.0%
25.3%
11.5%
Potential
for
ThirdParty
Sales
High
High
Low
High
High
Low
High
Low
Low
2015
Margin
Lift/(Drag)
from $1B
Sales
(Basis Pts)
(1)
8
22
6
6
2
33
20
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Sales Taxes and Increasing Its Physical Presence
We believe collecting sales taxes could have a negative impact on as much as 21% of its US
retail sales (or 10% of total revenues), based on our analysis of Amazon.com’s proportion of
big-ticket sales. However, a number of the company’s efforts that are at least somewhat
dependent on it increasing its physical presence and collecting sales tax could offset much of
that pressure, including adding fulfillment centers for expedited delivery, lockers,
AmazonFresh, and (potentially) pickup points. Last, several third-party sellers will still be able
to offer merchandise on Amazon.com’s platform without having to collect sales taxes, which
should enable Amazon.com to retain these sales and – considering the much more favorable
margin dynamics for third-party sales over first party – could benefit the company’s CSOI
margin.
Investment Conclusions
Amazon.com – Our Top Pick Among Internet Stocks
Results of the research we conducted for this report increase our conviction in the name for
several reasons:
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
We have a greater understanding of the company’s strategy regarding sales taxes and a
greater appreciation of its efforts that could more than offset any pressure on big-ticket
sales, including adding fulfillment centers for expedited delivery, lockers, AmazonFresh,
and (potentially) pickup points. Also, several third-party sellers will still be able to offer
merchandise on Amazon.com’s platform without having to collect sales taxes, which
should enable Amazon.com to retain these sales and should be accretive to margins.

We have a greater appreciation for the levers the company could pull to increase its longterm CSOI margin, including increasing its proportion of third-party unit sales, converting
Amazon Prime into more of a membership model (similar to the warehouse clubs),
intensifying its advertising efforts, offering more private-label merchandise, and
leveraging its expanded fulfillment center footprint.

A number of our industry sources suggest that Amazon would not be disrupted because it
has been executing its strategy so effectively and has positioned itself so well from a
competitive standpoint.
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Increasing Our 12-Month Price Target to $400 from $370
Our new price target is based on our free cash flow yield analysis, which compares our longterm forecast for Amazon.com, including a 7.0% CSOI margin, against current valuations of
more mature retailers – Costco, Target, and Wal-Mart.
Our Investment Thesis
Thanks to its basic strategy of investing to offer consumers a large selection with low prices
and fast delivery times, we believe Amazon.com will increase its market share in global ecommerce to 7.7% in 2015 from 7.3% in 2012 and 5.7% in 2009, and we project that its
penetration of total global retail sales will rise to 1.0% in 2015 from 0.7% in 2012 and 0.3% in
2009.
Several of Amazon.com’s emerging efforts could meaningfully increase its sales growth,
including advertising, apparel (such as MyHabit), and grocery (AmazonFresh).
The company could pull multiple levers to increase its CSOI margin, including increasing its
private-label merchandise, and leveraging its expanded fulfillment center footprint.
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SPECIAL REPORT
AMAZON.COM’S STRATEGY – IN BRIEF
Mr. Bezos’ comments at an Amazon Web Services (AWS) conference in Las Vegas in
November 2012 explained the company’s strategy as well as – if not better than – anything
we have seen or heard before or since. He noted that he is frequently asked, What is going to
change in the future? A better question, according to Mr. Bezos, would be: What is not going
to change in the future? It is a better question because you can build a business with a
greater chance of succeeding around the answer to the second question than the first.
What is not going to change in the future? In all likelihood, customers will still want low prices,
a large selection, and fast delivery. Amazon.com invests a lot of resources in those three
items, which drive its flywheel, including its performance today and in the future. Its efforts on
those fronts will ensure that the company remains the market leader in e-commerce in the
future and that it continues to take share of the overall retail market, too.
THE STRATEGY THAT DRIVES AMAZON.COM’S FLYWHEEL
Source: Company reports and TAG research.
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SPECIAL REPORT
LOW PRICES
SALES/MARGIN IMPLICATIONS
In this section we
discuss the company’s
efforts to offer
consumers low prices,
including its pricing
strategy, use of thirdparty sales on the
Amazon.com platform,
and online sales taxes
strategy.
Sales Implications: Its reputation for low prices is one reason many customers turn to
Amazon.com and is therefore a significant driver of its past, present, and future long-term
sales growth. We project that sales will expand at a 20.5% CAGR during 2012-2015 vs.
35.6% in 2009-2012 and 31.8% in 2006-2009.
Margin Implications: Amazon.com’s strategy of offering consumers low prices means it will
have to rely on scale or mix – instead of pricing – to drive margin. For that reason, we
consider Amazon.com similar to Wal-Mart, the current market leader in retail sales (at more
than $1B per day) but a low-margin business, with operating margins of 5.9% in 2012 vs.
5.9% in 2009 and TAG’s forecast for 6.2% in 2015. We project Amazon.com’s CSOI margin
at 3.9% in 2015 vs. 2.7% in 2012 and 6.4% in 2009.
Pricing Philosophy
Amazon.com’s philosophy is to sell products to consumers at low prices every day (similar to
Walmart’s everyday low pricing strategy), rather than have frequent sales (such as
department stores) or sell some products at a loss with others at a healthier profit (akin to the
high-low grocery store model). Its desire to offer consumers low prices extends to shipping,
including its Amazon Prime membership offering. The company strives to operate its business
more efficiently so it can offer even lower prices to consumers. It does not explicitly factor
taxes into its pricing equation: Product prices are the same in New York, where it collects
sales tax of 8.0%, as they are in Nevada, where it collects no tax.
One way the company implements its pricing strategy is by using an algorithm that enables it
to match competitors’ prices (including those of third-party sales on its platform). As a result,
prices on Amazon.com can move. For example, we purchased an LED lantern from
Amazon.com on October 28, 2012 (following Hurricane Sandy), for $21.39. On December 5,
2012 (about a month later), the product was offered by Amazon.com at $29.19; as of January
17, 2013, the price was $29.59; and as of August 20, 2013, the price was $27.67 (shown in
the following pictures). This example suggests that the company matched a competitor’s
pricing around Hurricane Sandy. The point here is that its prices are fluid, and through use of
its pricing algorithm, Amazon.com tries to maintain prices that are competitive with those of
other retailers, including those offering merchandise on its platform.
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SEPTEMBER 23, 2013
AMAZON.COM – MOVING PRICES EXAMPLE – LED
LANTERN, JANUARY 2013
Source: Company website and TAG estimates.
SPECIAL REPORT
AMAZON.COM – MOVING PRICES EXAMPLE –
LED LANTERN, AUGUST 2013
CASE STUDY 1: PRICE COMPARISON – AMAZON.COM VS. THE COMPETITION, AUGUST 2013
In our price comparison, eBay offered consumers the lowest prices, not only on merchandise but also
when shipping and sales taxes are factored in. We compared the price of identical merchandise on an à la
carte basis at Amazon.com (both first party and third party) against Apple, Costco, eBay, HSN, QVC (part of
Liberty Interactive Corp.), Target, and Walmart. We discovered that eBay offered the lowest prices on the
merchandise, with Amazon.com’s prices 1.9% higher. Including shipping costs, eBay’s prices remained the
lowest, with Amazon.com’s 1.8% greater. To illustrate the benefits to Amazon.com of not collecting sales taxes
in all 50 states, we compared prices for a consumer in New York (where Amazon.com collects sales tax) with
those for a consumer in Connecticut (where it will begin collecting sales taxes in November 2013). On that basis, the total cost of
merchandise (product plus shipping and taxes) was lowest at eBay for both our New York consumer, with Amazon.com 7.1% higher, and
our Connecticut consumer, with Amazon.com 1.3% higher. We considered this a great illustration of why Amazon.com wants the
minimum sales threshold to be as low as possible for a company to be required to collect sales taxes (under legislation that passed the
Senate in May and is now in the House) to protect itself against small-scale sellers on eBay, which will have a sales tax advantage over
Amazon.com.
When comparing prices at Amazon.com with those at Walmart.com, we note the following: The merchandise was 6.3% lower at
Amazon.com. Including shipping, it was 6.8% less at Amazon.com. Factoring in sales taxes, our Connecticut consumer would pay 11.6%
less on Amazon.com while our New York purchaser would spend 7.7% less. Stated differently, not collecting sales taxes on firstparty items sold in Connecticut gave Amazon.com a 480-basis-point advantage over Walmart. In New York, where Amazon.com
collects sales taxes on first-party items and collection on third-party items depends on whether the seller has a physical
presence in the state (among other things), the advantage was only 90 basis points.
Analyzing the results on a by-item basis, of the 56 like-for-like items, Amazon.com’s merchandise prices were cheaper for 19 (34%) than
were those of eBay, identical for 2 (4%), and pricier for 35 (63%). Including shipping, it was 16 (29%) cheaper, 1 (2%) identical, and 39
(70%) pricier. Including shipping and sales taxes, it was 17 (30%) cheaper, 1 (2%) identical, and 38 (68%) pricier for our Connecticut
consumer and 14 cheaper (25%), 1 (2%) identical, and 41 (73%) pricier for our New York consumer. Therefore, eBay’s sales tax
advantage over Amazon.com in New York enabled it to offer consumers 2 more items (4% more) at a lower total cost.
Compared with Walmart for the 35 identical products, Amazon.com’s prices were cheaper for 14 (40%), identical for 12 (34%), and pricier
for 9 (26%) Including shipping, it was 15 (43%) cheaper, 5 (14%) identical, and 15 (43%) pricier. Including shipping and sales taxes, it
was 25 (71%) cheaper, 1 (3%) identical, and 9 (26%) pricier for our Connecticut consumer and 17 cheaper (49%), 5 (14%) identical, and
13 (37%) pricier for our New York consumer. Amazon.com’s sales tax advantage over Walmart in Connecticut enabled it to offer
consumers 10 more items (29% more) at a lower total cost.
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SEPTEMBER 23, 2013
SPECIAL REPORT
INTERNET PRICE COMPARISON, AUGUST 2013
vs. AAPL
Shipping
P+S
C I
(72.5%) (3.4%) 7 2
(72.5%) (3.4%) 7 2
Items Product C
CT 11
(3.3%) 7
NY 11
(3.3%) 7
I
2
2
P
2
2
Items Product C
CT 56
1.9% 19
NY 56
1.9% 19
I
2
2
P Shipping
35
(1.5%)
35
(1.5%)
Items Product C
CT 11
(21.5%) 10
NY 11
(21.5%) 10
I
0
0
P
1
1
vs. HSNI
Shipping
P+S
C I
(67.3%) (24.1%) 10 0
(67.3%) (24.1%) 10 0
P
Tax
Total C I
1 (100.0%) (28.6%) 10 0
1 (26.3%) (24.3%) 10 0
P
1
1
Items Product C
CT 14
(14.3%) 11
NY 14
(14.3%) 11
I
0
0
P
3
3
vs. QVC (LINTA)
Shipping
P+S
C I
(77.0%) (18.1%) 11 0
(77.0%) (18.1%) 11 0
P
Tax
Total C I
3 (100.0%) (23.0%) 12 0
3 (58.7%) (21.4%) 13 0
P
2
1
Items Product C
CT 10
(0.7%) 6
NY 10
(0.7%) 6
I
0
0
P
4
4
vs. COST
Shipping
P+S
C I
(46.7%) (2.0%) 6 0
(46.7%) (2.0%) 6 0
P
Tax
Total
4 (100.0%) (7.7%)
4 (58.5%) (6.0%)
C I
6 0
6 0
P
4
4
Items Product C
CT 29
(6.8%) 24
NY 29
(6.8%) 24
I
4
4
P
1
1
vs. TGT
Shipping
P+S
C I
(69.4%) (8.3%) 27 0
(69.4%) (8.3%) 27 0
P
Tax
Total C I
2 (100.0%) (13.8%) 29 0
2 (37.9%) (10.7%) 28 0
P
0
1
P
9
9
vs. WMT
Shipping
P+S
C I P
Tax
Total C I P
(27.2%) (6.8%) 15 5 15 (100.0%) (11.6%) 25 1 9
(27.2%) (6.8%) 15 5 15 (20.7%) (7.7%) 17 5 13
CT
NY
Items Product C I
35
(6.3%) 14 12
35
(6.3%) 14 12
P
Tax
Total C I
2 (100.0%) (9.0%) 11 0
2 (31.4%) (5.6%) 9 2
vs. EBAY
P+S
C I P
Tax
1.8% 16 1 39 (100.0%)
1.8% 16 1 39 1817.5%
Total
1.3%
7.1%
P
0
0
C I P
17 1 38
14 1 41
Source: Company websites and TAG estimates.
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SEPTEMBER 23, 2013
AMZN V. EBAY – PRODUCT PRICE ONLY
SPECIAL REPORT
AMZN V. EBAY W/ SHIPPING COSTS
70%
80%
63%
70%
70%
60%
60%
50%
50%
40%
34%
40%
30%
30%
20%
29%
20%
10%
10%
4%
2%
0%
0%
Cheaper
Identical
Pricier
Cheaper
Identical
AMZN V. EBAY – IN CT (NO TAX)
AMZN V. EBAY – IN NY (W/ TAX)
80%
80%
68%
70%
73%
70%
60%
60%
50%
50%
40%
30%
40%
30%
30%
20%
20%
10%
25%
10%
2%
2%
0%
0%
Cheaper
Identical
Pricier
Cheaper
Identical
Pricier
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Pricier
17
SEPTEMBER 23, 2013
AMZN V. WMT – PRODUCT PRICE ONLY
SPECIAL REPORT
AMZN V. WMT W/ SHIPPING COSTS
45%
45%
43%
43%
40%
40%
40%
34%
35%
35%
30%
30%
26%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
14%
0%
Cheaper
Identical
Pricier
Cheaper
Identical
Pricier
AMZN V. WMT – IN CT (NO TAX)
AMZN V. WMT – IN NY (W/ TAX)
60%
80%
71%
70%
50%
49%
60%
37%
40%
50%
40%
30%
30%
26%
20%
14%
20%
10%
10%
3%
0%
0%
Cheaper
Identical
Pricier
Cheaper
Identical
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18
SEPTEMBER 23, 2013
SPECIAL REPORT
Sales Tax: One of the Most Complex Issues for AMZN
Sales Implications: We believe collecting sales taxes could have a negative impact on as
much as 21% of its US retail sales (or 10% of total revenues), based on our analysis of
Amazon.com’s proportion of big-ticket sales. However, a number of the company’s efforts
that are at least somewhat dependent on it increasing its physical presence and collecting
sales tax could offset much of that pressure, including adding fulfillment centers for
expedited delivery, lockers, AmazonFresh, and (potentially) pickup points. Last, several
third-party sellers will still be able to offer merchandise on Amazon.com’s platform without
having to collect sales taxes, which should enable Amazon.com to retain these sales.
Margin Implications: With Amazon.com’s margin reliant on scale, a decline in revenues
owing to the collection of sales taxes could result in significant deleveraging. However,
considering that we believe most of the sales pressure would come on big-ticket items, such
as TVs and computers, which have lower margins than other categories, such as apparel,
the improvement in mix could offset some of the deleverage. In addition, if Amazon’s
collection of sales taxes on first-party sales increases the proportion of third-party sales from
merchants that will still not collect sales taxes (such as those with less than $1MM in annual
sales), it could benefit margins since margins on its third-party sales are much more
favorable than those on first-party transactions.
In our view, Amazon will continue to collect sales taxes in an increasing number of states in
the US either because it forges more by-state deals or Congress passes legislation. We
believe collecting sales taxes could negatively affect as much as 21% of its US retail sales (or
10% of total revenues). Depending on passage of federal legislation and how it is written,
Amazon could face more intense competition from certain e-retailers that now have a sales
tax advantage over Amazon, such as small-scale sellers on eBay.
However; we believe Amazon could use multiple strategies to offset that impact, including
offering sales tax collection as a service to merchants selling on its platform and, more
importantly, advancing its physical efforts (those that give it a physical presence in a state,
whereby the company would collect sales taxes per current law) – adding fulfillment centers
for expedited delivery, lockers, AmazonFresh, and (potentially) pickup points. Last, several
third-party sellers will still be able to offer merchandise on Amazon.com’s platform without
having to collect sales taxes, which should enable Amazon.com to retain these sales and –
considering the much more favorable margin dynamics for third-party sales than for first-party
– could benefit the company’s CSOI margin.
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SEPTEMBER 23, 2013
SPECIAL REPORT
AMAZON.COM EXPANDING ITS PHYSICAL PRESENCE, SEPTEMBER 2013
Source: The Dallas Morning News, The Digital Reader, GeekWire, and TAG research.
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SEPTEMBER 23, 2013
SPECIAL REPORT
AMAZON’S PHYSICAL LOCATIONS, SEPTEMBER 2013
Independent of Federal Legislation, Amazon.com Is Collecting Sales
Tax in More States
When applying by-state US retail sales as a proxy, we estimate that Amazon.com will collect
sales taxes on 54.1% of its US retail sales in 2015 vs. 34.6% in 2012 and 10.8% in 2009.
When applying by-state
US retail sales as a
proxy, we estimate that
Amazon.com will collect
sales taxes on 54.1% of
its US retail sales in
2015 vs. 34.6% in 2012
and only 10.8% in 2009.
The following figure illustrates the percentage of US retail sales (based on 2009 data from the
US Census) for which Amazon.com collects sales taxes. For example, it has been collecting
taxes in its home state of Washington since its 1994 launch. Washington’s 2009 retail sales of
$88.4B accounted for 2.3% of the US total. The percentage of its US sales for which Amazon
collected taxes increased to 3.6% in 1999 with the addition of Kentucky, then moved to 3.8%
when North Dakota was added in 2001, and ticked up to 4.7% with the addition of Kansas in
2004. When New York came on board in 2008, it moved the needle up to 10.8%.
After three years with no new states added, 2012 represented a significant change, as the
additions of some of the largest US states for retail sales, including California (ranked first),
Texas (second), and Pennsylvania (sixth) pushed the figure materially higher to 34.6%.
This year includes the largest addition of states in a calendar year (six) with Arizona (added in
February), New Jersey (July), Georgia (September), Virginia (September) and Connecticut
(November), and Massachusetts (November) coming on board later this year. As a result of
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SEPTEMBER 23, 2013
SPECIAL REPORT
this activity, we estimate that Amazon.com is currently collecting taxes for 45.6% of its US
retail sales, which will increase to 49.0% at year-end. As of this writing, Indiana (January
2014), Nevada (January 2014), and Tennessee (January 2014) are coming on board next
year, which would drive the total to 54.1%. South Carolina starts in January 2016, which
would bring the total to 55.5%. In addition, according to published reports, the company has
made a proposal for Florida (6.5% of US retail sales). (Note: Alaska, Delaware, Montana,
New Hampshire, and Oregon do not have state sales tax; Alaska has city sales tax; and these
five states account for only 2.9% of US retail sales.)
AMAZON.COM SALES TAX COLLECTION AND BY-STATE US RETAIL SALES,
1994-2016E
60%
40%
20%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013E
2014E
2015E
2016E
0%
Source: Company reports, US Census Bureau, and TAG estimates.
Federal Legislation Still Has to Get Through the House
In May, the Senate voted 69-27 in favor of online sales tax legislation. We remain skeptical
that the bill will have as easy a time in the House of Representatives for the following reasons:

Unlike the Senate, which is controlled by Democrats (53 Democrats, 45 Republicans, and
2 Independents), Republicans control the House (232 Republicans, 201 Democrats, and
2 vacancies).

Although proponents of the legislation have done a good job of changing the narrative to
a way of helping businesses (small, medium, and large) combat showrooming and away
from a new tax, many still consider it anti-small-business and a new tax.

Unlike senators, who have the luxury of six-year terms, representatives serve only for
two-year periods, and Republicans still face the risk of angry constituents (spurred by
Grover Norquist’s lobbying) who oppose raising taxes.

Overall, Congress, in our view, has not been effective in passing major legislation since
Republicans took control of the House in January 2011.
What Our Industry Sources Are Saying
As part of our effort to closely monitor the legislative process, we reached out to a number of
industry sources for updates on their opinions and here is what we found:
Professor Richard Pomp, a tax expert and law professor at the University of Connecticut,
noted that although the legislation passed the Senate, it will be more difficult to get it through
the House. A well organized pushback is already underway. But in support of the legislation,
he pointed out that small businesses are telling their congressmen that their stores have
become Internet showrooms, where consumers visit, pick their salespersons’ brains, track bar
codes, and ultimately purchase on the Internet. He also noted that the Tea Party seems
emasculated and that Grover Norquist's power has waned.
Professor Pomp believes the change in Amazon’s position – to actually supporting the
legislation instead of merely paying lip service to it – was a catalyst for the change in political
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SEPTEMBER 23, 2013
SPECIAL REPORT
views. He believes eBay may be resigned to it passing in the House and, therefore, has
changed its tactics to damage control from blocking the legislation. If it passes, he thinks eBay
could make money by starting to collect sales taxes on behalf of any of its sellers that will be
forced to collect sales taxes by the legislation.
Professor John Swain, a tax expert and law professor at the University of Arizona (and
panel participant at our 5th Annual Spring Consumer Conference in April), is more confident
that the legislation will pass than in prior years, but he still does not see the likelihood as even
50/50. He believes eBay will exploit any weakness in the vote count, which could make it
more difficult for the bill’s sponsors to get it passed without a material increase in the nexus
threshold, which might cause it to move up from $1MM.
The Retail Industry Leaders Association (RILA) noted that the bill passed in the Senate. It
expects the House debate to start in the Judiciary Committee, which could result in the bill
being altered. However, RILA likes the potential for passage in the House because it is
starting with the support of 24 Republican cosponsors.
The Performance Marketing Association (PMA) believed there was a high likelihood that
the bill would pass the Senate, noting that the vote to invoke “cloture” and bypass the
committee was 76-24 in favor. The PMA believes the legislation will receive much more
scrutiny in the House than in the Senate because of the Republican control. It noted that last
year there was a lot of support for the legislation, including from more than a dozen
Republican governors, and confidence that the bill would pass if it made it to the floor.
The PMA mentioned eBay’s opposition and the company’s efforts to build grassroots support
against the bill. It also pointed out that eBay agreed to a $1MM sales threshold for California
and speculated that more than 95% of its sellers were below that threshold. The PMA
believes bricks and mortar retailers would balk at a higher threshold than $1MM because they
do not get such a benefit themselves and, at the minimum, there will be much more debate on
the threshold. In the view of the PMA, the biggest risk to passage is partisan politics creating
distractions, akin to the fiscal cliff of 2012.
Industry Source No. 1 noted that there are many more skeptical politicians in the House than
in the Senate, which should result in a lot more scrutiny of the legislation; even so, according
to this source, the bill will not be dead on arrival. At a minimum, the bill will receive much more
consideration in the House than it did in the Senate. This consideration could include a closer
look at the $1MM threshold than was given in the Senate.
Industry Source No. 2 said that some in Washington think the exemption threshold could
start above $1MM but then phase down to lower levels in a few years.
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SEPTEMBER 23, 2013
SPECIAL REPORT
CASE STUDY 2: THE CASES FOR/AGAINST SALES TAX COLLECTION HURTING AMAZON’S SALES
The Case for Sales Tax Collection Hurting Amazon’s Sales
According to an industry source, consumers shop at remote sellers (e-commerce companies and
catalog retailers) for a number of reasons, including selection and convenience and sometimes price.
Avoiding sales taxes is low on that list. However, according to the source’s studies, consumers care
about sales taxes on big-ticket items, such as computers and televisions. We estimate that 21% of
Amazon.com’s US retail sales come from big-ticket items.
This notion was supported by Amazon.com’s comments that its 4Q12 sales were soft in products with
high average selling prices, such as televisions. The company noted that the softness in TV sales was
across the US and not limited to California, Pennsylvania, and Texas – three states where it had
recently begun collecting sales taxes. Best Buy indicated that its online sales in California,
Pennsylvania, and Texas improved 400-600 basis points after Amazon.com began collecting sales taxes in those states.
The Case Against Sales Tax Collection Hurting Amazon’s Sales
Our analysis of data from the New York suggests that Amazon.com’s collection of sales taxes in that state did not result in New York’s ecommerce sales growing more slowly than those for the entire US. We compared data from the State of New York Office of Tax Policy
Analysis against US Census Bureau e-commerce data and found that e-commerce sales in NY grew faster than those in all of the US in
comparable time periods (see the following figure).
E-COMMERCE SALES GROWTH NY VS. US, 2008-2012 ($MM)
Start
Date
3/1/08
3/1/09
3/1/10
3/1/11
-
End
Date
2/28/09
2/28/10
2/28/11
2/29/12
NY
Tax
Revenue
57
82
100
120
NY
E-Commerce
Sales
671
965
1,176
1,412
Annual
Growth
NA
NA
22.0%
20.0%
US
E-Commerce
Sales
105,590
150,014
175,387
201,409
Annual
Growth
NA
NA
16.9%
14.8%
Source: State of New York Office of Tax Policy Analysis, US Census Bureau, and TAG estimates.
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SEPTEMBER 23, 2013
SPECIAL REPORT
Implications: We Estimate That 21% of Amazon.com’s US Retail Sales
and 10% of Its Total Revenues Are at Risk
Regarding demand elasticity and online sales tax, we assume that if the sales tax disparity
were resolved, only sales of big-ticket items (products that sell for more than $300) would be
materially affected and that Amazon could lose sales to consumers who opt for the instant
gratification of purchasing an item at a brick-and-mortar retailer.
We performed two types of analysis to estimate the portion of sales Amazon.com derives
from big-ticket items. First, we examined the categories it sells in the US and looked at other
retailers that offer that type of merchandise, and we estimated the percentage of sales they
derive from big-ticket items. That analysis suggests that Amazon.com derives 21% of its US
retail sales from big-ticket items. On a company-wide basis that would suggest that 10% of its
revenues come from big-ticket items (considering that it derives significant revenue outside
the US and from its other efforts, including Amazon Web Services).
AMAZON.COM—CATEGORIES AND BIG-TICKET SALES MIX, 2012
Comparison Company
Category
Physical Media
Electronics
Toys
Baby
Tools & Hardware
Home & Garden
Apparel
Sports & Outdoors
Jewelry & Watches
Health & Personal Care
Beauty
Shoes & Accessories
Dry Foods
Auto Parts & Accessories
Kindle Device & Store
Office Supplies
Year
Company
1995
Barnes & Noble, Inc.
1999
Best Buy Co. Inc.
1999
Toys 'R Us
1999
Toys 'R Us
1999
The Home Depot, Inc.
2000
Bed Bath & Beyond, Inc.
2002
Gap Inc.
2003
Dick's Sporting Goods Inc.
2003
Tiffany & Co.
2003
Walgreen Co.
2004 Estee Lauder Companies, Inc.
2005
Nike Inc.
2006
The Kroger Co.
2006
AutoZone Inc.
2007
Apple
2008
Staples, Inc.
Average
Ticker
2012
Sales
($MM)
BKS
7,129
BBY 50,705
NA
13,543
NA
13,543
HD
74,754
BBBY 10,915
GPS 15,651
DKS
5,836
TIF
3,794
WAG 71,633
EL
9,714
NKE 24,128
KR
96,751
AZO
8,604
AAPL 156,508
SPLS 24,381
36,724
Big
Ticket
Sales
Mix
0%
70%
10%
10%
10%
10%
0%
10%
70%
0%
5%
0%
0%
25%
90%
25%
21%
For our second analysis, we examined the company’s best-selling items on a by-category
basis, which suggested that the impact from collecting sales taxes may be even greater (more
or less), depending on how you interpret the data. We considered six of the 105 top-selling
products to be big-ticket items (those with price tags greater than or equal to $300). On an
equal-weighted basis only 6% of the items are big ticket. However, when we considered
product prices and held the number of units constant, then 40% of sales are from big-ticket
items. On a company-wide basis that would suggest that 3%-20% of Amazon.com’s revenues
come from big-ticket items.
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SEPTEMBER 23, 2013
SPECIAL REPORT
TOP ITEM SALES AT AMAZON AND AVERAGE SELLING PRICES, JUNE 2013
Category
Appliances
Appstore for Android (Paid only)
Arts, Crafts & Sewing
Automotive
Baby
Beauty
Books
Camera & Photo
Cell Phones & Accessories
Clothing
Computers & Accessories
Electronics
Gift Cards Store
Grocery & Gourmet Food
Home & Kitchen
Home Improvement
Industrial & Scientific
Jewelry
Kindle Store
#1
Item
GE MWF Refrigerator
Water Filter, 1-Pack
Dentist Office Kids
15pcs Nail Art Painting
Pen Brush
Viking 912600 8-Way
Heavy Duty Spray…
Vulli Sophie the Giraffe
Teether
Dotting 5 X 2 Way
Marbleizing Dotting…
Inferno, by Dan Brown
GoPro HERO3: Black
Edition
iPhone 4 / 4S Anti-Glare,
Anti-Scratc…
Ray-Ban RB2132 New
Wayfarer Sunglasses
Samsung Galaxy Tab 2 (7Inch, Wi-Fi)
Kindle Fire HD 7", Dolby
Audio, Dual-…
Amazon Gift Card - E-mail
Donut Shop K-Cup packs
for Keurig Bre…
Playtex Diaper Genie Refill
(810 coun…
Cuisinart CGS-5014 14Piece Deluxe St…
GE MWF Refrigerator
Emergency Mylar Thermal
Blankets (Pac…
Vintage, Retro Colorful
Crystal Owl P…
Price
33.99
0.99
2.43
5.64
19.99
1.76
16.19
399.99
0.85
127.68
169.00
199.00
50.00
29.99
16.99
37.49
33.99
6.60
0.97
26.49
MP3 Downloads (Paid only)
Up the Down Staircase
Paderno World Cuisine
A4982799 Tri-Bl…
101 - The Essential Blues
Album, Various
Magazines
National Geographic
15.99
Movies & TV
Favors
13 [Deluxe Edition], by
Black Sabbath
1.99
Kitchen & Dining
Music
Musical Instruments
Office Products
Patio, Lawn & Garden
Pet Supplies
Shoes
Software
Sports & Outdoors
Toys & Games
Video Games
Watches
8.08
2.99
14.99
Snark SN-1 Tuner
8.34
GP Spectrum Multi-Use
Paper, 8.5 x 11…
13.99
37.49
Merial Frontline Plus Flea
and Tick C…
57.15
Reef Men's Fanning
Sandal
59.25
Norton 360 2013 - 1 User /
3 PC [Down…
22.99
Insanity 60 Day 13 Dvd
Workout
144.80
Cards Against Humanity
PlayStation 4 Standard
Edition
Geneva Rose Gold Plated
Classic Round…
Average
Median
25.00
399.96
7.50
57.16
19.99
#2
Item
Little Giant Classic
10103LGW 300-Pou...
Minecraft - Pocket Edition
Brother CS6000i FeatureRich Sewing M…
BAFX Products (TM) PIC18F2480 Bluet…
Nosefrida The Snotsucker
Nasal Aspirator
Extra Strength Hair
Nutrient Tablets,…
A Song of Ice and Fire,
Books 1-4, by G. Martin
Canon PowerShot A2300
16.0 MP Digital…
Apple Lightning to USB
Cable
Carhartt Men's Workwear
Pocket T-Shir…
Tech Armor Apple iPad
Mini Premium HD…
Kindle Paperwhite, 6" High
Resolution…
Amazon Gift Card - E-mail #1 Dad
Nature's Way Organic
Extra Virgin Coc…
Pampers Sensitive Wipes
12x Box with…
A4982799 Tri-Bl…
10103LGW 300-Pou…
Commercial Chalkboard
Contact Paper,…
316L Surgical Steel 14
Guage Leaf Dan…
Price
349.99
6.99
154.99
23.99
12.29
29.05
19.79
79.00
16.99
22.95
7.95
119.00
50.00
8.89
22.89
26.49
349.99
8.02
1.59
Forever Too Far
3.99
BlenderBottle® Classic 28ounce Black
6.53
Tomorrow's Harvest, by
Boards of Canada
6.99
Popular Science (1-year
auto-renewal)
7.00
Star Trek: The Complete
Original Seri…
106.41
Random Access
Memories, by Daft Punk
11.88
Planet Waves Assorted
Pearl Celluloid…
3.68
Velcro Reusable SelfGripping Cable T…
7.10
Weber 7416 Rapidfire
Chimney Starter
14.99
Precious Cat Ultra
Premium Clumping C…
22.56
Crocs Unisex Classic Clog
Premium SP1 64bit
(OEM…
32.23
Camelbak Eddy Bottle
Cards Against Humanity:
First Expansion
Xbox One Console - Day
One Edition
U.S. Polo Assn. Sport
Men's US9061 Bl…
16.99
90.91
10.00
499.96
21.99
62.12
19.79
#3
Item
Price
Maytag UKF8001 Pur
Refrigerator Cyst...
29.50
Plants vs. Zombies (Kindle
Tablet Edi…
0.99
Art Advantage Oil and
Acrylic Brush S…
14.98
Autel MaxiScan MS300
CAN Diagnostic S…
16.99
Baby Einstein Take Along
Tunes
8.99
Lovely Vintage Jewelry
Crystal Peacoc…
0.95
Joyland (Hard Case
Crime)
6.79
Dropcam HD Wi-Fi
Wireless Video Monit…
147.99
iPhone 5 USB Cable, Car
Charger 5V 1A…
3.32
Levi's Men's 501 Jean
Samsung Chromebook
(Wi-Fi, 11.6-Inch)
Kindle, 6" E Ink Display, WiFi - Inc…
Amazon Gift Card Upload
Your Photo -…
Brooklyn Beans Variety
Pack Coffee K-…
Fitbit One Wireless Activity
Plus Sle…
SODIAL- Mickey Mouse
Face Shape Cooki…
Maytag UKF8001 Pur
Refrigerator Cyst…
Kapro 990V-41-48 Zeus
Vision Box Leve…
2.00 Carat Cubic Zirconia
Earrings. S…
Inferno: A Novel (Robert
Langdon)
Face Shape Cooki…
13, by Black Sabbath
Cosmopolitan (1-year autorenewal)
Skyfall (Blu-ray/ DVD +
Digital Copy)
Wrote a Song For
Everyone, by J. Fogerty
On Stage XCG4 Tubular
Guitar Stand wi…
Brother Laminated Black
On White Tape…
Weber 6424 21-Inch TBrush
Bayer Advantage II Purple
6-Month Fle…
KEEN Newport H2 Sandal
(Toddler/Littl…
Office Mac Home and
Student 2011 - 1P…
Hip Hop Abs DVD Workout
Second Expansion
PlayStation 4 Launch
Day Edition
Casio Men's DW9052-1V
G-Shock Classic…
BigTicket Total
Items Items Mix
BigTicket
Items
Total
Items
1
3
349.99
413.48
0
3
0
8.97
0
3
0
172.4
0
3
0
46.62
0
3
0
41.27
0
3
0
31.76
0
3
0
42.77
1
3
399.99
626.98
0
3
0
21.16
55.50
0
3
0
206.125
249.00
0
3
0
425.95
69.00
0
3
0
387
50.00
0
3
0
150
22.00
0
3
0
60.88
89.00
0
3
0
128.88
0.64
0
3
0
64.62
29.50
1
3
349.99
413.48
79.00
0
3
0
93.62
0.01
0
3
0
2.57
12.99
0
3
0
25.06
0.64
0
3
0
33.66
7.99
0
3
0
17.97
15.00
0
3
0
37.99
12.00
0
3
0
120.4
11.88
0
3
0
38.75
9.95
0
3
0
21.97
19.26
0
3
0
40.35
12.33
0
3
0
64.81
50.84
0
3
0
130.55
127.49
0
3
0
218.96
119.99
0
3
0
233.89
27.94
0
3
0
189.73
10.00
0
3
0
45
399.96
3
3
1,299.88
1299.88
0
68.91
39.42
0
3
6
105
6%
Mix
2,399.85 5,926.42 40%
50.05
16.99
th
26
SEPTEMBER 23, 2013
SPECIAL REPORT
Tables Turned – Competition with Sales Tax Advantage Over AMZN
We believe another reason that Amazon.com favors federal sales tax legislation is to protect
itself from eBay and other e-commerce companies that could have a tax advantage over
Amazon.com as the company forges agreements with a growing list of states.
As was borne out in our conversations with multiple industry sources, one advantage of
working more closely with members of Congress is the ability to influence how legislation is
written. For example, one sticking point is the revenue threshold for online sales tax
collection. This year’s legislation includes a $1MM threshold – that is, companies with more
than $1MM in online sales will be required to collect sales tax. Last year the House version
had a $1MM provision while the Senate version’s was $0.5MM. Amazon.com wants this figure
to be as low as possible so that it will not be at a disadvantage to small-scale sellers on eBay.
According to our conversations with industry sources, the legislation may be passed, but the
threshold may be $5MM or higher. The Performance Marketing Association suggested that
95% of eBay’s sellers had less than $1MM in online revenues, which could result in significant
competition even if the threshold were not increased.
This was supported by the results of our pricing survey. The sales tax bill from purchasing the
56 products from Amazon.com was $484.95 vs. only $25.29 on eBay, 1,817.5% higher.
Amazon.com collected sales taxes on 32 items, but eBay collected sales taxes on only 2. This
enabled eBay to improve its total purchase price against Amazon.com by 530 basis points,
converting a 1.8% price advantage (when factoring in the price of the merchandise and
shipping) to a 7.1% lead.
Amazon.com Ramping Efforts to Offset Potential Revenue Drag
Amazon appears to have multiple strategies to offset the impact of collecting sales taxes,
including offering sales tax collection as a service to merchants selling on its platform and,
more importantly, advancing its physical efforts (those that give it a physical presence in a
state, whereby the company would collect sales taxes, per current laws) – adding fulfillment
centers for expedited delivery, lockers, AmazonFresh, and (potentially) pickup points. We
discuss these efforts throughout the report and believe they could enable the company, over
time, to more than offset the sales drag from collecting sales taxes.
Given the importance to both Amazon.com and all of retail, we will continue to closely monitor
sales-tax-related issues.
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27
SEPTEMBER 23, 2013
SPECIAL REPORT
CASE STUDY 3: AMAZON.COM VS. WALMART, BY-STATE SALES TAXES COLLECTION COMPARISON, SEPTEMBER 2013
In the following table, we compare sales tax rates in capital cities across the US. As of September 2013, Amazon collects sales taxes in
12 states, five states do not have sales taxes, and Amazon does not collect in the remaining 33 states. Walmart collects sales taxes in 46
states. The average sales tax rate is 7.0% in the 34 states in which Amazon.com does not collect, but Walmart does. Independent of
federal legislation, Amazon.com will begin collecting sales taxes in Connecticut (November 2013), Massachusetts (November 2013),
Indiana (January 2014), Nevada (January 2014), Tennessee (January 2014), and South Carolina (January 2016). After South Carolina,
there would be 28 states where Amazon.com does not collect sales tax but Walmart does; the average tax rate for those states is 6.9%.
CURRENT SALES TAX RATES, BY STATE, SEPTEMBER 2013
City
County
State
Alabama
Montgomery
Montgomery
Alaska
Juneau
Juneau
Phoenix
Maricopa
Arizona
Arkansas
Little Rock
Pulaski
Sacramento
Sacramento
California
Denver
Denver
Colorado
Hartford
Hartford
Connecticut
Dover
Kent
Delaware
Tallahassee
Leon
Florida
Atlanta
Fulton
Georgia
Honolulu
Honolulu
Hawaii
Boise
Ada
Idaho
Springfield
Sangamon
Illinois
Indianapolis
Marion
Indiana
Des Moines
Polk
Iowa
Topeka
Shawnee
Kansas
Frankfort
Franklin
Kentucky
Baton Rouge East Baton Rouge
Louisiana
Augusta
Kennebec
Maine
Annapolis
Anne Arundel
Maryland
Boston
Suffolk
Massachusetts
Lansing
Ingham
Michigan
St. Paul
Ramsey
Minnesota
Jackson
Hinds
Mississippi
Jefferson City
Cole
Missouri
Helena
Lewis and Clark
Montana
Lincoln
Lancaster
Nebraska
Carson City
Nevada
Carson City
Concord
Merrimack
New Hampshire
Trenton
Mercer
New Jersey
Santa Fe
Santa Fe
New Mexico
Albany
New York
Albany
Raleigh
Wake
North Carolina
Bismarck
Burleigh
North Dakota
Columbus
Franklin
Ohio
Oklahoma City
Oklahoma
Oklahoma
Salem
Marion
Oregon
Harrisburg
Dauphin
Pennsylvania
Providence
Providence
Rhode Island
Columbia
Richland
South Carolina
Pierre
Hughes
South Dakota
Nashville
Davidson
Tennessee
Austin
Travis
Texas
Salt Lake
Utah
Salt Lake City
Vermont
Montpellier
Washington
Virginia
Richmond
Richmond City
Olympia
Thurston
Washington
Charleston
Kanawha
West Virginia
Madison
Dane
Wisconsin
Cheyenne
Laramie
Wyoming
Tax
10.0000%
5.0000%
8.3000%
8.5000%
8.5000%
7.6200%
6.3500%
0.0000%
7.5000%
8.0000%
4.7120%
6.0000%
8.0000%
7.0000%
6.0000%
8.9500%
6.0000%
9.0000%
5.0000%
6.0000%
6.2500%
6.0000%
7.6250%
7.0000%
7.7250%
0.0000%
7.0000%
7.4750%
0.0000%
7.0000%
8.1875%
8.0000%
6.7500%
6.0000%
6.7500%
8.3750%
0.0000%
6.0000%
7.0000%
8.0000%
6.0000%
9.2500%
8.2500%
6.8500%
6.0000%
5.0000%
8.8000%
6.0000%
5.5000%
6.0000%
Amazon.com
0.0000%
0.0000%
8.3000%
0.0000%
8.5000%
0.0000%
0.0000%
0.0000%
0.0000%
8.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
8.9500%
6.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
0.0000%
7.0000%
0.0000%
8.0000%
0.0000%
6.0000%
0.0000%
0.0000%
0.0000%
6.0000%
0.0000%
0.0000%
0.0000%
0.0000%
8.2500%
0.0000%
0.0000%
5.0000%
8.8000%
0.0000%
0.0000%
0.0000%
34 States Where Walmart.com Collects Sales Tax and Amazon.com Does Not:
Average Tax Rate
Median Tax Rate
Walmart.com
10.0000%
5.0000%
8.3000%
8.5000%
8.5000%
7.6200%
6.3500%
0.0000%
7.5000%
8.0000%
4.7120%
6.0000%
8.0000%
7.0000%
6.0000%
8.9500%
6.0000%
9.0000%
5.0000%
6.0000%
6.2500%
6.0000%
7.6250%
7.0000%
7.7250%
0.0000%
7.0000%
7.4750%
0.0000%
7.0000%
8.1875%
8.0000%
6.7500%
6.0000%
6.7500%
8.3750%
0.0000%
6.0000%
7.0000%
8.0000%
6.0000%
9.2500%
8.2500%
6.8500%
6.0000%
5.0000%
8.8000%
6.0000%
5.5000%
6.0000%
6.9535%
6.9250%
Note: Bolding represents states where Amazon.com does not collects sales tax and states bolded in green text do not collect sales tax: DE, MT, NH, and OR. Alaska does not
have a state sales tax, but does have a city sales tax.
Source: Source: Zip2tax.com and TAG research.
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28
SEPTEMBER 23, 2013
SPECIAL REPORT
Third-Party Sales via Amazon.com Drive Low Pricing
Sales Implications: Because offering merchandise from third-party sellers on its platform
both increases its selection and enables it to be more price competitive, we believe thirdparty sales are accretive to Amazon.com’s revenues and are one of the cornerstones of the
company’s strategy. We estimate that third-party sales will account for 4.0% of total
revenues in 2015 vs. 4.1% in 2012 and 4.2% in 2009.
Margin Implications: We estimate that the incremental gross margin from a third-party sale
vs. a first-party one approximates 7,000 basis points. Therefore, every incremental $1B of
revenue from third-party sales on Amazon.com would add 65 basis points to our base CSOI
margin forecast for 2015.
We estimate that the percentage of paid units sold by third parties through Amazon will reach
41.0% in 2015, compared with 39.7% in 2012 and 29.8% in 2009. As a result, we project that
Amazon.com’s commissions from these third-party sales would represent 4.3% of its retail
sales in 2015 vs. 4.3% in 2012 and 4.3% in 2009. On a total revenue basis this would account
for 4.0% of its total revenues in 2015 compared with 4.1% in 2012 and 4.2% in 2009. This
suggests that its third party efforts would account for 12.9% of its gross profit dollars in 2015
compared with 15.1% in 2012 and 16.7% in 2009 and 67.5% of its CSOI in 2015 compared
with 103.1% in 2012 and 48.0% in 2009. We note the 2012 and 2015 figures are particularly
high because of our estimates that first-party sales generated or will generate a negative
CSOI in 2012 and 2015. (In the Appendix, we illustrate our method for estimating revenues
and CSOI from third-party sales.)
THIRD-PARTY UNITS MIX, 2011-2015E
THIRD-PARTY SALES, 2011-2015E
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29
SEPTEMBER 23, 2013
AMAZON.COM’S REVENUE MIX, 2009
4.2%
SPECIAL REPORT
2.2% 0.4%
4.1%
3.8%
0.3%
91.7%
93.2%
1P Retail
3P Retail
Other - NA
Other - Int'l
1P Retail
3P Retail
Other - NA
Other - Int'l
AMAZON.COM’S REVENUE MIX, 2015E
6.8%
0.3%
4.0%
88.9%
1P Retail
3P Retail
Other - NA
Other - Int'l
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30
SEPTEMBER 23, 2013
AMAZON.COM’S GROSS PROFIT MIX, 2009
SPECIAL REPORT
1.9%
1.1%
9.9%
15.5%
16.7%
15.1%
68.3%
71.5%
1P Retail
3P Retail
Other - NA
Other - Int'l
1P Retail
3P Retail
Other - NA
Other - Int'l
AMAZON.COM’S GROSS PROFIT MIX, 2015E
0.9%
24.3%
62.0%
12.9%
1P Retail
3P Retail
Other - NA
Other - Int'l
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31
SEPTEMBER 23, 2013
AMAZON.COM’S CSOI MIX, 2009
SPECIAL REPORT
60.0%
150.0%
103.1%
48.0%
50.0%
100.0%
40.0%
50.0%
20.0%
8.0%
29.3%
30.0%
0.0%
17.2%
-50.0%
10.0%
-100.0%
5.5%
0.0%
1P Retail
-150.0%
3P Retail
109.7%
Other - NA
Other - Int'l
(120.80%)
1P Retail
3P Retail
Other - NA
Other - Int'l
AMAZON.COM’S CSOI MIX, 2015E
150.0%
132.3%
100.0%
67.5%
50.0%
4.9%
0.0%
-50.0%
-100.0%
(104.7%)
-150.0%
1P Retail
3P Retail
Other - NA
Other - Int'l
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32
SEPTEMBER 23, 2013
SPECIAL REPORT
CASE STUDY 4: PRICE COMPARISON – AMAZON.COM FIRST PARTY VS. THIRD PARTY, AUGUST 2013
Amazon.com offered consumers the lowest prices for its first-party merchandise, but third-party sellers
provided merchandise at a lower total cost including shipping and sales taxes in states where they had
a tax advantage over Amazon.com’s first-party efforts. In the second pricing survey we conducted, we
compared the prices of identical merchandise sold by Amazon.com with those on merchandise sold by thirdparty sellers on its platform. Amazon.com’s price on first-party merchandise was 3.2% below that of third-party
sellers. Including shipping costs, Amazon.com’s first-party prices remained the lowest, by 3.3%. Connecticut
consumers able to circumvent sales taxes on first-party and almost all third-party merchandise (sales taxes
were collected on only 1 of the 32 items) saved 4.9% buying first-party merchandise. However, the story
changed for our New York consumer, because many third-party sellers were not required to collect sales taxes
while Amazon.com was, and first-party merchandise from Amazon.com was now 2.4% more expensive. Stated
differently, not collecting sales taxes on first-party items sold in Connecticut vs. one third-party seller that
collected sales taxes gave Amazon.com’s first-party sales a 160-basis-point advantage over third-party sellers.
In New York, where Amazon.com collects sales taxes on first-party items and collection on third-party items
depends on whether the seller has a physical presence in the state, among other things, third-party sellers held
a 570-basis-point advantage over Amazon.com’s first-party efforts. Therefore, Amazon.com’s efforts to offer
merchandise from third-party sellers on its platform could enable it to retain revenues even when it must collect sales taxes on
first-party merchandise. In addition, this increasing proportion of third-party unit sales could also provide a margin lift to the
company.
Analyzing results on a by-item basis, of the 32 like-for-like items, Amazon.com’s first-party merchandise prices were cheaper for 12 (38%)
than those of third-party sellers, identical for 1 (3%), and pricier for 19 (59%). Including shipping, it was 8 (25%) cheaper, 2 (6%) identical,
and 22 (69%) pricier. Including shipping and sales taxes, it was 8 (25%) cheaper, 2 (6%) identical, and 22 (69%) pricier for our
Connecticut consumer and 7 cheaper (22%), 0 (0%) identical, and 25 (78%) for our New York consumer. Therefore Amazon.com’s thirdparty sales tax edge over its first-party sellers in New York enabled it to offer consumers 1 more item (3% more) at a lower total cost.
INTERNET PRICE COMPARISON FIRST PARTY VS. THIRD PARTY, AUGUST 2013
Items Product C I
CT 32
(3.2%) 12 1
NY 32
(3.2%) 12 1
P
19
19
vs. Amazon.com Third Party
Shipping P+S C I P
(5.3%) (3.3%) 8 2 22
(5.3%) (3.3%) 8 2 22
Tax
Total C I P
(100.0%) (4.9%) 8 2 22
263.3% 2.4% 7 0 25
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33
SEPTEMBER 23, 2013
1P VS. 3P – PRODUCT PRICES
SPECIAL REPORT
1P VS. 3P PRODUCT & SHIPPING
80%
90%
69%
70%
78%
80%
70%
60%
60%
50%
50%
40%
40%
30%
25%
30%
20%
22%
20%
6%
10%
10%
0%
0%
0%
Cheaper
Identical
Pricier
Cheaper
1P VS. 3P TOTAL COST – NY
70%
70%
59%
60%
50%
59%
60%
50%
38%
40%
30%
30%
20%
20%
38%
10%
10%
3%
3%
0%
0%
Cheaper
Identical
Pricier
Cheaper
Identical
Pricier
th
Pricier
1P VS. 3P TOTAL PRICE – CT
40%
Identical
34
SEPTEMBER 23, 2013
SPECIAL REPORT
LARGE SELECTION
Sales Implications: Its large selection is one reason many customers shop at Amazon.com
and is therefore a significant driver of its past, present, and future long-term sales growth.
We project that sales will expand at a 20.5% CAGR in 2012-2015 vs. 35.6% in 2009-2012
and 31.8% in 2006-2009.
Margin Implications: With a willingness to wait five to seven years to achieve a profit, most
of Amazon.com’s expansion into new categories and countries dilutes its short-term CSOI
margin. This is evident when comparing its North American and International CSOI margins,
which we estimate at 5.4% and 1.3%, respectively, in 2015 vs. 4.6% and 0.3% in 2012 and
5.5% and 7.4% in 2009. An important offset is the prevalence of third-party unit sales on its
platform, because their gross margins are higher than those on its other efforts.
In this section, we discuss the company’s efforts to offer consumers a large selection of
merchandise, including via third parties selling on its platform and by adding categories.
According to an industry source, consumers shop from remote sellers (e-commerce
companies and catalog retailers) for a number of reasons, including selection and
convenience and sometimes price. Amazon.com is able to increase its wallet share by
offering products across multiple categories, and consumers are more likely to start their
shopping experience with Amazon.com because they know they are usually able to get most,
if not all, of what they are looking for at one site vs. having to purchase products from multiple
retailers. The company’s efforts to expand its selection are a big reason for our projection of
24.0% e-commerce market share in the US in 2015 vs. 18.5% in 2012 and 10.8% in 2009.
Same for international, where we project that Amazon.com will achieve 4.0% e-commerce
market share in 2015 vs. 4.3% in 2012 and 3.9% in 2009.
In the following table, we show the categories of merchandise Amazon.com sells, as
illustrated by a screen shot from its Amazon.com website from September 2013. As a general
rule, the company targets a five- to seven-year time horizon to achieve profitability in a new
category or country. Its willingness to invest for such a long time before earning a return gives
Amazon.com a large competitive advantage over other businesses that manage their
operations focused on much shorter time periods.
Wharton Professor David Bell noted that an average of 8%-10% of all retail is e-commerce,
but with a wide range of categories, from grocery at the low end and consumer electronics at
20%. He suggested that e-commerce penetration in certain categories could approach 50%60%, so there is a lot of runway for Amazon.com, in our view.
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SEPTEMBER 23, 2013
SPECIAL REPORT
AMAZON.COM SELECTION, SEPTEMBER 2013
Third-Party Sales Through Amazon.com Drive Selection
Offering merchandise from third-parties on its platform increases Amazon.com’s selection,
which makes it easier for consumers to shop their entire baskets through the company. For
example, for our next case study (detailed below), we compared the selection at Amazon.com
with those at a number of other retailers when putting together a shopping list for Super Bowl
XLVII. We started by looking for a Samsung OLED TV that was at least 40”. Using third-party
sellers nearly doubled Amazon.com’s SKU count, increasing it to 71 from 38. Best Buy began
allowing third-party sellers at BestBuy.com in September 2011, and this initiative increased its
SKUs by 6 to 67. Anecdotally, Amazon.com’s use of third-party sellers enabled me to
purchase the entire list of back-to-school merchandise required by my daughter’s school,
whereas I was not able to get all of the items at Office Depot, Staples, Target, and Walmart
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SEPTEMBER 23, 2013
SPECIAL REPORT
CASE STUDY 5: WHO OFFERED CONSUMERS THE MOST CHOICES ON SUPER BOWL SUNDAY?
To illustrate Amazon.com’s large selection, we put together a shopping list for Super Bowl XLVII and compared
the number of SKUs available at Amazon.com and at a handful of other retailers. The company came second
only to eBay (whose Marketplaces leveraged inventory from 119.7MM active accounts as of June 2013) in
offering consumers the most choices for the products on our shopping list.
We started by looking for a Samsung OLED TV that was at least 40” because you need to have a big-screen TV to enjoy the Super Bowl.
We focused our search on new products and in TVs, for example, we excluded refurbished ones (Amazon.com, Best Buy, and eBay sell
refurbished TVs). The Marketplaces at eBay offered the greatest selection, at 641, with Amazon.com second, at 71, and Best Buy third, at
67. Best Buy and Walmart also offer merchandise from third-party sellers on their websites. Best Buy began this strategy in September
2011, and Walmart started in September 2009.
Next we looked at HDMI cables, a necessity to exploit the HD capabilities of the Samsung OLED TV. This time, Amazon led the charge
with a whopping 29,922 SKUs, ahead of even eBay at 12,809. Included in the list were 13 private-label AmazonBasics SKUs. Later in this
report, we discuss the potential for the company to offer more private-label merchandise to drive its long-term margin.
We also looked at the number of SKUs for PlayStation3 consoles and video games in case we wanted to play video games instead of
watching the hours and hours of pre-game and post-game TV coverage. Because the PlayStation3 doubles as a Blu-Ray player, we also
included the number of Blu-Ray titles offered by the retailers. We could have expanded our comparison even further by comparing the
number of digital titles offered by the retailers.
We included two grocery items – potato chips and beer – to illustrate a point that grocery remains an opportunity for Amazon.com. (We
discuss its AmazonFresh effort.) For beer, there were several SKUs from third-party sellers on Amazon.com, but we were unable to
purchase Bud Light or Heineken. In addition, we were able to determine which beers Target and Walmart offered in its stores, but we were
unable to purchase beer through their websites. For potato chips, there were a lot SKUs, but many were for bulk purchases, such as a 24
pack of Popchips; we could not purchase a single large bag of Tostitos, akin to what you might pick up at a Costco, Target, or Walmart
physical store.
SUPER BOWL SHOPPING LIST, JANUARY 2013
Samsung TV
TV - Samsung LED TV > 40"
HDMI cables
Wall Mounts
Surge Protectors
PS3 Console
PS3 Video Games
Blu-Rays
NFL Jerseys
Potato Chips
Beer
Amazon.com
Company Third-Party Total Rank
62
357
419
2
38
33
71
2
1,330
28,592
29,922
1
862
28,514
29,376
2
218
1,555
1,773
3
4
40
44
2
467
2,449
2,916
2
NA
NA
31,236
2
255
4,646
4,901
2
237
2,046
2,283
1
0
2,557
2,557
1
Average
Samsung TV
TV - Samsung LED TV > 40"
HDMI cables
Wall Mounts
Surge Protectors
PS3 Console
PS3 Video Games
Blu-Rays
NFL Jerseys
Potato Chips
Beer
Best Buy
103
10
113
3
61
6
67
3
98
764
862
3
63
3
66
4
65
9
74
4
6
0
6
6
404
0
404
5
NA
NA
8,999
3
0
0
0
6
0
0
0
5
0
0
0
2
1.8
HSN
Company Third-Party Total
27
0
27
10
0
10
7
0
7
12
0
12
6
0
6
2
0
2
278
0
278
1
0
1
0
0
0
0
0
0
0
0
0
Average
Rank
5
8
7
8
8
7
6
7
6
5
2
6.3
4.0
QVC
Company Third-Party Total
58
0
58
32
0
32
23
0
23
61
0
61
12
0
12
23
0
23
118
0
118
5
0
5
439
0
439
10
0
10
0
0
0
Rank
4
4
5
5
7
3
7
6
3
4
2
4.5
Costco
17
0
17
8
17
0
17
5
4
0
4
8
16
0
16
7
14
0
14
6
1
0
1
8
10
0
10
8
0
0
0
8
0
0
0
6
0
0
0
5
0
0
0
2
6.5
Target
19
0
19
7
12
0
12
6
20
0
20
6
41
0
41
6
31
0
31
5
7
0
7
5
435
0
435
4
6,720
0
6,720
4
31
0
31
5
0
0
0
5
0
0
0
2
eBay
Buy It Now Auction Only
1,095
34
624
17
12,137
672
30,110
361
8,978
143
464
71
24,441
1,829
104,037
4,476
30,773
1,743
612
5
0
0
Total Rank
1,129
1
641
1
12,809
2
30,471
1
9,121
1
535
1
26,270
1
108,513
1
32,516
1
617
2
0
2
1.3
Company
21
12
30
226
295
8
560
NA
10
136
0
Wal-Mart
Third-Party
0
0
4
899
1,598
0
0
NA
341
1
0
5.0
Total
21
12
34
1,125
1,893
8
560
6,421
351
137
0
Rank
6
6
4
3
2
4
3
5
4
3
2
3.8
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37
SEPTEMBER 23, 2013
SPECIAL REPORT
Category and Country Expansion
We expect Amazon.com to keep adding new categories for its US and international websites
to increase the large selection of merchandise it offers consumers and increase its wallet
share. In the next three years, we believe the company will continue to fill in the grid in the
following table and add grocery if its rollout succeeds (it launched its second market, Los
Angeles, in June 2013). For example, so far during 2013, Amazon.com has added toys,
health & personal care, and beauty in Canada; auto parts & accessories in France, Italy, and
Spain; and physical media, Kindle devices, and the Kindle store in India (which also is a new
country for the company). Given the small relative size of the company’s AmazonFresh
grocery effort, it is not included in one of these categories. Should the company advance its
efforts here, it could become a new category.
AMAZON.COM’S CATEGORY ADDITIONS, 2Q13
Product Categories
Physical Media
Electronics
Toys
Baby
Tools & Hardware
Home & Garden
Apparel
Sports & Outdoors
Jewelry & Watches
Beauty
Shoes & Accessories
Dry Foods
Auto Parts & Accessories
Kindle Device & Store
Office Supplies
US
1995
1999
1999
1999
1999
2000
2002
2003
2003
2003
2004
2005
2006
2006
2007
2008
UK
1998
2001
2001
2007
2004
2004
2008
2007
2007
2008
2008
2007
2010
2009
2010
2009
Germany
1998
2001
2004
2007
2004
2004
2008
2006
2007
2007
2008
2007
2010
2008
2011
2009
France
2000
2005
2007
2007
2012
2007
2010
2010
2007
2009
2009
2009
NA
2013
2011
2009
Japan
2000
2003
2004
2007
2009
2003
2007
2005
2007
2006
2008
2007
2008
2009
2012
2009
China
2004
2004
2004
2006
2009
2006
2010
2006
2006
2006
2006
2009
2010
2009
2012
2010
Canada
2002
2008
2013
2012
2011
2009
NA
2010
2010
2013
2013
NA
NA
NA
2012
NA
Italy
2010
2010
2011
2012
NA
2010
NA
2011
2010
NA
NA
2011
NA
2013
2011
NA
Spain
2011
2011
2011
2012
NA
2011
NA
NA
2011
2011
NA
2012
NA
2013
2011
NA
India
2013
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2013
NA
The timeline of Amazon.com’s international expansion illustrates that after being dormant
from 2005 to 2009, the company is, once again, adding new countries at a measured pace.
We view international expansion as one of the company’s current investment buckets (along
with Amazon Web Services, content for Amazon Instant Video, fulfillment center expansion,
and hardware). Future countries could include Brazil and Russia, when considering eBay’s
expansion plans.
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SEPTEMBER 23, 2013
SPECIAL REPORT
INTERNATIONAL EXPANSION: 1995-2015E
As illustrated in the following table, Amazon.com has accelerated its rollout of new countries
and categories since 2010 vs. 1995-1999 and 2000-2009. We believe the company is
becoming more efficient at adding categories, which, coupled with its advanced digital efforts,
has speeded the expansion. We expect the company to add eight categories per year through
2015, which would mimic the pace from 2012. For international expansion, we believe the
company could mirror eBay’s efforts and enter Brazil and Russia before the end of 2015
though we have not included those countries in our sales and earnings estimates.
AMAZON CATEGORY AND COUNTRY ADDITIONS, 1995-2015E
Countries
Categories
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
1
0
0
2
0
2
0
1
0
1
0
0
0
0
0
1
1
0
1
0
0
1
0
0
2
4
3
3
2
5
10
3
10
17
10
14
14
14
8
8
8
8
19952003
0.7
2.2
20042011
0.4
11.5
20122015E
0.3
8.0
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39
SEPTEMBER 23, 2013
SPECIAL REPORT
AmazonFresh (Grocery)
Sales Implications: If Amazon.com could take an incremental 1.0% market share by 2015,
it would add $6.5B in revenue and 708 basis points to our sales growth projection for 2015.
Margin Implications: Grocery is among the lower-margin categories in the retail sector,
and AmazonFresh’s lack of private-label merchandise suggests that this initiative will
dampen company margins. We see two potential offsets: First, the vast majority of SKUs
offered by AmazonFresh are not grocery products and, therefore, should have higher gross
margins; second, the company could leverage its AmazonFresh infrastructure to sell thirdparty merchandise, as it does with its core retail website Amazon.com. If the company were
able to add $1B of grocery revenue in 2015 at a margin rate comparable to that of Kroger
(TAG’s 2015 forecast for Kroger is 2.8%), it would subtract 1 basis point from our CSOI
margin projection for 2015.
AmazonFresh is an important initiative for the company for several reasons:
th

Adding grocery could meaningfully expand Amazon.com’s total addressable market –
with $602.6B in sales in the US in 2012, according to Progressive Grocer magazine. Put
differently, it could enable Amazon.com to pick up incremental wallet share. The USDA
estimated that 4.1% of disposable income was spent on food at home in 2011.

Grocery items, such as milk, are purchased frequently, so offering these items to
consumers could increase the frequency of other purchases at Amazon.com or could
enable Amazon.com to capture sales it would not have captured without offering grocery.
According to the Food Marketing Institute, on average, consumers visit supermarkets
2.2x per week.

Consumer demand for online grocery is robust. According to The Hartman Group’s The
Online Grocery Shopper 2013 report, 18% of US households went online to purchase
food, beverages, or groceries over a three-month period, with 75% of those buying 5% or
more of such products online and 20% buying at least 50%.

To address this opportunity, Amazon is delivering products to consumers from its own
trucks, which leverages its fulfillment center infrastructure and positions the company to
compete against UPS and FedEx.

Creating pickup points for consumers to get their groceries at locations outside of their
homes and offices adds locations to which Amazon could deliver other products to
consumers.

AmazonFresh could represent the next major capital investment by the company, which
could pressure near-term operating margins. According to an industry source, Amazon
could expand into 50 markets at $20MM per, for a total investment of $1B. Forrester
noted that those figures could be much higher, depending on the extent to which Amazon
sells non-grocery items; for example, of the roughly 100K SKUs in Seattle, only about
11K are grocery. This compares with the Food Marketing Institute’s data point that the
average supermarket offered 39K SKUs in 2010.

In addition, LJM Consultants pointed out that Amazon’s grocery efforts could extend
beyond AmazonFresh, as products could be ordered through Amazon and delivered by a
local store, as in the 1-800-Flowers model.

At present, our model includes Amazon’s efforts only in Seattle and Los Angeles. Should
the company meaningfully expand AmazonFresh, there would be upside to our sales
estimates and incremental CSOI margin pressure (1 basis point for every $1B of grocery
sales).
40
SEPTEMBER 23, 2013
SPECIAL REPORT
Amazon.com started testing grocery sales in major metropolitan Seattle in 2007. In June it
expanded the service to the Los Angeles area. We compare AmazonFresh with a number of
other online grocery companies in the following table. Most offer pickup points, and we
believe Amazon.com will do so in the future.
ONLINE GROCERY SERVICES COMPARISON, SEPTEMBER 2013
Delivery
Launched
Order
Delivery
Free
Membership
Minimum
Charges
Delivery
Program
Availability
Pick-up
Points
Varies by location;
free shipping on
orders over $30 for
Prime Fresh
members
Seattle: BigRaddish loyalty
program offers free delivery on
orders > $50; LA: Free delivery
on orders > $30 for Prime
Fresh Members (costs $299/yr
after 90-day free trial)
Seattle, WA; Los Angeles, CA
No
AmazonFresh
2007
None
Seattle: $9.99 for orders >
$50, $7.99 on orders
costing $50-99.99. LA:
Only available to Prime
Fresh members
Fresh Direct
2002
$30
Varies by location; $5.99+
No
No
New York and surrounding areas
Yes
Instacart Express membership
costs $99/yr and provides free
shipping for orders over $35
San Francisco, Palo Alto, Mountain View, Berkeley, &
Oakland, CA
No
No
Chicagoland, Milwaukee, S.E. Wisconsin, Indianapolis; CT,
MS, RI, Southern NH; NY, NJ, MD, VA, Washington D.C.;
Philadelphia, S.E. PA
Yes
Instacart
2012
None
$3.99 for orders over $35
Free shipping on
orders over $35 for
Instacart Express
members
PeaPod
1989
$60
$6.95
No
Relay
2009
None
$9
No
Safeway
2002
$49
$3.95 on purchases >$150;
$6.95 on purchases <$150
No
No
Phoenix, Tucson, AZ; Greater Sacramento, San Francisco
Bay Area, Fresno, Stockton, Bakersfield, Ventura County,
San Fernando Valley, Greater San Diego, CA;
Baltimore/Washington Metropolitan Area, MD, Las Vegas,
NV; Portland, OR; Philadelphia, PA; Seattle, WA
Yes, but at
higher cost
SPUD
2011
None
Varies by zip code
Varies by zip code;
free delivery above
threshold
No; however, company offers
SPUD Rewards Points
US: Seattle, San Francisco, Los Angeles; Canada:
Vancouver, Victoria, Calgary
Yes
Ocado
2002
£40
SmartPass membership
program offers free delivery,
among other benefits
Growing parts of the UK
No
Tesco
2002
£40
Delivery Saver membership
program offers free delivery
from £10 a month on orders
over £40
UK
Yes
Charges vary depending on Orders over £75 may
delivery address, day and
be offered free
time of chosen slot and
delivery at certain
order value
times
Varies by product type;
starting from £3
For books
Relay Doorstep program offers
Richmond, VA; Annapolis and Baltimore, MD; and all northern
unlimited delivery for
VA and Southern MD cities that are part of the DC metro area
$30/month
Yes
Source: Company website, company reports, and TAG research.
Relay noted that online grocery delivery is challenging, especially from an execution
standpoint; it is one that is easy to get wrong and, for example, lose $10 on a variable basis
for every $90 of sales, before taking into account fixed costs.
Forrester discussed the opportunities and challenges for online grocery. The opportunities
include offering premium merchandise and providing a unique delivery service. The target
customer is a busy professional who resides in an urban area. Forrester expressed concerns
about a company’s ability to address the US online grocery market at enough scale to be
profitable.
When comparing Relay’s approach with AmazonFresh, Forrester pointed out Relay’s
advantages, including less focus on delivering merchandise the last mile to the consumer’s
home, which can be expensive, and offering consumers the benefits of trip consolidation
(picking up merchandise from Relay in a pre-determined time period, including products from
grocery stores, direct from farms, and restaurants).
Regarding the potential for Amazon.com to acquire a company in the online grocery category,
Forrester pointed out that in the past, the company’s strategy has been to initially attempt to
buy a market, but if that effort became too unprofitable, Amazon.com’s next step has been to
make an acquisition, as it did with Quidsi (Diapers.com) and Zappos. The difference with
grocery is that no company has cracked the code (as Quidsi did with diapers and Zappos did
with shoes). Delivering dry goods is not the problem; it is perishable products that are the
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41
SEPTEMBER 23, 2013
SPECIAL REPORT
most difficult, as they require a different logistical skill set and assets, including refrigerated
trucks and fulfillment centers.
CASE STUDY 6: PRICE COMPARISON – GROCERY – EDLP WITH CHEAPER DELIVERY, FEBRUARY 2013
We compared the price of online grocery delivery for AmazonFresh and Safeway in suburban Seattle and found
that, in general, their prices were comparable; however, Safeway Club prices were lower than AmazonFresh’s,
and delivery was cheaper at Amazon.com.
Our Amazon grocery basket of 60 items was 0.1% more expensive than Safeway’s regular prices. Thirty-one
items (52%) were cheaper at AmazonFresh, 8 (13%) were identically priced, and 21 (35%) were more
expensive. Including delivery charges, our total cost was 1.2% cheaper.
Our Amazon grocery basket was 7.5% more expensive than Safeway Club’s prices. Eighteen items (30%) were
cheaper at AmazonFresh, 7 (12%) were identically priced, and 35 (58%) were more expensive. Including
delivery charges, it was 6.0% more expensive. Of the 60 products, there were Safeway Club prices on 26.
AMAZONFRESH PRICE COMPARISON, FEBRUARY 2013
Safeway - Safeway Club Prices
Safeway - Regular Prices
AMZN Competitor's
AMZN Competitor's Premium/
AMZN Competitor's Premium/ Basket &
Basket & Premium/
Basket
(Discount) Shipping
Shipping (Discount) Shipping
Shipping (Discount)
Cheaper Identical Pricier Total Basket
0.00
3.95
(100.0%) 303.19
286.08
6.0%
18
7
35
60 303.19
282.13
7.5%
0.00
3.95
(100.0%) 303.19
306.72
(1.2%)
31
8
21
60 303.19
302.77
0.1%
CASE STUDY 7: PRICE COMPARISON – GROCERY – SURPRISE! WHOLE FOODS WAS CHEAPER, FEBRUARY 2013
We wanted to see how AmazonFresh’s and Whole Foods’ prices compared so we looked at the prices of Amazon’s
online grocery delivery in suburban Seattle and Whole Foods’ prices in Richmond, Virginia. Whole Foods is not
offering online grocery delivery today, so we used prices from Relay’s offering. Relay is a Mid-Atlantic online natural
and organic delivery company that delivers consumers food from local farms, artisans, and national brands.
Our grocery basket of 60 items was 11.0% more expensive at Amazon. Fifteen items (25%) were cheaper at
AmazonFresh, 2 (3%) were identically priced, and 43 (72%) were more expensive. Including delivery charges, our
total cost was 6.0% more expensive. Since Relay allows consumers to pick up merchandise at pickup spots for
free, AmazonFresh was, once again, 11.0% more expensive.
We believe the higher prices at Amazon reflect its pricing algorithm, not including Whole Foods’ prices because
Whole Foods does not deliver groceries. Should Whole Foods enter the market, we expect Amazon to be more
price competitive.
AMAZONFRESH PRICE COMPARISON, FEBRUARY 2013
Whole Foods - Relay Foods Home Delivery
Whole Foods - Relay Foods Pickup Spot Delivery
AMZN Competitor's
AMZN Competitor's Premium/ AMZN Competitor's Premium/ Basket &
Basket & Premium/
Basket
(Discount) Shipping
Shipping (Discount) Shipping
Shipping (Discount)
Cheaper Identical Pricier Total Basket
15
2
43
60 283.61
255.61
0.00
12.00
(100.0%) 283.61
267.61
6.0%
11.0%
0.00
0.00
0.0%
283.61
255.61
11.0%
15
2
43
60 283.61
255.61
11.0%
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42
SEPTEMBER 23, 2013
SPECIAL REPORT
Two Markets – Two Different Loyalty Programs:
Big Radish and Amazon Prime for Prime Fresh
When it comes to grocery, Amazon offers two different loyalty programs for the Seattle and
Los Angeles markets, which provide insights on its different strategies for the two markets.
Big Radish
Big Radish is a free loyalty program for AmazonFresh customers. It rewards customers for
purchasing more than $300 of products from AmazonFresh by providing them lower
thresholds for free delivery for a 30- to 60-day period. As long as customers continue to meet
that $300 threshold they qualify for the Big Radish program.
Prime Fresh
In our view, to combat higher transportation costs in the Los Angeles market – such as higher
fuel expenses, more delivery miles owing to the spread out nature of the area, and longer
travel times because of the traffic – Amazon requires a membership in Prime Fresh (at $299
per year) and requires a customer to purchase more than $35 of merchandise per delivery to
qualify for its grocery delivery service in this market. We believe Prime Fresh is an example of
the premium type of delivery service Amazon could roll out as it extends its Amazon Prime
membership to higher price points for greater levels of service, such as next-day delivery
instead of two-day.
BIG RADISH VS. PRIME FRESH, SEPTEMBER 2013
Market
Requirement for Service
Eligibility
Duration
Membership Fee
Benefits
Big Radish
Seattle
No
Based on purchase levels
30-60 days
Free
Delivery discounts (outlined in the following table)
Prime Fresh
Los Angeles
Yes
Annual membership fee
1 year
$299
Amazon Prime benefits
plus free delivery for
purchases >$35
AMAZONFRESH SEATTLE DELIVERY CHARGES,
SEPTEMBER 2013
AMAZONFRESH LOS ANGELES DELIVERY CHARGES,
SEPTEMBER 2013
Order Size
Order Size
Doorstep Delivery
Big Radish Status
Big Radish
Not Big Radish
<$49.99
$9.99
$9.99
$50.00-$99.99
Free
$7.99
>$100
Free
Free
Attended Delivery
Big Radish Status
Big Radish
Not Big Radish
<$49.99
$9.99
$9.99
$50.00-$124.99
Free
$7.99
>$125
Free
Free
Doorstep Delivery
Prime Fresh
Attended Delivery
Prime Fresh
<$49.99
$9.99
$50.00-$99.99
$7.99
>$100
Free
<$49.99
$9.99
$50.00-$124.99
$7.99
>$125
Free
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43
SEPTEMBER 23, 2013
SPECIAL REPORT
CASE STUDY 8: OUR EXPERIENCE WITH AMAZONFRESH: IT IS AS MUCH ABOUT FAST AND CONVENIENT DELIVERY OF
PRODUCTS FROM AMAZON AS IT IS ABOUT GROCERY
On a business trip in June, we ordered from AmazonFresh and had our order delivered to our hotel in Seattle.
Conclusions from Our Experience
It was truly an eye-opening experience for us and gave us a lot of insight into what the offering could mean to
Amazon.com. In short, AmazonFresh is about having products from Amazon delivered to you in an Amazon
truck (often with an Amazon employee as the driver) to your doorstep in less than 24 hours.
Nothing could be more convenient than having Amazon deliver merchandise (grocery and non-grocery) to your
doorstep in a short time frame (with several options in less than 24 hours). Ordering on AmazonFresh was similar
to ordering from Amazon.com – a great experience if you know what you are looking for, less so if you aren’t
certain. The $9.99 delivery charge is a premium to same-day offerings from eBay (eBay Now at $5.00) and Google (currently offering it
for free as part of its beta test) but comparable to those of other online grocery delivery services.
As a consumer, we look forward to the service coming to the East Coast so we can use it again and again.
The Ordering Process – Via App, Mobile Web, or Laptop Browser
We started the ordering process on our cab ride from the airport to our hotel. We had already downloaded the
app to our iPhone 5 to learn more about the offering. So we started the process from our app.
> Step 1 – Adding an Eligible Address to Our Amazon.com Account
To be eligible for the service, we needed a Seattle address, so we added our hotel as a new address to our
Amazon account. This was fairly straightforward but had to be done via Amazon.com on the mobile web, as we
were unable to determine how or if it could be done on our AmazonFresh or Amazon.com apps. We think
Amazon will add that capability to its apps in the future.
>
Step 2 – Picking a Delivery Type and Time
Next, we chose our delivery type and time. We could have it sent by “Attended Delivery” (where we would be
present for the delivery) or “Doorstep Delivery” (where we did not have to be present). There were fewer options
for “Attended Delivery,” and none were available during our window of opportunity, so we chose “Doorstep Delivery” for the following
morning between 4AM and 6AM. (There were extra steps involved for us at this point because we were having it shipped to a hotel
address, but we will ignore those because they are not applicable to the average consumer’s experience – except for one detail, which
we found funny/interesting (explained below). In addition, during this part of the experience we contacted customer service to learn more
about the offering.)
>
Step 3 – Ordering the Merchandise
This was a real eye opener and is where we learned a lot about the potential for AmazonFresh. Of the roughly 100K SKUs offered in
Seattle for AmazonFresh, only about 11K are grocery and the rest are general merchandise (led by about 45K books).
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SEPTEMBER 23, 2013
SPECIAL REPORT
CASE STUDY 8: OUR EXPERIENCE WITH AMAZONFRESH: IT IS AS MUCH ABOUT FAST AND CONVENIENT DELIVERY OF
PRODUCTS FROM AMAZON AS IT IS ABOUT GROCERY (CONTINUED).
AMAZONFRESH SKUs BY CATEGORY, AUGUST 2013
Apparel & Accessories
Appliances
Automotive
Baby
Beauty
Books
Electronics
Grocery
Home & Kitchen
Movies & TV
Music
Musical Instruments
Office Products & Supplies
Pet Products
Software
Sports & Outdoors
Tools & Home Improvement
Toys & Games
Video Games
Total
Los Angeles
6,717
NA
18,860
6,991
11,185
17,322
144,232
17,740
28,637
28,647
63,508
10,013
16,625
22,742
4,194
12,897
17,152
NA
57,648
33,227
18,604
NA
536,941
%
1.3%
NA
3.5%
1.3%
2.1%
3.2%
26.9%
3.3%
5.3%
5.3%
11.8%
1.9%
3.1%
4.2%
0.8%
2.4%
3.2%
NA
10.7%
6.2%
3.5%
NA
Seattle
1,105
211
1,657
2,831
3,641
1,374
31,342
9,305
11,883
76
11,732
1,413
10,932
7,861
1,547
3,437
2,467
226
5,807
9,476
5,039
833
%
0.9%
0.2%
1.3%
2.3%
2.9%
1.1%
25.2%
7.5%
9.6%
0.1%
9.4%
1.1%
8.8%
6.3%
1.2%
2.8%
2.0%
0.2%
4.7%
7.6%
4.1%
0.7%
124,195
The selection was broader than we expected, especially for something described as grocery delivery. There were multiple SKUs related to
our interests, including Chicago Bears merchandise (though some of it was out of stock) and products tied to the New York Yankees.
(Anecdotally, a Seattle resident suggested that the merchandise from out-of-town sports teams was available because the local teams
were so bad.) With so many products to choose from, the AmazonFresh buying experience was much like the Amazon.com buying
experience. It was good if you knew what you wanted: You could search by category or item description. It was not a curated type of
experience where you rely on the merchant to pick the one or two best items in a category or even offer good, better, and best choices, and
we did not notice any private-label merchandise. This was similar to our experience shopping Best Buy on the eBay Now app. So a lot
could be done here, in our view, to make the experience easier for the consumer.
So what did we buy? One grocery item – Tim’s Cascade Style Potato Chips Hawaiian Luau Barbeque, because
we love barbeque potato chips and wanted to try a new brand. (They were good and had a surprising bite to
them.) One gift for our kids (because you never want to come home empty handed from a business trip): We
opted for a Melissa & Doug puzzle because we were unable to find a children’s Blu-ray that we did not already
own, through no fault of AmazonFresh because it offered several titles. One book: We decided we had waited
long enough for the sequel to Black Swan to come out in paperback (it hasn’t yet) so we decided it was time to
start reading it in hardcover on the long flight back to the East Coast.
Our total purchase price was $36.76; delivery cost $9.99 (we did not receive a discount for being an Amazon Prime member), and we
opted not to tip the delivery person via the app (sorry).
>
Step 4 – Receiving the Merchandise
As promised, AmazonFresh delivered the three items to our hotel between 4 a.m. and 6 a.m. the next day. Here is the funny/interesting
part we mentioned earlier. Our hotel, not knowing what we ordered, put the bags in the fridge. So when we came down to the lobby to pick
them up, we had a cold bag of chips, book, and puzzle.
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45
SEPTEMBER 23, 2013
SPECIAL REPORT
AmazonSupply (B2B)
Sales Implications: If Amazon could take an incremental 1.0% market share in 2015, that
would add $5.9B to revenues and 647 basis points to our sales growth projection for 2015.
Margin Implications: As a whole, we view selling B2B merchandise as an average margin
opportunity. Though the company’s initial efforts are limited to first party, if it could leverage
its platform to offer third-party merchandise as well, the long-term margin opportunity would
be more favorable. If the company were able to add $1B of B2B revenue in 2015 at a
margin rate comparable to that of Home Depot (TAG’s 2015 forecast is 12.8%), it would
add 8 basis points to our CSOI margin projection for 2015.
To better address the $550B B2B market (according to The Electrical Distributor magazine),
the company launched AmazonSupply in April 2012, which is still in beta. It offers more than
600K SKUs in 14 categories and leverages the company’s 2005 acquisition of science labs
equipment supplier Small Parts. As with other company initiatives, we see this as primarily a
sales driver; on the CSOI front, it will depend on the extent to which the company opens its
platform for third-party unit sales. Today, it is primarily a first-party effort.
AMAZONSUPPLY, AUGUST 2013
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46
SEPTEMBER 23, 2013
SPECIAL REPORT
Hardware: E-Readers, Tablets, and Smartphones
In our view, the company’s efforts in hardware are part and parcel with its efforts to offer
consumers a large selection of merchandise. We believe Amazon.com will add a smartphone
to its growing list of branded hardware to extend this strategy in the future.
In the following table, we illustrate our estimates for Kindle Fire unit sales and what the
product means to Amazon.com’s sales and operating profit. The company noted when it
announced its second generation of tablets in September 2012 that it commanded 22% of the
US tablet market.
Barnes & Noble has noted the benefits of selling e-readers along with digital content. It has
found that once a consumer establishes a digital locker and builds a library, she is unlikely to
abandon the library. Most of that company’s digital content sales have been to dedicated ereading devices, primarily its Nook hardware. Selling Nooks can also be accretive, as Barnes
& Noble noted that its members increased their baskets by 25% following a Nook purchase.
Wharton Professor David Bell discussed how mobile e-commerce is transformative, as
consumers are now able to purchase merchandise in what had previously been down time,
such as when on a commuter train. Selling smartphones could also make it easier for
consumers to purchase products via showrooming, whereby a consumer can scan an item
from an Amazon smartphone and purchase it with one push of a button, and Amazon would
not have to worry about circumventing potential tolls to Apple, Google, or anyone else that
may get in its way.
KINDLE FIRE, 1Q13E-4Q15E
Kindle Fire Units (MM)
ASPs ($)
1Q13
1.8
232
2Q13
1.3
221
3Q13E
1.2
213
4Q13E
6.0
217
1Q14E
1.8
214
2Q14E
1.8
208
3Q14E
1.4
204
4Q14E
6.0
204
1Q15E
2.2
202
2Q15E
2.2
197
3Q15E
1.6
193
4Q15E
6.0
190
Kindle Fire Sales ($MM)
Kindle Fire Sales (% of Total)
417.0
2.6%
287.3
1.8%
258.8
1.5%
1,302.0
4.9%
385.2
2.0%
374.4
2.0%
275.4
1.3%
1,224.0
3.7%
435.6
2.0%
425.5
1.9%
312.7
1.3%
1,140.6
3.0%
Kindle Fire Gross Profit ($MM)
Kindle Fire Gross Profit Margin
20.9
5.0%
14.4
5.0%
12.9
5.0%
65.1
5.0%
19.3
5.0%
18.7
5.0%
13.8
5.0%
61.2
5.0%
21.8
5.0%
21.3
5.0%
15.6
5.0%
57.0
5.0%
Sales Growth
Sales Growth (ex-Kindle Fire)
Difference
NA
NA
NA
NA
NA
NA
NA
NA
NA
23.8%
26.4%
(2.6%)
18.4%
19.1%
(0.7%)
20.6%
20.5%
0.2%
23.3%
23.6%
(0.3%)
24.1%
25.6%
(1.6%)
17.4%
17.5%
(0.1%)
16.6%
16.7%
(0.1%)
16.6%
16.6%
(0.0%)
16.8%
17.7%
(0.9%)
Gross Margin
Gross Margin (ex-Kindle Fire)
Difference
26.6%
27.1%
(0.6%)
28.6%
29.1%
(0.4%)
27.3%
27.6%
(0.3%)
26.3%
27.4%
(1.1%)
27.5%
27.9%
(0.5%)
29.4%
29.9%
(0.5%)
27.8%
28.2%
(0.3%)
26.8%
27.7%
(0.9%)
27.8%
28.2%
(0.5%)
29.8%
30.3%
(0.5%)
28.2%
28.5%
(0.3%)
27.2%
27.9%
(0.7%)
Set-Top Boxes and the Battle for the Living Room
According to published reports, Amazon is working on a set-top box device. Assuming this is
true, we believe this would be part of Amazon’s strategy to win the battle in the consumer’s
living room. In other words, several companies are vying to own the first screen a consumer
sees when he turns on his TV. They can influence the content he watches, such as by
offering subscription streaming video services (like Amazon Instant Video, Hulu, and Netflix),
sell TV shows and movies on an à la carte basis, provide consumers another access point to
their digital media locker (not just TV shows and movies but also personal photos and videos),
and offer additional services, such as a web browser and access to social networking
(Facebook, Twitter, etc.). A set-top box, at a minimum, would serve as another distribution
point for its streaming video subscription services – Amazon Instant Video and LOVEFiLM.
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SEPTEMBER 23, 2013
SPECIAL REPORT
Smartphones – The Next Logical Step for Hardware
Sales Implications: If Amazon could take an incremental 1.0% market share by 2015, it
could add $4.4B in revenue and 483 basis points to our sales growth projection for 2015.
Margin Implications: The potential is there for the company to make money selling a
smartphone, as evidenced by market-profitability leader, Apple. If the company were able to
add $1B of hardware revenue in 2015 at a margin rate comparable to that of Apple (TAG’s
FY15 forecast is 27.5%), it would add 22 basis points to our CSOI margin projection for
2015. However, if Amazon.com were to mirror its hardware strategy with tablets, it would
probably be much less accretive to our base margin forecast.
Now that the company is offering e-readers, a low-end and high-end tablet to compete against
Apple and others in that hardware category, and may roll out a set-top box, we believe
smartphones are the next logical device for Amazon.com. An Amazon smartphone could
make it even easier for consumers to order merchandise from Amazon.com. Rather than
having to download apps, consumers could use their device’s pre-programmed functionality to
scan barcodes for products in competitors’ stores and purchase them on Amazon. Similar to
buying items on other Amazon hardware, buying could be just one click away, reducing the
friction when purchasing from Amazon on Apple devices. (For example, consumers are
unable to purchase movies and TV shows on Apple’s Amazon Instant Video iPad app.
Instead, they must buy them elsewhere and add them to their watch list to view them on the
app.) In addition, having consumers own your device greatly increases the likelihood that they
will purchase digital media from your store, which alone could make it worth Amazon’s time
and investment to create its own smartphone.
With low prices at its foundation, Amazon is a natural to offer a low-priced phone to penetrate
emerging markets, whereas Apple has to walk a tightrope to protect its premium brand, as
was evident by the “high” price of its low-end smartphone, the iPhone 5c at $549, without a
subsidy from a wireless carrier vs. $649 for its high-end one, the iPhone 5s.
Forrester suggested that offering its own smartphone would make sense for Amazon as it
would be another way for Amazon.com to own its ecosystem. One challenge for Amazon and
others is that participants in mobile are both partners and competitors. For example, if
Amazon offered its own smartphone, it would compete with Apple in hardware but would be
its partner on its iOS mobile operating system as a leading e-commerce app provider.
KINDLE SMARTPHONE, 4Q13-4Q15E
Kindle Smartphone Units (MM)
ASPs ($)
4Q13E
1.2
299
1Q14E
1.3
299
2Q14E
1.1
299
3Q14E
1.1
299
4Q14E
1.6
289
1Q15E
1.7
289
2Q15E
1.4
289
3Q15E
1.4
289
4Q15E
2.1
287
Kindle Smartphone Sales ($MM)
Kindle Smartphone Sales (% of Total)
346.8
1.3%
392.4
2.1%
321.4
1.7%
321.4
1.5%
461.0
1.4%
500.7
2.2%
410.1
1.9%
410.1
1.7%
589.5
1.5%
Kindle Smartphone Gross Profit ($MM)
Kindle Smartphone Gross Profit Margin
17.3
5.0%
19.6
5.0%
16.1
5.0%
16.1
5.0%
23.0
5.0%
25.0
5.0%
20.5
5.0%
20.5
5.0%
29.5
5.0%
Sales Growth
Sales Growth (ex-Kindle Smartphone)
Difference
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
24.1%
23.9%
0.1%
17.4%
17.2%
0.2%
16.6%
16.4%
0.2%
16.6%
16.4%
0.2%
16.8%
16.6%
0.2%
Gross Margin
Gross Margin (ex-Kindle Smartphone)
Difference
26.3%
26.5%
(0.3%)
27.5%
27.9%
(0.5%)
29.4%
29.9%
(0.4%)
27.8%
28.2%
(0.4%)
26.8%
27.1%
(0.3%)
27.8%
28.3%
(0.5%)
29.8%
30.3%
(0.5%)
28.2%
28.6%
(0.4%)
27.2%
27.5%
(0.3%)
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48
SEPTEMBER 23, 2013
SPECIAL REPORT
MyHabit (Apparel)
Margin Implications: Apparel is among the higher-margin categories in the retail sector. It
is also a natural category for third-party sales, which should benefit margins. If the company
were able to add $1B of apparel revenue in 2015 at a margin rate comparable to that of Gap
(TAG’s 2015 forecast is 14.1%) it would add 10 basis points to our CSOI margin projection
for 2015.
We believe Amazon is making great strides in its efforts to sell apparel, which could have a
favorable impact on its margin because of its potential for higher margins than other
categories, especially consumer electronics. The company launched its flash sales website
MyHabit in May 2011. On its 2Q13 earnings call, Amazon mentioned that apparel and
consumables were two of its fastest-growing retail sales categories in North America.
Overstock discussed its own strategy for apparel sales and how e-commerce companies,
including Amazon, are doing a better job selling apparel. Overstock is moving its model
toward carrying less of its own inventory and having more fulfillment performed by its
suppliers, similar to what it has done in jewelry. The challenge for all e-commerce companies
in selling apparel online is that consumers are unable to try on merchandise before
purchasing it to feel the material and see if it fits properly. Overstock noted that e-commerce
companies have added better pictures, such as Amazon.com’s use of what looks like live
models displaying their products. Despite the improvements, Overstock said that return rates
will always be high in apparel. We recognize this from our coverage of HSN and QVC (part of
Liberty Interactive Corp.), which have blended return rates in the high teens, often
approaching 20%. This reflects high return rates (perhaps 30% or more) for apparel offset by
lower return rates for other categories, such as consumer electronics. We have also read that
Zappos’ return rates for shoes were 30%. Overstock agreed with our assessment that virtual
dressing rooms (such as Swivel by FaceCake) should be able to result in, at least, slightly
lower return rates for apparel in the future.
MYHABIT LIVE MODELS
FACECAKE SWIVEL
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SEPTEMBER 23, 2013
SPECIAL REPORT
Amazon Local
Sales Implications: If Amazon could take an incremental 1.0% market share by 2015 that
would represent $3.4B and add 372 basis points to our sales growth projection for 2015.
Margin Implications: As evidenced by our 2015 forecast for Groupon – 10.0% – we believe it
is possible to generate a double-digit operating margin from daily deals. If the company
were able to add $1B of local revenue in 2015 at a margin rate comparable to that of
Groupon (the TAG forecast for 2015 is 10.0%) it would add 6 basis points to our CSOI
margin projection for 2015.
Amazon offers consumers additional SKUs through its Amazon Local initiative and investment
in LivingSocial. It also builds a connection between the company and local merchants, one
that could build over time.
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SEPTEMBER 23, 2013
SPECIAL REPORT
AMAZON LOCAL, SEPTEMBER 2013
City
Birmingham
State
Alabama
City
St. Paul
State
Minnesota
East Valley
Phoenix
Scottsdale
Tucson
West Valley
Arizona
Arizona
Arizona
Arizona
Arizona
Kansas City
St. Louis
Missouri
Missouri
Omaha
Nebraska
Las Vegas
Nevada
Inland Empire
Long Beach
Los Angeles
Napa / Sonoma
North Orange County
Oakland / Easty Bay
Roseville / Folsom
Sacramento
San Diego
San Fernando Valley
San Francisco
San Gabriel Valley
San Jose
SF Peninsula
South Orange Count
Ventura County
Walnut Creek
Contra Costa
West Side / South County
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
Bergen County
Central Jersey
Hoboken / Jersey City
North Jersey
South Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
Albequerque
New Mexico
Brooklyn
Buffalo
Nassau County
NYC
Rochester
Staten Island
Westchester County
New York
New York
New York
New York
New York
New York
New York
Charlotte
Raleigh
North Carolina
North Carolina
Boulder County
Colorado Springs
Denver
Colorado
Colorado
Colorado
Cincinatti
Cleveland
Columbus
Ohio
Ohio
Ohio
Washington
District of Columbia
Portland
Oregon
Philadelphia
Pittsburgh
Pennsylvania
Pennsylvania
Nashville
Tennessee
Coral Gables / South Miami
Florida
Fort Lauderdale
Florida
Jacksonville Beaches
Florida
Miami
Florida
North Miami Dade / South BrowFlorida
Orlando
Florida
Palm Beaches
Florida
Tampa
Florida
Atlanta
Georgia
Boise
Idaho
Chicago
Illinois
Indianapolis
Indiana
Louisville
Kentucky
New Orleans
Louisiana
Montgomery County
Maryland
Boston
Massachussetts
Detroit
Michigan
Wayne County / Oakland CountMichigan
Minneapolis
Minnesota
Austin
Texas
Dallas - Fort Worth
Texas
Houston
Texas
San Antonia
Texas
Sugar Land / South Houston Texas
The Woodlands / North HoustonTexas
Salt Lake City
Utah County
Utah
Utah
Arlington / Alexandria
Northern Virginia
Richmond
Virginia
Virginia
Virginia
Bellevue / East Side
Olympia
Seattle
Snohomish County
South King County
Tacoma
Washington
Washington
Washington
Washington
Washington
Washington
Milwaukee
Wisconsin
Source: Company website and TAG research.
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51
SEPTEMBER 23, 2013
SPECIAL REPORT
Amazon Game Studios (Social Gaming)
could add $2.2B in revenues and 243 basis points to our sales growth projection for 2015.
Margin Implications: The social gaming market should offer an attractive long-term margin
opportunity if the company can moderate development expenses and open its platform to
games from third-party developers, or if it could generate revenue from app sales, online
ads, and in-app purchases of virtual goods. Zynga has struggled to exploit the opportunity,
and we project its 2015 margin at 5.7%. If Amazon.com were able to add $1B of B2B
revenue in 2015 at a margin rate comparable to Zynga’s, it could add 2 basis points to our
CSOI margin projection for 2015.
To better address the social games market, Amazon.com launched Living Classics in August
2012 on Facebook and Air Patriots in November 2012 as mobile Android and iOS apps. We
believe this initiative is comparable to its Amazon Studios effort and to Amazon Publishing as
they all offer the company the potential to be more vertically integrated – offering hardware
(Kindle Fire) and software (social game) or hardware (Kindle e-reader) and software (e-book
published by Amazon.com). Of those three efforts, however, Amazon Game Studios seems to
be the least advanced.
LIVING CLASSICS, AUGUST 2012
AIR PATRIOTS, NOVEMBER 2012
Advertising
Margin Implications: Advertising is among the higher-margin categories in the Internet
sector. If the company were able to add $1B of apparel revenue in 2015 at a margin rate
comparable to that of Google (TAG’s 2015 forecast is 39.0%), it would add 33 basis points
to our CSOI margin projection for 2015.
Amazon.com has been generating revenue from online advertisements since at least 2005
(according to its 10K SEC filings). Its 2012 advertising revenue was estimated at $600MM by
eMarketer, suggesting that it accounted for 23.8% of its other revenue (both North American
and international). The company has been including ads on start-up screens for its e-readers
and tablets as a way of offering consumers the devices at lower prices. For example, it offers
the Kindle Fire HD tablet for $15 less to consumers willing to view the startup aps.
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52
SEPTEMBER 23, 2013
SPECIAL REPORT
When it comes to its advertising efforts, Forrester noted that Amazon.com has a lot of
valuable information to leverage, including minutiae on purchased product and post-purchase
details. The challenge for the company is that if it is successful, its advertisers’ efforts on
Amazon.com could result in consumers leaving its website to make e-commerce purchases
elsewhere.
KINDLE FIRE HD WITH SPECIAL OFFERS
ADVERTISING ON AMAZON.COM
Amazon Publishing
could add $174MM in revenue and 19 basis points to our sales growth projection for 2015.
Margin Implications: Publishing can be a double-digit operating margin business. If the
company were able to add $1B of apparel revenue in 2015 at a margin rate comparable to
that of Bertelsmann (we estimate a 2015 margin of 11.5%), it would add 7 basis points to
our CSOI margin projection for 2015.
As part of its efforts to become more vertically integrated in books, Amazon launched Amazon
Publishing in May 2009. Imprints include AmazonCrossing, AmazonEncore, 47 North,
Montlake Romance, Powered by Amazon, and Thomas & Mercer. In June 2013, it achieved
its first 1MM selling title, when Oliver Potzsch’s Hangman’s Daughter series (three titles – The
Hangman’s Daughter, The Dark Monk: A Hangman’s Daughter Tale, and The Beggar King: A
Hangman’s Daughter Tale) topped 1MM in combined print, e-book, and audio book sales. In
July the fourth book of the series, The Poisoned Pilgrim: A Hangman’s Daughter Tale, was
published.
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SEPTEMBER 23, 2013
SPECIAL REPORT
The company is also using Amazon Publishing to offer exclusive e-book titles. Barnes &
Noble is not selling Amazon Publishing titles in its brick-and-mortar locations when it is unable
to sell the e-book, as was the case with the cooking title Four Hour Chef by Timothy Ferriss.
The company is not limiting that practice to Amazon Publishing but is applying it to any
publisher that will not allow it to sell the physical and digital versions of the book, with another
example being DC Comics.
Selling Merchandise Outside of Amazon.com:
Quidsi and Zappos
Sales Implications: We consider Amazon.com’s retail efforts through its growing Quidsi
family of branded websites and Zappos as a way for the company to penetrate categories
more deeply, such as baby (via Diapers.com) and shoes (Zappos). These efforts are
already baked into our numbers, but we estimate that sales for both the Quidsi family of
brands and Zappos are accretive to Amazon.com’s first-party sales on its platforms because
of expansion in nameplates for Quidsi and categories for Zappos.
Margin Implications: Because Amazon.com primarily sells first-party merchandise through
its Quidsi family of branded websites and Zappos and, in some cases, offers the same
inventory it sells on Amazon.com, we consider these low-margin retail sales. The primary
margin opportunity is to get the scale benefits from additional sales, leverage its
infrastructure, and, in some instances, offer the same inventory through multiple websites to
improve sales. When considering the shipping policies at Quidsi (free two-day delivery with
a $35 hurdle rate) vs. Zappos (free shipping and free returns), we estimate that Quidsi has
superior margins. When considering the types of products offered – primarily consumables
at Quidsi and apparel at Zappos, we give the nod to Zappos. So, we would not be surprised
if they both had similar low margins.
In addition to offering more categories through Amazon.com, the company is adding
categories through two of its most significant e-commerce acquisitions – Quidsi (in April 2011
for $500MM) and Zappos (in November 2009 for $1.1B).
Quidsi – AfterSchool.com, BEAUTYBAR.com, Bookworm.com,
CASA.com, Diapers.com, Look.com, SOAP.com, VINE.com, wag.com,
yoyo.com
If Amazon.com is the superstore, its Quidsi brands are its specialty retailers, offering the
company another way of expanding its sales in specific categories and of leveraging its
warehouse infrastructure. Amazon.com acquired Quidsi and the company is using the
platform to run multiple category-specific websites – AfterSchool.com (activities),
Bookworm.com (books), Diapers.com (baby), BEAUTYBAR.com (beauty), CASA.com (home
goods), LOOK.com (clothing), SOAP.com (essentials), VINE.com (natural), wag.com (pets),
and yoyo.com (toys). Anecdotally, as a parent, Diapers.com is an extraordinary e-commerce
company, enabling you to order products on Sunday evening on the East Coast and receive
them Monday, without charging for shipping, and shipping products to you on the West Coast
in a similar manner, in case you did not pack enough diapers for a West Coast trip. As much
as we wanted to try the Amazon Mom Amazon Prime service, it was difficult (nearly
impossible) to want to change from Diapers.com.
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QUIDSI BRANDS, AUGUST 2013
CASE STUDY 9: PRICE COMPARISON – AMAZON VS. QUIDSI, SEPTEMBER 2013
We compared the prices of Amazon.com with those of Quidsi’s family of e-commerce websites and found
Amazon.com’s to be cheaper, while Quidi’s e-commerce sites offered faster shipping to compete with
Amazon.com (spend $35 or more on select merchandise for free two-day shipping) and in some instances offered
free next-day shipping. By comparison, consumers had to purchase $25 or more of merchandise (for free
shipping, but not guaranteed free two-day shipping) or sign up for Amazon Prime (and pay $79 per year) to get
free delivery from Amazon.com, including two-day shipping. In addition, Quidsi’s websites capped shipping at
$4.99 per vs. as much as $12.49 for a product from a third-party seller or $6.49 on those from Amazon.com.
Amazon.com’s price on merchandise was 16.1% lower than those of Quidsi’s websites. Quidsi’s shipping policy enabled it to recapture 90
basis points of pricing, as Amazon.com’s price advantage declined to 15.2%. Quidsi collects sales taxes in the same states as Amazon, so
any differences in collection were due to third-party sellers on Amazon.com. Connecticut consumers are able to circumvent sales taxes at
both Amazon.com and Zappos. In New York, Amazon.com’s use of third-party sellers resulted in a 42.7% decline in sales tax.
Analyzing the results on a by-item basis, of the 17 like-for-like items, Amazon.com’s merchandise prices were cheaper than Quidsi’s for 14
(82%), identical for 1 (6%), and pricier for 2 (12%). That prices were identical for only 1 product suggests to us that Amazon.com has room
for improvement in leveraging the same inventory for Quidsi vs. Zappos, where 42% of the merchandise we selected had the same prices.
Including shipping, it was 14 (82%) cheaper, 0 (0%) identical, and 3 (18%) pricier. Including shipping and sales taxes, it was 14 (82%)
cheaper, 0 (0%) identical, and 3 (18%) pricier for both our Connecticut and New York consumers, an indication that we did not select items
from Amazon.com’s third-party sellers, which usually do not collect sales taxes.
AMAZON VS. QUIDSI PRICE COMPARISON, SEPTEMBER 2013
Items Product C I
CT 17
(16.1%) 14 1
NY 17
(16.1%) 14 1
P
2
2
vs. Quidsi
Shipping
P+S
C I
22.6% (15.2%) 14 0
22.6% (15.2%) 14 0
P
3
3
Tax
NA
(42.7%)
Total C I
(15.2%) 14 0
(17.4%) 14 0
P
3
3
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AMAZON V. QUIDSI - PRODUCT
90%
SPECIAL REPORT
AMAZON V. QUIDSI – PRODUCT AND SHIPPING
90%
82%
80%
80%
70%
70%
60%
60%
50%
50%
40%
30%
82%
40%
30%
20%
6%
10%
18%
20%
12%
10%
0%
0%
0%
Cheaper
Identical
Pricier
Cheaper
Pricier
AMAZON V. QUIDSI – TOTAL COST CT
90%
Identical
AMAZON V. QUIDSI TOTAL COST NY
90%
82%
80%
80%
70%
70%
60%
60%
50%
50%
40%
30%
82%
40%
30%
18%
20%
18%
20%
10%
10%
0%
0%
0%
0%
Cheaper
Identical
Pricier
Cheaper
Identical
Pricier
Zappos
Zappos is broadening its merchandise from shoes to apparel to home to beauty. We are
familiar with Zappos, having toured its headquarters on multiple occasions and having read
Tony Hsieh’s book, Delivering Happiness. It also includes the liquidation e-commerce
website, 6pm.com.
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ZAPPOS CATEGORY EXPANSION, SEPTEMBER 2013
CASE STUDY 10: PRICE COMPARISON – AMAZON VS. ZAPPOS, SEPTEMBER 2013
We compared the prices of Amazon.com with those of Zappos and found Amazon.com’s to be cheaper, while
Zappos offered consumers the benefit of free shipping (and free returns) on all purchases, whereas consumers
had to purchase at least $25 of merchandise or sign up for Amazon Prime to get free delivery from
Amazon.com.
Amazon.com’s price on merchandise was 6.9% lower than that of Zappos. Zappos’ free shipping policy enabled
it to recapture 90 basis points of pricing, as Amazon.com’s price advantage declined to 6.0%. Zappos collects
sales taxes in the same states as Amazon, so any differences in collection were due to third-party sellers on
Amazon.com. Connecticut consumers able to circumvent sales taxes at both Amazon.com and Zappos. In New
York, Amazon.com’s use of third-party sellers resulted in a 14.3% decline in sales tax.
Analyzing the results on a by-item basis, of the 12 like-for-like items, Amazon.com’s merchandise prices were
cheaper than Zappos’ for 6 (50%), identical for 5 (42%), and pricier for 1 (8%). That prices were identical for 5 products suggests to us
that we picked items where Amazon.com is offering the same merchandise at the same prices on both platforms. Including shipping, it
was 5 (42%) cheaper, 5 (42%) identical, and 2 (8%) pricier. Including shipping and sales taxes, it was 5 (42%) cheaper, 5 (42%) identical,
and 2 (8%) pricier for our Connecticut consumer and 6 cheaper (50%), 4 (33%) identical, and 2 (17%) for our New York consumer.
Therefore Amazon.com’s sales tax advantage over Zappos in New York from offering third-party merchandise enabled it to offer
consumers 1 more item (8% more) at a lower total cost.
AMAZON VS. ZAPPOS PRICE COMPARISON, SEPTEMBER 2013
Items Product C I
CT 12
(6.9%) 6 5
NY 12
(6.9%) 6 5
P
1
1
vs. Zappos
Shipping P+S C I
NA
(6.0%) 5 5
NA
(6.0%) 5 5
P
2
2
Tax
NA
(14.3%)
Total C I
(6.0%) 5 5
(6.5%) 6 4
P
2
2
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AMAZON V. ZAPPOS - PRODUCT
SPECIAL REPORT
AMAZON V. ZAPPOS – PRODUCT AND SHIPPING
60%
45%
50%
42%
42%
40%
50%
35%
42%
40%
30%
25%
30%
20%
20%
10%
8%
10%
5%
0%
0%
Cheaper
Identical
Cheaper
Pricier
Pricier
AMAZON V. ZAPPOS – TOTAL COST CT
42%
Identical
45%
17%
15%
AMAZON V. ZAPPOS TOTAL COST NY
60%
42%
50%
40%
50%
35%
40%
30%
33%
25%
20%
17%
15%
30%
20%
17%
10%
10%
5%
0%
0%
Cheaper
Identical
Pricier
Cheaper
Identical
Pricier
Other Categories
We believe Amazon.com’s long-term strategy for category expansion will not be limited to the
grid on page 38. It proved with Amazon Web Services that it can succeed outside of its core
retail effort. Depending on the category and how Amazon elects to pursue it (for example, first
party or third party, direct sales or commission revenue), the impact on its long-term sales
growth and margins could be meaningful.
Forrester suggested some long-term category opportunities for Amazon.com, including the
automotive industry, banking, and travel. For example, it suggested that insurance could be a
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SPECIAL REPORT
very lucrative opportunity for Amazon.com to leverage its extensive database on its
customers’ browsing and buying habits.
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FAST DELIVERY
In this section, we discuss the company’s efforts to deliver merchandise to consumers quickly,
including Amazon Prime (its free two-day shipping membership offering) and its budding
same-day shipping efforts. We also discuss the company’s fulfillment center rollout.
Sales Implications: Amazon’s ability to compete in a retail environment with a level playing
field for sales tax collection will increasingly depend on its ability to get products to
consumers quickly. We remain highly confident in this ability, and this effort is reflected in
our current sales expectations.
Margin Implications: The company is already losing money on its shipping efforts. The
situation could worsen due to higher shipping expenses attributable to expedited delivery
offerings, such as same-day shipping. That said, the company could pull several levers to
offset that pressure, including adding fulfillment centers to shorten ship miles, offer
consumers more shipping choices (including ones that are less detrimental to margins, such
as a free MP3 for consumers who are willing to wait to get their products vs. same-day,
next-day, or two-day shipping options), and converting Amazon Prime to more of a
membership model (like warehouse clubs).
Although we believe offering consumers faster delivery is core to Amazon.com’s basic
strategy (low prices, large selection, and fast delivery), in our view, of equal importance is the
company’s creation of a spectrum of delivery options for consumers, which provides it a much
greater ability to manage margins from fast delivery (AmazonFresh’s Prime Fresh) to add-on
sales (requiring consumers, including Amazon Prime members, to spend $25 to purchase
items that may pressure margins to ship individually – such as a box of crayons) to slow
delivery (free MP3s to consumers who are willing to wait longer to receive their merchandise)
to a much broader set of membership options beyond Amazon Prime ($2.99 for curated kids’
content on Kindle Devices with an Amazon Prime membership, $4.99 without).
Managing shipping costs will become only more important because of the convergence of two
important trends in e-commerce: Shipping costs continue to increase and consumers want
products delivered to them faster.
LaserShip noted that its pricing on certain services, such as ground, was similar to last year’s
rates for FedEx and UPS, which was another reason e-commerce companies such as
Amazon.com use regional providers in addition to the national ones. Another reason is that
LaserShip is more flexible on accessorial charges (such as shipping to a residential address
instead of a commercial one).
OnTrac pointed out that it offers next-day delivery at ground rates for much of the West Coast
(it provides next day services from its Reno distribution center on the West Coast from the
Mexican border to the Canadian border). FedEx does not offer a similar service, which
enables OnTrac to secure important customers such as Newegg.com and drugstore.com.
LJM Consultants outlined the ways that FedEx and UPS were raising prices by more than the
4.9% they noted. For example, the companies may refer to the 4.9% figure as the average
price increase for deliveries from 1 lb. to zones 2 through 8; however, the actual increase on
packages weighing 1-10 lbs. is closer to 7.5%, and those on packages 70-150 lbs. are less
than 2.5%. Most e-commerce shippers are sending packages that weigh less than 20 lbs.
Accessorial fees, such as an address correction (an increase to $12 from $11 in the charge
for a wrong zip code) or shipping to a residential address instead of a commercial one, are
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SPECIAL REPORT
going up to $3.00 from $2.50. Including price hikes on lighter-weight packages and
accessorial fees, the real price increase for an e-commerce company could reach 9%-10%.
LJM Consultants pointed out that FedEx and UPS are highly unlikely to lower prices and
offered the example of how both companies increased prices during the last recession.
In the following table, we illustrate our estimates of Amazon.com’s shipping revenue as a
percentage of sales and profitability. Based on our conversations with industry sources, we
estimate that Amazon.com could save 200-300 basis points on its shipping expenses from its
efforts to add fulfillment centers and shorten its ship miles.
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AMAZON.COM’S SPECTRUM OF SHIPPING OPTIONS, SEPTEMBER 2013
Source: Company reports and TAG research.
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SHIPPING AS A PERCENT OF REVENUE, 2011-2015E
SPECIAL REPORT
SHIPPING REVENUE, 2011-2015E
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
2015E
2014E
2013E
2012
2011
0.0%
Fulfillment – Getting Closer to the Customer
Sales Implications: Adding fulfillment centers closer to the consumer improves the
company’s ability to get merchandise to the consumer more quickly, as evidenced by
Amazon.com’s 2Q13 earnings call comments that its consumable sales were growing
quickly.
Margin Implications: We estimate Amazon.com could add 200-300 basis points to its
gross margin by reducing its ship miles from adding fulfillment centers to move closer to its
customers. At the mid-point (250 basis points), an incremental $1B of revenues would add 2
basis points to our base CSOI margin forecast.
Amazon.com’s fulfillment center expansion is the cornerstone of its efforts to expedite
delivery. We project that the company will expand its number of fulfillment centers by 21 to
110 in 2015 from 89 in 2012, compared with 50 added in the prior three-year period.
LaserShip pointed out that Amazon.com is a leader in offering fast shipping at an economical
price and the company could move further ahead of the competition by converting its Amazon
Prime offer to next-day shipping from two-day, thanks, in part to its fulfillment expansion
efforts.
AMAZON.COM FULFILLMENT CENTERS, 2006-2015E
Amazon.com
Wal-Mart
2006
31
269
2009
39
278
2012
89
318
2015E
110
355
CAGR
20062009
8.0%
1.1%
CAGR
20092012
31.7%
4.6%
CAGR
20122015E
7.3%
3.7%
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Wharton Professor David Bell noted that, in general, consumers respond to faster shipping
times, with sales higher in locations that can receive merchandise in one day instead of two
and two days instead of three.
LJM Consultants indicated that shipping expense leverage could be significant from adding
fulfillment centers. For example, if adding fulfillment centers enables an e-commerce
company to change its shipping method to ground service instead of air from UPS or FedEx
or allows it to use a regional carrier (such as LaserShip or OnTrac – which can offer next-day
delivery from its Reno facility to the Canadian and Mexican borders at ground rates), instead
of UPS or FedEx, it could result in significant cost savings. (OnTrac’s customers include
Newegg.com, drugstore.com, and Urban Outfitters. Residential deliveries account for 49.5%
of its business, with the majority of those from e-commerce companies.)
LJM Consultants also pointed out that adding fulfillment centers helps Amazon.com get a leg
up on its competition. For example, most retailers have only one or two fulfillment centers. So,
for a company with only a fulfillment center on the West Coast it would be more expensive
and more difficult to offer same-day shipping to the East Coast vs. Amazon, which could put a
fulfillment center in Hartford, Connecticut, and offer consumers next-day or same-day
shipping – a tremendous competitive advantage.
Overstock discussed its strategy for adding fulfillment centers. The company noted the
tradeoff between lower shipping costs from reducing freight miles and the expenses of
running another facility. It is not always obvious that adding fulfillment centers will improve
overall economics, and in some instances it is more expensive to operate two fulfillment
centers instead of one. The incentive for an e-commerce company is to get product to the
consumer faster and get returns from the consumer more quickly, which are both viewed
favorably by the consumer.
According to OnTrac, there are 11 megaregions (areas of concentrated population) in the US
and that a company could provide next-day shipping to most of the US if it had fulfillment
centers located in those megaregions. In the following figure, we illustrate the megaregions
and locations of Amazon’s fulfillment centers. Based on this analysis, Amazon has eight
megaregions well covered and is under-penetrated in the three megaregions. This will
become increasingly important as companies, including Amazon.com, advance their efforts to
ship merchandise to consumers more quickly. OnTrac noted that today two-thirds of the US
population can be reached by two-day shipping from Kentucky and if an e-commerce
company adds a second fulfillment center in Salt Lake City, Utah or Reno, Nevada it could
add a large portion of the US for two-day shipping.
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THE EMERGING 11 MEGAREGIONS
Source: OnTrac and TAG research.
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Kiva Systems and Faster Picking
According to Rakuten, speedy picking of merchandise off the shelves of its fulfillment centers
is vital for an e-commerce company to get merchandise to the consumer quickly. To that end,
in May 2012, Amazon.com acquired Kiva Systems for $678MM. Relay noted the speed
advantage of picking in a warehouse vs. at a retail store: It takes four times as long to pick
items in a store as it does in a warehouse.
E-commerce company Overstock discussed the importance of fast delivery based on its
infrastructure. It is always working to improve the time it takes to get merchandise to the
consumer. Overstock leverages its own warehouse for its core products and those of its
1,200-1,500 supplier partners that have their own warehouses across the US. When a
consumer orders a product from Overstock it could be receiving it from across the country or
practically next door. Overstock works hard at ensuring that it and its suppliers get orders out
the door in less than 24 hours. It believes this effort benefits its sales.
Using Physical Locations to Get Products to the
Consumer Faster
We believe that in the future, Amazon will use more physical locations to deliver merchandise
to consumers more quickly, including its lockers initiative (currently active) and pickup points
(something it has tested in the past and an initiative used by other retailers, especially in the
grocery category). In addition, we think the company could open stores to showcase its
expanded hardware lineup. The future of Amazon.com includes physical locations – at a
minimum, places where consumers can pick up merchandise beyond their home and office; at
the maximum, at Amazon.com’s own retail stores.
Lockers
According to LJM Consultants, FedEx and UPS essentially operate a duopoly in the US and
consistently raise prices 4%-5% annually. However, the rate of annual increase is uneven –
higher for deliveries to residential addresses and lower for those to commercial ones. Enter
Amazon.com’s lockers initiative, which we expect to be a successful driver of e-commerce
transactions and provide superior management of shipping expenses for multiple reasons,
including the ability to convert multiple residential deliveries (one of the most expensive types
of deliveries) to a single commercial delivery (one of the least expensive types).
AMAZON.COM LOCKERS
Source: GeekWire and TAG research.
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For example, by converting a residential delivery to a commercial one, Amazon.com could
save $3.00 per package, so if is able to consolidate three deliveries, it could save $9.00.
Shipping to commercial addresses rather than residential offers multiple opportunities for cost
savings, according to LJM Consultants. For example, Michael Kors could save $3.00 per item
by having a product shipped to one of its stores rather than the customer’s house. Additional
cost savings are possible by avoiding delivery area surcharges, off-the-beaten path charges,
and extended delivery fees. Wharton Professor David Bell noted similar benefits to the lockers
initiative – the ability to create customer density; for example, by sending eight things to one
location instead of eight separate ones. He cited Relay’s ability to leverage this density by
offering pickup points and how consumers prefer picking up products (at their convenience)
instead of having them delivered to their homes.
Sport Chalet pointed out that Amazon.com’s lockers initiative could also be effective at
college campuses, office complexes, and retailers, where there was a natural complement in
product offerings.
Amazon launched Amazon Lockers in September 2011. In the following table, we estimate
the number of Amazon lockers by state and in the UK. For the analysis, we used Google
Maps and searched for “Amazon Locker” and “State” or “UK.” What we learned from the
exercise is that the initiative is limited to a handful of states – California, New Jersey, New
York, Oregon, and Virginia. We believe the company has not rolled it out to more states
because it is concerned that adding lockers to states where it does not have a sales tax
collections deal would force its hand and eliminate its ability to negotiate with those states. As
the company forges more deals on a state-by-state basis, or in the event of federal legislation,
this impediment will go away, and we expect Amazon will continue expanding this effort. The
analysis also suggests that Amazon is further along in this initiative in the UK than in the US.
AMAZON.COM LOCKERS LOCATIONS, AUGUST 2013
Locations
%
State
California
315
34.3%
New Jersey
6
0.7%
New York
180
19.6%
Oregon
66
7.2%
Virginia
78
8.5%
Total US
645
UK
Total International
273
273
Total Global
918
29.7%
Source: Google Maps and TAG estimates.
In the following table, we list a number of retailers Amazon is working with for its lockers
initiative. As part of our research, we noticed that there were several locations outside of
traditional retailers, such as convenience stores, gas stations, and parking garages. Many of
these nontraditional retailer locations had the added benefit of 24-hour accessibility, which
suggested to us that the company is focusing on high-traffic spots. Amazon’s efforts have
resulted in speculation that it would consider purchasing a retailer with a large base of small
stores to advance its efforts, such as Radio Shack (which had 4,311 stores in the US and 273
in Mexico as of June). We believe such a deal makes sense based on our assessment of
Amazon.com’s ability to leverage such retail real estate – as a showroom for its increasing
hardware offerings and a pickup point for merchandise delivery; however, we do not foresee
Amazon.com entering into any deal that would give it nexus in all 50 states until federal sales
tax legislation has passed or the company has forged agreements with the 46 states that
have sales taxes.
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AMAZON.COM LOCKERS RETAILERS, SEPTEMBER 2013
7-Eleven
Ace Hardware
Albertsons
Box Brothers
Broadway Market
Central Parking
D'Agostino
Discount Builders
Fillmore Center
Fort Knox Storage
Foto Video
Green Citizen
Gristedes
Hammersmith Broadway
Harbor Steps Tower
New Street Square
Nob Hill
O2 Central Mall
Pacific Place
Park West Apts
Philz Coffee
Professor Copy 'n' Print
Radio Shack
Ranier Copy
Red Apple
Rite Aid
Seattle Muni Tower
Shepherd's Bush Library
SoHo Food 'n' Wine
SPAR
Storage PRO
Staples
The Cooperative
Unit 1
West 12 Shopping Center
Youngstown Flats
Why Consumers Appreciate Lockers.
Lockers offer consumers a third location to have merchandise shipped, beyond their home
and office. This can be convenient for consumers ordering products online which they do not
want shipped to their apartments because, for example, they do not have a doorman, as
noted by LaserShip. Consumers can also shop at the location where they pick up
merchandise (discussed below in the paragraph on Walmart).
DHL and Lockers
According to Deutsche Post DHL, its German Mail and Parcel business was one of the
pioneers for lockers and it has approximately 2,500 of them in Germany. They are located at
gas stations, work places, and supermarkets. Consumers appreciate the ability to pick up
merchandise 24 hours a day and 7 days a week. We believe that e-commerce customers who
use lockers, including those of Amazon.com, purchase more frequently. The companies
appreciate the traffic the lockers drive to their establishments; for example, consumers who
pick up merchandise at lockers at gas stations also buy gas; as a result DHL can often secure
attractively low rent for its lockers. That Germany has a number of densely populated urban
areas is a positive contributing factor to the performance of the company’s lockers, in our
view.
LaserShip mentioned the benefits of lockers to carriers, such as economies of scale from
delivering 10 packages to one location instead of 10 different ones. Delivering to
condominiums and apartment buildings with doormen also prevents situations where there
are high attempt rates, which frustrate consumers and delivery companies, alike, and
negatively impact its margins.
One industry expert noted that e-commerce companies often prefer regional carriers to
national ones because they have greater flexibility with accessorial charges, such as
residential delivery surcharges. Having a greater upfront understanding of accessorial
charges also makes it easier for e-commerce companies to understand their per-unit and
customer acquisition costs, which is very valuable.
Forrester noted that the reason lockers are so effective in Germany is because of its customer
density. For example, it is smaller than California but has twice the population. The lockers
are also effective because consumers are uncomfortable having merchandise left at their
doorsteps, many of which do not have front porches. It noted that less than 20% of ecommerce packages were delivered in this manner in Germany and that penetration in the US
may not get that high, though it could approach that figure in certain markets.
Google Positions Itself for Lockers with Buffer Box Acquisition
In December 2012, Google acquired Buffer Box, a Canadian start-up launched in June 2011,
for a reported $17MM. Buffer Box offers consumers the ability to pick up e-commerce
merchandise at lockers located primarily at transportation hubs, such as train stations. As of
September, there were 25 locations in the Toronto area. We believe Google is expanding its
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offering to compete more effectively against Amazon.com in this arena. We also view its
acquisition as validation that more of e-commerce will be delivered via lockers in the future.
BUFFERBOX LOCATIONS (GREATER TORONTO, ON AREA), SEPTEMBER 2013
City
Waterloo
Hamilton
Burlington
Oakville
Mississauga
Etobicoke
Bramalea
North York
Toronto
Total
Locations
3
2
1
2
1
1
1
1
13
25
Staples: If You Can’t Beat ’Em, Join ’Em
According to published reports, in November 2012, Amazon.com forged an agreement with
Staples to include its stores in its lockers initiative. Among retailers offering Amazon.com’s
lockers in its stores, we considered this to be one of the most interesting from a strategic
standpoint for both parties.
Based on our conversations with industry sources, Staples receives rent and a commission
on merchandise picked up at its stores. The company entered into the agreement in hopes of
generating incremental traffic, which it could leverage for its other services, such as printing.
We will continue to monitor Amazon.com’s lockers efforts to see if more companies it
competes with begin including its lockers in their retail stores.
Note, recently there have been published reports suggesting both Staples and Radio Shack
may be discontinuing their practice of housing Amazon.com’s lockers. If true, this would not
negatively impact our favorable view of the initiative as there are still several high-traffic
locations for Amazon.com to leverage.
Walmart’s Efforts
Walmart announced its plans to add lockers to its stores in March 2013. In December 2012,
Wal-Mart indicated that consumers who shop online and pick up merchandise in its stores
spend about $60 at their physical stores when they come to get their online order.
Forrester commented that Walmart has an even bigger opportunity in this arena because of
its efficiency and frequency of product deliveries and customer visits to its stores. Walmart’s
stores could become pickup locations for merchandise from other retailers, with its sister
company, Sam’s Club, at the minimum. Forrester pointed out that UK grocers are already
doing this at their grocery stores. Both UK grocers and Walmart have the advantage of store
density, with several locations throughout their countries. Forrester mentioned that Walmart is
already working to make its real estate more productive by including everything from nail
salons to opticians in its stores. This theme of making real estate more productive will make
this model more efficient for rapid delivery of e-commerce purchases than those offered by
Amazon.com, eBay, or Google. As an adjunct to this service, Wal-Mart could leverage its
supply chain management expertise to other e-commerce companies. This could be another
way to take advantage of the fact that delivery to commercial addresses is less expensive
than residential ones.
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Forrester suggested that although Amazon may have a first-mover advantage in lockers for
the US, other retailers may be better positioned to leverage the opportunity, including CVS,
Walgreens, and regional grocers.
USPS’s gopost Effort
As another indication of the emerging trends of lockers, the USPS launched its own service,
dubbed gopost in January 2012. An interesting feature of the USPS’s efforts is the ability for
consumers to ship from these lockers in addition to receiving packages at them. We illustrate
the gopost locations in the following table.
USPS GOPOST LOCATIONS, SEPTEMBER 2013
City
College Park
Rockville
Brooklyn
New York
Alexandria
Arlington
Merrifield
Springfield
Total
State
Maryland
Maryland
New York
New York
Virginia
Virginia
Virginia
Virginia
Number
1
2
2
3
2
3
1
1
15
Why Lockers May Enable Amazon.com to Avoid Opening Its Own Stores
LJM Consultants noted that Amazon.com’s ability to ship to another retailer’s location may
preclude it from opening its own stores by eliminating much of the need to do so.
LOCKERS COMPARISON, SEPTEMBER 2013
Number
Market
Location Types
Pricing & Fees
Accessibility
Ship From
Potential advantages
Potential Disadvantages
Max Days to Pick Up
Amazon
918
CA, WA, DC, NY, UK
Rite-Aids, Staples, Radio Shack, 7/11s
No cost to consumer; Fee to retailer
Subject to retailers' business hours
No - only returns
Higher number, closer together
No way to browse or exchange
3
Wal-Mart
12
CA Only
In-Store Only
No cost to consumer
24/7 Availability
No
Wal-Mart leads in distribution
Ability to browse and exchange
7
Google/BufferBox
25
Toronto, ON
GO, 7/11s, Sobeys
TBD Variable Fee
Subject to retailers' business hours
No
Google
Late-mover in USA
3
USPS gopost
15
Virginia
Post Office, groceries,transportation hubs
No additional cost
24/7 Availability
Yes
Greater historical user penetration
Standard USPS reliability woes
15
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Pickup Points
Following its Lockers effort, we believe Amazon.com’s next step toward using physical
locations to get product to consumers faster is pickup points (pickup stations for physical
merchandise). We believe this could be another catalyst for its sales as it provides yet another
way for consumers to conveniently receive products from Amazon.com.
PICKUP POINTS
Source: GeekWire and TAG estimates.
This is not a new concept for Amazon.com, as it tested pickup points in 2007 as part of its
early efforts with Amazon Fresh (as depicted in the picture above). It discontinued the effort in
2008 as it focused on home delivery. Today, Amazon offers consumers pickup points in the
UK, leveraging an effort by a third party. Based on our conversations with a number of global
grocers, including Ahold, Carrefour, Loblaws, and Metro AG, we believe Amazon.com could
restart this effort in the US, especially as it collects sales taxes in more states, with the
addition of grocery as a catalyst to do so.
Ahold’s online grocer, Peapod, is offering consumers pickup points as part of its Peapod
Pickup initiative (see below). As of September 2013, there were 45 Peapod Pickup points in
eight states.
PEAPOD PICKUP POINTS
Source: Ahold and TAG estimates.
PEAPOD PICKUP POINTS
Source: SupermarketNews.com and TAG estimates.
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PEAPOD’S PICKUP POINTS, SEPTEMBER 2013
City
Norwalk
Stonington
Wilton
State
Connecticut
Connecticut
Connecticut
Deerfield
Palatine
Illinois
Illinois
Annapolis
Chevy Chase
Clarksville
Columbia
Gambrills
Maryland
Maryland
Maryland
Maryland
Maryland
Abington
Braintree
Chelmsford
East Weymouth
Hudson
Milford
North Andover
North Attleboro
North Dartmouth
Norwood
Pembroke
Plymouth
Quincy
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Massachussetts
City
Sandwich
Walpole
Wareham
Westborough
State
Massachussetts
Massachussetts
Massachussetts
Massachussetts
Franklin Lakes
New Jersey
Jackson
Hartsdale
Lake Ronkonkoma
Medford
North White Plains
Port Chester
Shirley
Smithtown
South Setauket
Staten Island
New Jersey
New York
New York
New York
New York
New York
New York
New York
New York
New York
Cranston
Lincoln
Pawtucket
Providence
Rhode Island
Rhode Island
Rhode Island
Rhode Island
Alexandria
Centreville
Herndon
Virigina
Virigina
Virigina
Relay, one company that has excelled in leveraging pickup points, was surprised to discover
that consumers often preferred receiving merchandise in this manner over home delivery
because they consider it more convenient. One reason is that the company offers consumers
a four-hour window at the location so they do not have to rush home to avoid missing a
delivery. Many consumers also prefer picking up merchandise over having someone knocking
on their door. Consumers appreciate having control over pickup location, and Relay offers
convenient ones, such as a Walgreens parking lot, where consumers would be driving
anyway, and it sends them reminders so they do not forget to pick up their groceries.
Stores
In our view, the next logical step in Amazon.com’s strategy to expand its physical presence is
opening stores. When considering the new emerging retail store formats, Amazon.com’s
hardware expansion efforts, its foray into grocery, and its growing list of states with sales
taxes, this may not be as radical a departure from the company’s original business model as
investors would have thought even a few years ago.
New ideas for unconventional store formats are emerging, so Amazon may not be limited to
traditional stores, such as Apple. Wharton Professor David Bell mentioned a few examples of
new store formats. Eyeglass merchant Warby Parker is adding locations in hotels (such as
the Standard Hotel in Los Angeles in the picture below). This is on top of its efforts to open its
own stores on a very limited basis, such as its two locations in New York City (SoHo and the
Meat Packing District). (Anecdotally, we recently visited the Meat Packing District location and
had a positive experience that included a less expensive eye exam – $85, including a $35
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charge to have our pupils dilated, not to mention the inexpensive, but still highly fashionable,
designer glasses, at $95). Men’s fashion retailer Bonobos is opening “guide” shops, where
men can be fitted and order products that are shipped to them at either 25th Street or Crosby
Street in New York City (the picture below depicts its guide shop in Bethesda, Maryland).
Dr. Nadia Shouraboura, the former head of Supply Chain and Fulfillment Technologies for
Amazon.com, has come up with an innovative retail store format for Hointer, with the tag line
where “retail meets technology.” Consumers tap the clothes they are interested in trying on
with their smartphones, and the clothes are ready for them in a fitting room in less than 30
seconds, plus customers can self-checkout if they want to purchase the merchandise. The
company’s goals are to provide consumers real-time inventory information, make in-store
shopping as easy as online, and leverage big data to personalize the shopping experience.
HOINTER, SEPTEMBER 2013
Electric car company Tesla has an entirely new approach to showrooms, opening them in
malls (such as the one pictured below at the Westchester Mall in White Plains, New York).
Wharton’s Professor Bell said he could envision a future where Amazon opens stores based
on the alternate prototypes others are creating. Retail store formats are changing, and we
remain highly confident that Amazon.com could come up with its own store to increase its
distribution and drive sales.
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WARBY PARKER, SEPTEMBER 2013
Source: Selectism and TAG research.
SPECIAL REPORT
BONOBOS, SEPTEMBER 2013
Source: Refinery29.com and TAG research.
HOINTER, SEPTEMBER 2013
TESLA, SEPTEMBER 2013
Source: CNN and TAG research.
Best-Case Scenario: Apple
Apple opened its first two retail stores on May 15, 2001, at the Glendale Galleria in Glendale,
California, and Tysons Corner Center in McLean, Virginia. The combination of innovative
store design, compelling products, and efficient customer service (the Genius Bar) has
created a retail powerhouse. As of September 2013, there were 413 Apple stores, 253 in the
US and 160 in 13 countries outside the US. In the June quarter, Apple’s retail sales totaled
$4.1B (which equates to 25.9% of Amazon.com’s total revenues), its operating income
amounted to $0.7B (176.9% that of Amazon.com’s total CSOI), and its average store
generated $10.1MM in revenue. We believe Amazon.com could mirror Apple’s efforts –
especially as it increases its hardware SKUs – and use retail stores to showcase its products.
In addition, Amazon.com’s stores could offer consumers yet another pickup point for online
orders, much like its lockers effort at 7-Eleven, Staples, and other retailers’ stores.
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APPLE STORE – 3RD ST. PROMENADE, SANTA MONICA, CA
APPLE STORES, SEPTEMBER 2013
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
No. of Locations
2
1
6
1
52
6
5
3
16
5
3
1
9
2
1
1
2
2
1
5
10
5
5
1
3
1
4
2
12
1
17
5
State
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
Total US store count
No. of Locations
6
2
3
9
1
2
4
18
2
7
6
3
253
Country
United Kingdom
Japan
Canada
Italy
Austrailia
China
Switzerland
Germany
France
Spain
Hong Kong
Amsterdam
Sweden
Total International
No. of Locations
37
7
28
14
20
8
3
11
16
10
3
1
2
160
Total Store count
413
Microsoft – Not Apple, but Not Bad
Microsoft has successfully created its own retail stores, leveraging many of Apple’s traits –
including a clean and simple store layout design, offering a manageable number of SKUs,
focusing on customer service, and concentrating on A and B mall real estate. According to
one of our mall developer contacts, Microsoft’s retail efforts have been favorable because the
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stores generate sales of $1,000 per square foot, and although that is a fraction of Apple’s
$6,000, it is more than double the previous tenants’ average of $400.
MICROSOFT STORE – DANBURY, CT
Source: The Dancing Hotdogs and TAG estimates.
MICROSOFT STORES,SEPTEMBER 2013
State
Arizona
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Illinois
Indiana
Kansas
Massachusetts
Michigan
Minnesota
Missouri
Nevada
New Hampshire
New Jersey
No. of Locations
1
10
2
2
1
8
2
1
3
1
1
3
2
1
1
2
1
3
State
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
Texas
Utah
Virginia
Washington
Wisconsin
PUERTO RICO
Alberta
British Columbia
Ontario
No. of Locations
6
1
2
2
2
1
1
7
2
2
3
1
1
1
3
2
Total store count
45
Worst-Case Scenario, Practically Everyone Else
Although Apple has been extraordinarily successful and Microsoft is doing relatively well,
there is a long list of technology companies that opened stores that are now closed. When
was the last time you stepped into a Palm or a Gateway store?
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SPECIAL REPORT
PALM
Source: aaplinvestors.net and TAG research.
Source: palminfocenter.com and TAG research.
Store Within a Store – Best Buy
Amazon arguably already has a presence in stores, with portions of certain retailers’ locations
showcasing and selling its Kindle and Kindle Fire e-readers and tablets and accessories (see
the following table). The company could also follow Apple, Microsoft, and Samsung’s lead by
opening stores within Best Buy locations.
SAMSUNG STORE-WITHIN-A-STORE
Source: idownloadblog.com and TAG research.
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PHYSICAL STORES SELLING KINDLE DEVICES AND ACCESSORIES, SEPTEMBER 2013
US
ABC Warehouse
Alco Stores
AT&T
Bartell Drugs
Best Buy
Bi-Mart
BJ's Wholesale Club
Conn's
Exchange
Follett Stores
Fred Meyer
Fry's
GameStop
J&R
Kmart
La Curacao
Navy Exchange
Nebraska Furniture Mart
Office Depot
Office Max
PC Mall
Purchasing Power
Radio Shack
Sears
Staples
Toys 'R Us
Australia/
New Zealand
Big W
Dick Smith
Canada
Canadian Tire
London Drugs
Memory Express
NCIX
The Source
Shopper's Drug Mart
Staples CA
Visions
South
Africa
Incredible Connection
Kiosks/Pop-Up Stores
In our research, we have found examples of Amazon kiosks selling its hardware. For
example, in Brazil, retailer Superfone has opened Amazon kiosks in malls to sell its Kindle
line. In addition, we believe Amazon could mirror Microsoft, Samsung, and others by opening
pop-up stores in malls to sell its hardware.
Forrester echoed our sentiment on this opportunity for Amazon.com’s retail stores, noting that
the company almost needs to have stores, though not necessarily traditional ones, where it
could demonstrate its hardware, such as an airport kiosk (which is one way Google has
shown consumers the power of its Chromebooks).
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KINDLE KIOSK, BRAZIL
SPECIAL REPORT
CHROMEBOOK AIRPORT KIOSK
Source: The Digital Reader and TAG estimates.
Source: The New York Times and TAG research.
Outlet Stores
Amazon.com could also open outlet stores to liquidate inventory. This strategy is employed by
e-commerce company Overstock, which has an outlet store near Salt Lake City, where it
mainly sells product returns it cannot offer via its website.
OVERSTOCK.COM OUTLET STORE
Source: KSL.com and TAG estimates.
Two-Day Shipping
This is the basic service offered by Amazon.com as part of its Amazon Prime membership
program and duplicated by ShopRunner, another shipping membership program. We believe
the company’s ability to get merchandise to consumers in two days gives it a significant
competitive advantage, and Amazon.com has trained consumers to expect merchandise this
quickly from others. Anecdotally, as Amazon Prime members, 31 of our 34 purchases on
Amazon.com were delivered via two-day shipping.
OnTrac discussed how fast shipping times enable e-commerce companies to compete more
effectively against brick-and-mortar retailers. It can take a long time for a consumer to receive
a product from an e-commerce company (as much as 7-10 business days) vs. picking up
merchandise at a local store. The same could be said for returns. However, when a consumer
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is now able to order a product on Monday and receive it on Tuesday or Wednesday that is a
significant improvement and competitive enabler.
Next-Day Shipping
This is the next level of premium shipping for consumers interested in receiving packages
faster but unwilling to pay a premium for same-day shipping. Amazon.com charges Amazon
Prime members $3.99 to receive purchases on a next-day basis. LaserShip noted that one
way Amazon.com could get further ahead of the competition would be to shift its two-day
shipping to next-day for its Amazon Prime membership program.
LaserShip’s comments suggested that although same-day delivery is getting all of the press
these days, next-day shipping will be the sweet spot for Amazon.com and other e-commerce
companies over the next three years. The company noted that it expected same-day delivery
to continue growing, but the largest piece of the puzzle will be next-day delivery, as
LaserShip, OnTrac, and regional carriers offer e-commerce companies the opportunity to get
them the product late in the day, or early in the morning while still delivering to the consumer
that day, as they offer much greater flexibility to companies like Amazon.com vs. the national
players, FedEx and UPS.
LaserShip discussed what we considered was the big opportunity for next-day shipping (and
same-day shipping, too). Regional shipping companies fill a niche in the market place. They
usually operate in major metropolitan areas and offer companies such as Amazon.com a lot
of flexibility, including weekend delivery. They enable e-commerce companies to compete
with traditional retailers for weekend sales thanks to next-day and same-day shipping options.
For example, the consumer who otherwise would be going to a store on Saturday or Sunday
to make a purchase, is now able to buy an item from home and receive it on Saturday or
Sunday, which we believe is very powerful.
Same-Day Shipping
Same-day shipping is one of the emerging trends in e-commerce, but there is still a lot of
uncertainty surrounding the initiative that needs to be addressed, including consumer
demand, expeditors’ business models, and the pluses and minuses of different logistical
methods to provide the service. Because same-day shipping is becoming more of a factor in
e-commerce, we will continue to closely watch developments, including Amazon.com’s efforts
to roll out same-day shipping to more locations across the US and the emergence of
competition, such as eBay Now. We remain concerned that same-day shipping could put
further pressure on margins for e-commerce companies, especially Amazon.com.
Consumer Demand for Same-Day Shipping Is Unclear
What is the consumer demand for same-day shipping? Wharton Professor David Bell and
Forrester suggest that, in many instances, Amazon.com and others might have some
consumer education to do when it comes to their same-day shipping efforts, i.e. that it is not
yet clear there is not significant demand for the service. Professor Bell suggested that
consumers who purchase online have set schedules for replenishment items, such as dog
food or detergent and are unlikely to pay a premium to have them delivered same day;
whereas, they may consider same-day shipping more seriously for items they perceive as
must-haves, such as the latest iPhone or iPad. Of course, to the extent that Amazon can
bundle items, perhaps through using the new AmazonFresh option as a "foot in the door" this
could be very successful.
Forrester pointed out that the service is expensive for both the e-commerce company to
provide and the consumer to use. A typical Walmart in-store shopper is a mother who is
shopping when she wants to and would rather pay a babysitter the $10 she would otherwise
spend for same-day delivery and shop at the store herself. Forrester noted that one reason
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shopping online and picking up in store is so successful is that consumers appreciate the
opportunity to save the $5-$10 on shipping. Buying products for same-day shipping could
make sense for the small portion of the total population that lives in a major metropolitan area,
such as New York City, and is too busy to shop or works off-hour shifts and cannot make it to
the stores when they are open. Most of the population already lives within two miles of a
Walmart store, which would limit demand for the service in the first place and is why cash and
carry remains the standard for retail. Forrester also pointed out that when consumers are
required to pay for shipping, they always choose free delivery over fast.
Expeditors Still Developing Business Models for Same-Day Shipping
FedEx and UPS are still trying to determine how to make money on same-day shipping. Both
have had same-day products for some time but for very different reasons. FedEx Critical is
the same-day offering for healthcare, such as transporting a kidney for a transplant. As a
result, its price points are much higher and margins much better. Walmart uses UPS for its
same-day shipping initiative, which costs the consumer $10 per. UPS is still trying to
determine whether there will be enough volume for it to profitably offer that service to Walmart
and others.
Professor Bell also pointed out that same-day shipping will be difficult in terms of cost and
logistics and will largely depend on volume. He noted that FedEx and UPS may not have
sufficient free capacity and that their logistics systems may get clogged in major metropolitan
areas. In addition, bottlenecks can arise, such as consumers not being home at the time of
delivery.
Another industry contact suggested that Amazon.com’s efforts in same-day shipping could
spur the initiative for the e-commerce sector by generating interest in several other companies
to follow Amazon.com’s efforts, thereby increasing what had been a low-volume offering for
the expeditors.
LJM Consultants suggested that Amazon.com or others interested in offering same-day
delivery to customers would have to employ several regional carriers because it would be
difficult to offer that service leveraging FedEx, UPS, or the USPS. LJM Consultants also noted
that for expeditors in general, there comes a point where they cannot profitably ship products
for Amazon even if Amazon.com continues to increase its volumes.
According to LaserShip the challenge for any company interested in offering same-day
delivery is scale. If LaserShip is able to pick up 10 deliveries with one driver in New York City
then it would result in one cost model. However, if LaserShip has to pick up 10 deliveries in 10
different locations with 10 separate drivers the cost model is entirely different. Economies of
scale lower the cost to both the expeditor and the e-commerce company shipping the
merchandise to the consumer.
Deutsche Post DHL is aware of the demand and has launched same-day delivery services in
selected city areas in Germany. These services target food and grocery distribution service
that supermarkets can use to offer consumers same-day shipping.
Logistical Challenges for Same-Day Shipping Are Significant
LaserShip discussed the logistical challenges for offering same-day shipping. To provide
same-day shipping at scale the e-commerce company needs to sell a product that can be
turned around quickly – it has to be easy to sort so it can move through distribution center
conveyors rapidly (therefore it will be difficult to offer same-day shipping on large items, at
scale). The products need to those selling in large volumes, such as Kindles and iPads;
products where e-commerce companies are able to compete with a computer going to a
physical store to pick it up, such as cellphone chargers. Conversely, slower turning inventory
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items, such as TVs, that require scheduling a delivery will likely be shipped in the same
manner as today.
Amazon.com’s Same-Day Shipping Efforts
Today, Amazon offers same-day deliver services in 11 cities vs. 3 for eBay Now and 1 for
Google.
University of Connecticut Professor Richard Pomp suggested that Amazon.com’s business
model has changed to offer same-day and next-day delivery, which will require adding
fulfillment centers in key locations. This need to add fulfillment centers was a motivating factor
for the company to forge by-state sales tax agreements, such as in California, because it
needed fulfillment centers closer than those in Nevada to advance its new strategy.
Wharton’s Professor Bell made similar remarks, noting that with Amazon.com’s pricing
advantage being wiped out as it collects sales taxes in more states, the company is working
on another strategy to remain relevant to the consumer – offering same-day delivery to be
almost as convenient as shopping at a local store. He said the company’s success here will
depend on consumers getting used to the new service.
Regarding the potential rollout of same-day delivery, LaserShip suggested it would start in
major metropolitan areas and the ability to offer the service to more rural locations will be
dependent on population density and proximity to a fulfillment center (such as New Jersey
and Eastern Pennsylvania to service New York), because of the necessary short turnaround
times required to execute the service. Otherwise, it would be cost prohibitive to offer the
service in rural areas. LaserShip also pointed out that same-day delivery will be the premier
service for e-commerce companies in the next few years.
LaserShip also pointed out that prior to Amazon.com’s and other e-commerce shippers
interest in offering same-day shipping it had been a service in decline – as it was historically
used for legal documents or by architectural companies.
SAME-DAY SHIPPING COMPARISON, SEPTEMBER 2013
Price
Service Eligibility
Delivery Speed
Cities Served
Retailers / Sourcing
Amazon
$8.99 and up
Amazon Prime Members
Within the day
Baltimore
Boston
Chicago
Indianapolis
Las Vegas
New York City (and parts of New Jersey)
Philadelphia
Phoenix
Seattle
Washington, D.C.
eBay Now
$5 per store w/ $25 minimum order
eBay account holders
Within the hour
San Francisco Bay Area
San Jose
New York City
Wal Mart To Go
Google Shopping Express
$3-$10 for most orders, $45 min purchase Free 6 month membership + $4.99/trip
None
No requirements
Within the day
3 - 4 Hours
Washington D.C.
San Francisco Bay Area
Philadelphia
Minneapolis
San Jose
San Francisco
Routed Via Amazon Fulfillment Centers
Best Buy, Toys R Us
Macy's, Office Depot
Target, Urban Outfitters, GNC
AutoZone, Radio Shack, Home Depot
Wal-Mart Stores and Distribution Centers Target, American Eagle Outfitters,, and
Office Depot, Toys R Us, Toy World
Staples, Walgreens, Nob Hill Foods
Blue Bottle Coffee, Palo Alto Sport Shop
The Cost of Offering Same-Day Shipping
LaserShip suggested the cost of same-day shipping to an e-commerce company was 3x-4x
that of next day ground delivery. As an illustration, LaserShip suggested that the cost
structure could be offering the consumer free shipping that will arrive in 7-10 days, paying
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ground shipping that takes up to five days to deliver for $4, two-day shipping at $8, next day
for $19 (for next-day air), and same-day in an hour for $35.
OnTrac noted that when comparing the cost of same-day and next-day shipping offers it was
important to consider where distribution centers are located. At the lower end, next-day
shipping could cost $4 (on shipments less than one pound for a large e-commerce company),
while same-day shipping in the Bay Area, Los Angeles Basin, or Seattle could cost $10-$20.
Scale could reduce the cost to $10. For same-day to work from a logistical stand point there
needs to be distribution centers in close proximity to the delivery area. For example, it would
be difficult to offer same-day delivery out of Reno Nevada (an area where there is a lot of
distribution) for San Francisco, which is four hours away, because a consumer would have to
order the product by 8AM, which would dampen demand for the service. (In general, one
advantage of using a regional carrier to a national one is the ability to get the package to the
regional carrier later in the day for next-day shipping, such as at the end of the business day
instead of 10:30AM.) Next-day shipping when using a regional company and ground
transportation could be $4-$5 depending on the shipping volume of the e-commerce company
and if there are accessorial charges, such as a surcharge for residential delivery. A similar
service from FedEx or UPS could cost $6 for ground transportation, with opportunity for cost
savings if they are able to use sure post (UPS) or smart post (FedEx), where the local post
office delivers the product the last mile to the consumer. In that instance, FedEx and UPS are
cannibalizing their own business, but willing to make that tradeoff because the final mile is the
most expensive one. Next-day delivery from locations further from the consumer, such as
Zone 4, would require express service, which is much more expensive. For example, a Zone
4 tariff for a one-pound package to arrive at the consumer the next afternoon would be $32 for
FedEx or UPS.
OnTrac pointed out the challenge for all e-commerce companies when it comes to shipping
times and what they can or cannot charge for shipping: Generation Y (consumers under age
35) want their products yesterday and do not want to pay for shipping.
Amazon’s Same-Day Efforts vs. eBay’s and Google’s
Most of the industry experts we talked to favored Amazon.com’s same-day delivery model
over those of eBay and Google. The basic notion is that Amazon.com has greater control of
its efforts as it is leveraging its own fulfillment centers outside of major metropolitan areas,
whereas eBay and Google are relying on local merchants’ inventory management systems,
which can often be flawed.
LaserShip outlined some of the benefits of Amazon.com’s approach and challenges for eBay,
Google, smaller e-commerce companies, and multi-channel retailers leveraging their store
bases. Amazon has the competitive advantage of being able to pick merchandise from oneto-three fulfillment centers in an area because the company has so many of them. This
compares against a smaller-scale e-commerce company that only has one fulfillment center in
that region. Walmart and other multi-channel retailers are upgrade their technologies to
leverage their stores and fulfillment centers more effectively, including to change their
configurations to offer same-day shipping. Unlike Amazon.com which is building its systems
and infrastructure from scratch, Walmart and others have to reconfigure their efforts, because
they stores, systems, and infrastructure were not designed for this purpose originally, which is
very difficult. The company will need to have a centralized system for every Walmart doing
same-day delivery in a certain area which will lead to more of a point-to-point delivery system
than a true distribution model; for example, pick up the merchandise from Walmart and deliver
to the consumer in an hour, which will be very expensive proposition for Walmart.
Barnes & Noble has been offering same-day shipping in New York City for several years. It
offers the service for free to its members or to consumers who purchase more than $25 worth
of merchandise. The products come from its New Jersey distribution center instead of its retail
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stores. The company has considered expanding the service into other markets but has not
announced an expansion of the offering.
Forrester discussed the challenge of eBay’s, Google’s, and couriers’ models for same-day
delivery. Practically all companies do not like shipping to residential addresses because it is
really expensive to deliver products the last mile to the consumer. Courier models are
expensive and historically were used only when businesses, not consumers, were paying for
them. As a result, using couriers makes sense for Staples with its business orders but not for
eBay, Google, and others, where consumers are unwilling to pay for the service.
Forrester provided additional details on the challenges of the courier delivery business model.
It is much cheaper to leverage retail stores to get products to consumers because commercial
real estate in the US is so inexpensive. For example, you cannot build a distribution center
that is that much cheaper than retail stores in the US. It can work in Europe because real
estate is much more expensive, and consumers pay a premium for groceries, such as at
Tesco, which can ship products from its distribution centers. Fresh Direct could be successful
in parts of the US where grocery is expensive; but in other parts of the country, it will be
difficult because grocery products are so cheap.
Even if you pay a courier above-minimum wages, such as $8 per hour, most businesses
expect them to do more than just deliveries, such as stocking shelves or processing multiple
transactions in an hour. As a result, too much scale economics are lost in the courier model. It
can work for Domino’s because it is selling a high-margin product, pizza.
The last thing chain retailers want is for the customer not to visit its stores, where impulse
buying occurs. Costco, Sam’s Club, and Target need customers to visit their stores to get
average transaction sizes of $70-$100.
Relay compared the logistical challenges for eBay’s and Google’s models with that of
Amazon.com. For example, it takes four times as long to pick items in stores as it does in a
warehouse.
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CASE STUDY 11: EBAY NOW HAS AMAZON.COM IN ITS CROSSHAIRS
One of the surprises with same-day shipping has been the emergence of eBay as a player. That said, we
believe that eBay has what it takes to be a serious participant in this emerging service. Same-day
shipping could be a tremendous opportunity for eBay for several reasons. The Marketplaces effort
(52.6% of its 2012 revenues and 66.4% of segment operating profits) boasts some of the highest margins
in e-commerce, enabling eBay to price the service aggressively – at $5 per order (plus, in some cases,
an introductory promotion of free the first time). In addition, the strategy is 100% aligned with eBay’s
intent to be the partner of choice for retailers (including multichannel ones).
The company’s December 2010 acquisition of Milo for $75MM gave it the technology to collect local
inventory data from retailers.
While Amazon.com is adding fulfillment centers near major metropolitan areas, eBay Now leverages
stores in major cities, including New York, San Francisco, and San Jose. This is important because it
could allow eBay to get products to customers more quickly. Its service aims for one- to two-hour delivery
times, but it often gets the product to the consumer in less than an hour. (In our Valentine’s Day test –
detailed below – it was about 30 minutes.)
The company is also in the very early stages of enabling consumers to have merchandise ordered online delivered the same day.
>
About eBay Now Same-Day Shipping Service
The eBay Now mobile app enables consumers to browse local inventory from hundreds of retailers. Participants include Best Buy, Home
Depot, Macy’s, Target, Toys ‘R’ Us, Urban Outfitters, and Walgreens. It currently costs $5 per order, but we would not be surprised if
eBay were to increase the pricing later, depending on consumer demand. By comparison, Walmart charges $10 for same-day delivery
(via UPS), as does Amazon. Delivery times are targeted at two to four hours, but eBay is currently surpassing that goal, at one to two
hours. The company launched same-day delivery as a beta test in San Francisco in August 2012, with an official launch in October 2012.
It started rolling out the service in New York City in November 2012. In March 2013 it added San Jose, and it has announced plans to
expand to Chicago and Dallas in 2H13. Depending on the success of the offering, we believe eBay could roll it out to more cities over
time.
>
eBay Now Delivers for Valentine’s Day
We used eBay Now same-day delivery service on Valentine’s Day, and it was a very good experience from start to finish. After spending
a little time using the service on our iPhone app, we found it easy enough to navigate to find the product we were looking for. The eBay
courier could not have been nicer and walked us through the process once we placed the order. We look forward to purchasing through
eBay Now again in the near future. eBay Now made it very easy for us to purchase a Blu-Ray DVD from Best Buy. Had we ordered it on
Amazon.com, the earliest we could have received it would have been the next day.
>
Details from Our Experience with eBay Now
When we launched the eBay Now app on our iPhone 5 at 8:58 a.m., we initially were surprised to see that the service was closed. A
message on the screen indicated that we could browse merchandise and return between 9 a.m. and 9 p.m. to complete our transaction.
Shortly after 9 a.m., we received an alert to a promotion on our phone, enabling us to get free shipping on our first eBay Now purchase.
Our intent was to buy a children’s Blu-Ray disc from Best Buy for Valentine’s Day. After some tinkering, searching for products was
reasonably intuitive, though we must admit to having visited BestBuy.com on our work computer to get more information about a product
before returning to the service. We attribute this more to our initial unfamiliarity with the app, not to a shortcoming of the offering. We
wanted to purchase the “Robots” Blu-Ray, but we were unable to find it through the app. We believe this was probably because the
product was not in inventory at any nearby Best Buy locations. The film was from 2005 and is not among the more popular titles. After
some browsing, we decided to purchase “A Bug’s Life.”
We placed the order shortly after 9:30 a.m. and almost immediately were notified that an eBay courier was available to deliver the product
to us. Within minutes, the courier called us on our iPhone 5 and let us know he would have the product for us within an hour and
confirmed our address. The GPS on our iPhone was a little off and had indicated to him that we were at 545 Fifth Avenue, instead of 535
Fifth Avenue. We asked him questions about payment options, and he explained that we could use PayPal or a debit or credit card.
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CASE STUDY 11: EBAY NOW HAS AMAZON.COM IN ITS CROSSHAIRS (CONTINUED)
As promised, the courier dropped off the Blu-Ray at our office a little after 10 a.m., well within an hour. The courier walked us through
paying with PayPal Here, which was very easy through our PayPal iPhone app, and we received a red rose and eBay Now canvas bag
along with our purchase. To be fair, the Best Buy location is across the street from our office, which probably accounted for the short
delivery time. When we discussed the service being closed when we first used the eBay Now app, the courier explained the hours of
operation (9 a.m. to 9 p.m. Monday to Saturday and 9 a.m. to 5 p.m. on Sundays) and how it had been open longer during the holidays.
As with any service business, the quality of the experience will depend greatly on the quality of the courier’s service; and in this instance,
it was very good.
>
Others’ Experience with eBay Now
Based on anecdotal evidence from our co-workers’ experiences with the service, three out of four times it was very favorable. On the plus
side, it was very convenient and fast (less than 90 minutes each time from order to delivery, with constant updates on where in the
process you stood), and the quality of the customer service and couriers exceeded expectations. For example, call center representatives
and couriers were helpful in explaining the service, including timing and payment options, and in confirming the order. Similar to our
experience on Valentine’s Day, when we received a free rose and canvas bag, the deliveries included free items that were timely, such as
wrapping paper, a card, and a box during the holidays.
The unfavorable experience was during the holiday shopping season and occurred late in the evening, during extended holiday hours.
The courier failed to get to Macy’s in a timely manner and what should have been a delivery by midnight would have become a 1:30 a.m.2 a.m. delivery if it had not been cancelled.
Google Shopping Express
In March, Google announced it would be testing a local delivery service featuring same-day
delivery. The initiative, dubbed Google Shopping Express, will be available in the San
Francisco Bay Area. Initial six-month test memberships will be offered for free and will feature
six national retailers, along with distinguished local businesses. The company has not
disclosed membership pricing for after the testing period. We believe there could be a place at
the table for Google, given its long list of assets and competitive strengths – such as local
search (historically, 20% of search activity has been local oriented), inventory information
showcased in Google Shopping, and Google Wallet. Same-day shipping remains in its early
stages for Google, and we await announcement of further details and expansion plans.
GOOGLE SHOPPING EXPRESS
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Amazon Prime
Amazon Prime is the company’s flagship delivery membership program and could be one of
the keys to improving its long-term CSOI margin. Launched in 2005 in the US, consumers are
able to get “free” two-day shipping, and a whole lot more, from Amazon.com in exchange for
an annual membership fee of $79. In the following table, we outline the company’s local
Amazon Prime membership programs across the globe.
AMAZON.COM’S SHIPPING PROGRAMS, 2Q13
Free Shipping (Purchase
Requirement) (local currency)
Membership Program
Launched
Annual Fee (local currency)
Offer
US
UK
Germany
Japan
France
Italy
Spain
Canada
China
India
$25
amazon.com prime
2005
$79
£10
amazon.co.uk prime
2007
£49
€ 20
amazon.de prime
2007
€ 29
¥0
amazon.co.jp prime
2007
¥3,900
€ 15
amazon.fr premium
2008
€ 49
€ 19
amazon.it.prime
2010
€ 10
€ 19
amazon.es premium
2011
€ 15
$25
amazon.com prime
2012
$79
¥29
NA
NA
NA
INR 499
NA
NA
NA
Free Expedited
(Same/Next Day &
Scheduled) Shipping
Free One-Day Shipping
NA
NA
Free Two-Day Shipping Free One-Day Shipping Free One-Day Shipping
Free Two-to-Three-Day Free Two-to-Three-Day
Free Two-Day Shipping
Shipping
Shipping
Notes: Free shipping for UK website includes 17 countries in Europe for orders greater than £25.
Free shipping for German website includes Austria, Belgium, Luxembourg, Netherlands, Liechtenstein, and Switzerland.
Free shipping for French website includes Belgium, Luxembourg (for some categories), and Switzerland.
Free shipping for Italian website includes Switzerland.
Free shipping for Spanish website is only for books.
According to Wharton’s Professor Bell, lowering the threshold for consumers to qualify for free
shipping opened the door to orders of any size, rather than those of $25 or more, igniting
spontaneous orders, which resulted in a lot of incremental purchasing. Anecdotally, we can
attest to Professor Bell’s observation as Amazon Prime members who purchase individual
products from Amazon.com all the time with order sizes below $25.
An industry source suggested Amazon.com could offer same-day shipping as a boutique
service, as part of an effort to offer consumers multiple choices, akin to suggesting whatever
you want, Amazon can do it.
LaserShip discussed the power of Amazon.com’s free shipping offering within Amazon Prime.
Products offered by third-parties on Amazon.com are often less expensive than those offered
by Amazon.com; however, including shipping costs, Amazon.com is less expensive because
others are unable to offer free shipping. It also pointed out that free shipping for e-commerce
companies is akin to marketing spending since offering free shipping on an e-commerce
website is similar to running an advertisement for an e-commerce company.
Overstock’s shipping membership program, Club O, is loyalty based. Consumers pay a $20
annual fee and, in return, earn 5% rewards on purchases and receive free shipping. If the
company were to upgrade the service to a next-day or same-day shipping model, it would
have to change the annual fee to compensate. Offering next-day delivery on everything would
be especially difficult for Overstock because it ships anything from DVDs to sectional
couches. As a result, it would have to exclude certain products from that offering. Overstock
indicated that its Club O members are very loyal, order much more than non-members, and
are much more profitable than its average customer.
Wharton’s Professor Bell believes Amazon.com has an opportunity to adjust its Amazon
Prime offering over time from less of a one-size-fits-all solution to one that is more customized
to the needs of varying groups of consumers, as the company collects more data on its
usage. He suggested that this could benefit margins, and he cited the example of Netgrocer’s
efforts to discourage consumers from placing large orders in areas that are hard to reach for
delivery.
Amazon Instant Video
With the company selling more of its own branded hardware, its Amazon Instant Video effort
will become more important in the future, in our view. The company launched the service as
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part of its Amazon Prime shipping program in February 2011. Since then, it has steadily
ramped up its investment in content for the service and in distribution for the service (outlined
in the following tables).
In the second table that follows, we compare distribution for a number of streaming video
services. When it comes to the quality of the viewing experience, Netflix walked through the
hierarchy: The first preference is to watch on a large screen in front of your couch at home; a
distant second is on a tablet device, such as an iPad, because its screen is larger than that of
a smartphone; and watching on a smartphone is a close third. The quality of the viewing
experience is important because it is tied to consumer use. Netflix noted that when it comes to
distribution for large-screen at-home viewing, game consoles are important because of their
large installed bases. Smart TV adoption has been relatively slow versus other connected
devices, such as smartphones and tablets. In some locations outside the US devices can be
prohibitively expensive for consumers and many, instead, opt to connect their laptops to their
TVs to access streaming video content.
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AMAZON VIDEO CONTENT DEALS (AS OF AUGUST 2013)
Distributor
Sony Pictures
Warner Bros.
BBC
PBS
Magnolia Pictures
IFC
National Geographic
Shout Factory
Music Box Films
Egami Media
Reel Media
Announced Rights in Type of Content
02/22/11
U.S.
Movies
02/22/11
U.S.
Movies
02/22/11
U.S.
TV
02/22/11
U.S.
TV
02/22/11
U.S.
Movies
02/22/11
U.S.
Movies
02/22/11
U.S.
TV
02/22/11
U.S.
Movies
02/22/11
U.S.
Movies
Movies, docs,
02/22/11
U.S.
performance
02/22/11
U.S.
Movies
Exclusivity
non-exclusive
non-exclusive
non-exclusive
non-exclusive
non-exclusive
non-exclusive
non-exclusive
non-exclusive
non-exclusive
Window
library
library
library
library
library
library
library
library
premium, library
Examples of Shows/Movies:
non-exclusive
library
n/a
n/a
The Tudors, Numb3rs, Medium, the complete Star Trek franchise,
Frasier Cheers.
Eternal Sunshine of the Spotless Mind, Elizabeth, Babe, Flipper,
Fear and Loathing in Las Vegas.
Speed, Mrs. Doubtfire, Doctor Dolittle, Last of the Mohicans,
Office Space, 24, The X-Files, NYPD Blue, Arrested
Development.
NOVA, Masterpiece, Antiques Roadshow, The Civil War, The
National Parks: America’s Best Idea, Baseball, Jazz
ABC Family’s Greek and The Secret Life of the American
Teenager, ABC Studios’ Lost, Grey’s Anatomy and Felicity, the
Disney Channel’s Phineas & Ferb, and Marvel’s Spider Man, XMen Evolution.
Stripes
Syriana, March of the Penguins
Doctor Who, The Office
Arthur, Caillou, Super Why! and Mister Rogers’ Neighborhood
Food Inc.
n/a
n/a
n/a
Girl with the Dragon Tattoo series
non-exclusive
library
CBS
07/19/11
U.S.
TV
non-exclusive
library
NBCUniversal
07/28/11
U.S.
Movies
non-exclusive
library
Twentieth Century Fox
09/26/11
U.S.
Movies, TV
non-exclusive
library
PBS
10/19/11
U.S.
TV
non-exclusive
current, library
Disney - ABC
10/31/11
U.S.
TV
non-exclusive
library
Twentieth Century Fox
12/09/11
U.S.
TV
non-exclusive
library
Glee, Sons of Anarchy
MTV shows including The Hills, Jersey Shore, The Hard Times of
RJ Berger, several seasons of The Real World, and Comedy
Central shows such as Chappelle’s Show and The Sarah
Silverman Program. Nickelodeon episodes of iCarly, Dora the
Explorer, SpongeBob SquarePants, Yo Gabba Gabba, along with
TV Land favorite, Hot in Cleveland.
Viacom
02/08/12
U.S.
TV
non-exclusive
library
Discovery
03/14/12
U.S.
TV
non-exclusive
library
Paramount
05/23/12
U.S.
Movies
non-exclusive
library
MGM
06/13/12
U.S.
Movies, TV
non-exclusive
library
Terminator, Rain Man, Silence of the Lambs, Dances with Wolves
library
Fringe, The West Wing
Dirty Jobs, Whale Wars
Star Trek, Breakfast at Tiffany’s, Top Gun, The Italian Job, The
Truman Show
Warner Bros.
07/20/12
U.S.
TV
Exclusive thru
summer 2012
for Fringe and
West Wing
ESPN
08/21/12
U.S.
Movies
non-exclusive
library
NBCUniversal
08/24/12
U.S.
TV
non-exclusive
library
EPIX
09/04/12
U.S.
movies, originals
non-exclusive
premium, library
The Avengers, Iron Man 2, The Hunger Games, Transformers:
Dark of the Moon, Thor, Rango
Turner
Broadcasting/Warner Bros.
12/17/12
U.S.
TV
exclusive
current, library
Falling Skies, The Closer,
A&E Networks
PBS
01/04/13
02/01/13
U.S.
U.S.
TV
TV
non-exclusive
exclusive
library
current, library
Pawn Stars, Storage Wars, Dance Moms
The U, Pony Excess and Winning Time, Ice Cube’s Straight Outta
L.A.
Parks and Recreation, Parenthood, Friday Night Lights, Heroes,
Battlestar Galactica
Downtown Abby
Under the Dome, America's Next Top Model, Everybody Loves
Raymond, Undercover Boss, United States of Tara and more
CBS
02/13/13
U.S.
TV
non-exclusive
current, library
Sony Pictures Television
02/26/13
U.S.
TV
exclusive
library
Justified, The Shield
Scripps Networks
Interactive
02/28/13
U.S.
TV
non-exclusive
library
Rachael Ray's Week in a Day, Anthony Bourdain: No
Reservations; Cupcake Wars; Diners, Drive-Ins and Dives; House
Hunters and House Hunters International, Iron Chef America,
Man v. Food, Selling New York and Selling LA, Throwdown With
Bobby Flay, Chopped, Ghost Advertures and Yard Crashers
NBCUniversal & NewMedia
Distribution
05/16/13
U.S.
TV
non-exclusive
library
Grimm, Suits, Hannibal, Defiance, Smash, Alphas, Eureka and
Warehouse 13
Viacom
06/04/13
U.S.
TV
non-exclusive
library
CBS
06/28/13
U.S.
TV
n/a = not available. Note: not all content deals are listed above.
non-exclusive
current
Dora the Explorer, Go, Diego, Go!, Blue's Clues and The
Backyardigans
Dome
Source: SNLKagan and TAG research.
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COMPARISON OF DISTRIBUTION OF STREAMING VIDEO ON VARIOUS DEVICES, SEPTEMBER 2013
DEVICES
Video Game Consoles
Microsoft Xbox 360
Nintendo Wii
Nintendo Wii U
Sony PlayStation 3
Mobile Devices
Apple iPad, iPhone, iPod Touch
Google Android
Microsoft Windows 7 Smartphone
HDTV
LG
Mitsubishi



















Panasonic

Philips
Samsung
Sanyo
Sharp
Sony
Toshiba
VIZIO
Blu-Ray Players
Insignia
LG
Magnavox






































Mitsubishi
OPPO Digital
Panasonic
Philips
Pioneer
Samsung
Sharp
Sony
Sylvania
Toshiba
VIZIO
Yamaha
DVRs
TiVo
Streaming Players
Apple




Logitech
Roku
Seagate
Sony
WD






































































D-Link
LG

















Note: Best Buy owns CinemaNow and Wal-Mart owns VUDU. Netflix is available on a few smartphones and tablets with the Google Android operating system.
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LOVEFiLM
The company’s LOVEFiLM unit will complement its Amazon Instant Video effort and serve as
its primary vehicle for international expansion. In February 2008, Amazon.com became
LOVEFiLM’s largest shareholder as part of a transaction in which Amazon.com sold the
company its DVD rental business in Germany and the UK. In January 2011, Amazon.com
acquired the company for €200MM. Netflix noted that it competed separately against
LOVEFiLM in the UK, where both companies primarily acquire content on an exclusive basis.
Regarding the potential for streaming video rights to be sold on a global basis, rather than by
country/region, Netflix suggested that it would take someone with enough scale to make it
happen for the content providers.
The Emergence of Anytime and Anywhere Video Content Consumption
We believe Amazon.com should be able to leverage the opportunity of video becoming more
of an anytime and anywhere experience and appointment TV fades away. This should
contribute to its long-term sales growth, and depending on the rate at which Amazon.com
signs content, this could be accretive to its long-term margin.
Although the timing of the move to true anytime, anywhere TV is unclear, we are convinced
that we are heading in that direction. Netflix suggested that much will depend on what
happens to advertising-supported TV in the next three years. Today content owners monetize
their product via multiple avenues, including linear advertising-supported viewing, offering
recent shows as part of a subscription with Hulu Plus, and licensing prior seasons for
streaming and DVD viewing via Netflix and streaming with Amazon Instant Video, for
example.
Monthly Amazon Instant Video Offering
Amazon tested charging a monthly fee for its Amazon Prime membership for a short period of
time, ultimately discontinuing the practice. We believe it could restart this effort, especially as
it bulks up its Amazon Instant Video offering with more exclusive content.
Future Competition as More Services Become Untethered
We believe more competition for streaming video services will come online as more traditional
players, such as HBO, are untethered from subscription video services over time, such as
cable and satellite TV. Netflix noted that there are many nuances that must be addressed
when pursuing the direct-to-consumer business model, including payment mechanisms and
marketing.
The opportunity for Amazon, Netflix, and others is to provide a robust, differentiated service to
motivate consumers to subscribe to multiple services, including those offered by Amazon,
Hulu, Netflix and, down the line, HBO and Showtime. One way Amazon.com and Netflix are
working toward that goal is by offering consumers exclusive content (see our comments on
Amazon Studios).
Piracy
One challenge Amazon.com faces for Amazon Instant Video and LOVEFiLM is piracy (illegal
free consumption of licensed content), with consumers opting to circumvent paid services to
consume free digital content, as was the case for the music industry with the emergence of
Napster. Netflix pointed out that video content providers, such as the movie industry, learned
lessons from what happened with music and Napster. In addition, Netflix mentioned that video
content appeals to a broader audience than the younger generation that was pirating music; it
suggested that, for example, a “soccer mom” is less likely to visit a website that offers pirated
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video content for free. We remain concerned about piracy, especially as Internet connection
speeds increase over time and it becomes easier for a consumer to download longer-form
media, such as movies.
Amazon Studios
could add $540MM in revenue and 59 basis points to our sales growth projection for 2015.
Margin Implications: Popular TV and movie content can still achieve a strong margin. If the
company were able to add $1B of proprietary-content-related revenue in 2015 at a margin
rate comparable to that of Disney (TAG’s 2015 forecast is 25.3%), it would add 20 basis
points to our CSOI margin projection for 2015.
Launched in November 2010, Amazon Studios has been the company’s channel for the
growth of original feature films and TV series. Since its launch, more than 14,000 movie and
4,000 series pilot scripts have been submitted to the studio. The company now has 25 movies
under development and 14 pilots that have been rolled out. Amazon Studios pilots are
currently streamed for free and solicit immediate feedback from viewers. The pilots have
featured such stars as John Goodman, Jeffrey Tambor, and Bebe Neuwirth and can be
accessed on the Amazon Instant Video app across the company’s Kindle Fire lineup, as well
as iPad, iPhone, iPod, Roku, Xbox, PlayStation 3, and Nintendo Wii.
AMAZON STUDIOS PILOTS, SEPTEMBER 2013
Title
Comedy
Alpha House
Betas
Browsers
Dark Minions
Onion News Empire
Supanatural
Those Who Can’t
Zombieland
Reviews
Picked
Stars Number Up
Creators
Actors
TAG
Description
Follows 4 Senators who live together in Washington DC
A series on 4 friends cracking the code in Silicon Valley
Follows 4 individuals in NYC as they start a news website
Centers on 2 slackers who work on an intergalactic warship
A news network spin-off from the popular satirical news outlet
A series that follows 2 outspoken divas and their adventures
A series based on juvenile misfit teachers and their students
4 survivors working together in a zombie apocalypse
4.1
4.3
3.0
3.7
4.3
4.2
4.4
3.7
3,117
1,859
926
971
2,099
817
1,725
6,055
yes
yes
no
no
no
no
no
no
Garry Trudeau
Evan Endicott, Josh Stoddard
David Javerbaum
Kevin Sussman, John Ross Bowie
Will Graham
Lily Sparks
Andrew Orvedahl
Rhett Reese
John Goodman
Joe Dinicol
Bebe Neuwirth
John Ross Bowie
Jeffrey Tambor
Kristin Schaal
Andrew Orvedahl
Kirk Ward
Kids
Annebots
Creative Galaxy
Positively Ozitively
Sara Solves It
Teeny Tiny Dogs
Tumbleaf
4.3
4.3
4.5
4.7
4.4
4.7
324
215
261
300
339
304
yes
yes
no
no
no
yes
JJ Johnson
Angela Santomero
Dara Monahan
Carol Greenwald
The Jim Henson Company
Drew Hodges
Katie Griffin
Susan Roman
Andy Yerkes
Shannon Chan-Kent
John Tartaglia
Gary Littman
Average
4.2
1,379
A series on a kid scientist, her best friend, and a robot
A lovable little alien explores various faucets of art
A carve-out of Frank Baum’s classic Wizard of Oz
A mathematical mystery show for kids
A children’s series that explores the world guided by dogs
A small blue fox named Fig embarks on an adventure
Given the exclusive nature of content from Amazon Studios, it could be more lucrative nonexclusive content to Amazon.com if it is successful, in our view. If any of these pilots become
series, they would add to Amazon Instant Video’s short but growing list of exclusive content, which
includes episodes of The Closer, Falling Skies, The West Wing, and Fringe. Most of Netflix’s
content also is not exclusive, but its longer list of exclusive content includes its own content
(Lilyhammer and House of Cards) and library content, such as Breaking Bad and Mad Men.
We are encouraged by the announcements as Amazon continues to add content to Amazon
Instant Video. Still, we are concerned that more agreements are exclusive, which suggests to
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SPECIAL REPORT
us that they are more expensive. Netflix has pointed out that exclusive content costs 1.3x-1.5x
more to license than nonexclusive. Netflix also has been adding exclusive content, including
deals with Disney (announced December 4, 2012), Queen Latifah’s Flavor Unit Entertainment
(February 5), and DreamWorks Animation (February 12). When considering Amazon.com’s
margins, which are already very narrow, we are closely monitoring the situation to see if it
becomes an arms race, akin to satellite radio when Sirius and XM forged expensive exclusive
deals for professional sports leagues, including MLB, NBA, and the NFL.
AmazonFresh – Another Mechanism for Speedy Delivery
As we indicated on page 44, we believe AmazonFresh is as much about fast delivery as it is
about selling groceries. Based on our own experience, we were able to place an order in the
evening and have it delivered between 4 a.m. and 6 a.m. the following morning. Based on our
own research of looking at open delivery times on its iPhone app, we were consistently able
to arrange same-day shipping times for Attended Delivery (where the consumer is at the
delivery location) and Doorstep Delivery (where the consumer does not have to be at the
delivery location). In certain instances, we were able to line up Doorstep Delivery times within
12 hours of our orders.
Just-in-Time Inventory and 3D Printing
A potential game-changer sits on the horizon, though we do not think it will materially affect
Amazon.com’s results by 2015. The basic concept is that Amazon will be able to leverage the
combination of its broad fulfillment center distribution and emerging 3D printing technology to
create a large number of SKUs in its fulfillment centers and ship to consumers in less than
two days.
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AMAZON WEB SERVICES (AWS)
Sales Implications: Amazon.com includes the sales from AWS in its other line for its North
American segment, which we estimate will represent 6.8% of its total revenue in 2015 vs.
3.8% in 2012 and 2.2% in 2009. This revenue line also includes sales from advertising and
its co-branded credit card.
Margin Implications: We estimate that its CSOI operating margin is in the low single digits,
comparable to its consolidated CSOI margin of 2.7% in 2012. At its summit earlier this year,
AWS indicated that it had cut pricing 31 times during its seven-year history, which supports
our view that it prices its AWS effort aggressively, as it does its retail division, which results
in low margins. At the summit, the company also indicated that it advised clients on how to
save money using AWS, which resulted in $22MM in additional savings for its clients.
Amazon Web Services is the company’s cloud computing service, launched seven years ago,
that it offers services to start-ups, small- and medium-sized businesses, and large companies
across multiple industries and leverages Amazon.com’s technology infrastructure.
AWS offers 33 major services and has hundreds of thousands of clients in more than 190
countries. Its marketplace (launched last year) spans more than 25 categories with 778
product listings, and it stores a massive number of objects (more than 2T vs. 905B in 1Q12).
AWS CLIENTS, SEPTEMBER 2013
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AWS CLIENTS, SEPTEMBER 2013
AWS also represents the company’s most significant business outside of its retail operations.
It demonstrates that Amazon can apply many of the same principles from its retail efforts to
non-retail opportunities.
8,000.0
80.0%
7,000.0
70.0%
6,000.0
60.0%
5,000.0
50.0%
4,000.0
40.0%
3,000.0
30.0%
2,000.0
20.0%
1,000.0
10.0%
(Annual Growth)
(NA Other Sales)
AWS SALES, 2011-2015E
0.0%
Annual NA Other Sales (Includes AWS)
2015E
2014E
2013E
2012
2011
0.0
YoY Growth
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SEPTEMBER 23, 2013
4.2%
SPECIAL REPORT
2.2% 0.4%
4.1%
3.8%
0.3%
91.7%
93.2%
1P Retail
3P Retail
Other - NA
Other - Int'l
1P Retail
3P Retail
Other - NA
Other - Int'l
AMAZON.COM’S REVENUE MIX, 2015E
6.8%
0.3%
4.0%
88.9%
1P Retail
3P Retail
Other - NA
Other - Int'l
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1.1%
1.9%
9.9%
15.5%
16.7%
15.1%
68.3%
71.5%
1P Retail
3P Retail
Other - NA
Other - Int'l
1P Retail
3P Retail
Other - NA
Other - Int'l
AMAZON.COM’S GROSS PROFIT MIX, 2015E
0.9%
24.3%
62.0%
12.9%
1P Retail
3P Retail
Other - NA
Other - Int'l
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60.0%
150.0%
103.1%
48.0%
50.0%
100.0%
40.0%
50.0%
20.0%
8.0%
29.3%
30.0%
0.0%
17.2%
-50.0%
10.0%
-100.0%
5.5%
0.0%
1P Retail
-150.0%
3P Retail
109.7%
Other - NA
Other - Int'l
(120.80%)
1P Retail
3P Retail
Other - NA
Other - Int'l
AMAZON.COM’S CSOI MIX, 2015E
150.0%
132.3%
100.0%
67.5%
50.0%
4.9%
0.0%
-50.0%
-100.0%
(104.7%)
-150.0%
1P Retail
3P Retail
Other - NA
Other - Int'l
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Key Takeaways from 2013 AWS Summit Series
We attended the AWS Summit series in New York City in both 2012 and 2013. For 2013, the
summit series spanned 12 cities across the globe and was its largest yet, with more than 20K
attendee registrations.
The key takeaways from the 2013 AWS Summit series were as follows:

We believe Amazon will continue to invest and expand AWS for years to come.

The company’s comments that it has cut pricing 31 times since its first product launched
on March 14, 2006, once again confirmed our view that it prices the service aggressively,
and we estimate that it generates low-single-digit non-GAAP operating margins from this
initiative.

AWS is accelerating its pace of innovation, which should benefit its revenue growth, in
our view.

Although AWS accounts for less than 5.0% of its total revenue, we forecast that the effort
will be accretive to the company’s total sales between 2012 and 2015.

We believe the company’s service is benefiting Internet start-ups and large, established
companies across multiple industries, as Amazon can leverage its tech infrastructure
without having to invest in capital expenditures, and it can then scale up spending with
demand.
AWS and Capital Expenditures
Investments in AWS contributed to the company’s increase in capital expenditures to $3.8B in
2012 (6.2% of revenues) from $1.8B in 2011 (3.8%) and $1.0B in 2010 (2.9%). We attribute
the bulk of the increase to the company’s efforts to expand its fulfillment centers. We project
2013 capital expenditures at $4.3B (5.7% of sales), with AWS investing as one contributor.
Among the current buckets Amazon is spending on during its current phase of hyperinvestment (AWS, hardware, fulfillment centers, and content for Amazon Instant Video), we
expect that Amazon will continue to invest heavily in expanding AWS in five years, and we
believe it is likely to scale back its spending on adding fulfillment centers, over that time
frame.
Increasing Innovation Should Drive Sales
AWS is accelerating its pace of innovation, which should boost its revenue growth, in our
view. It made 159 changes to its services in 2012 vs. 82 in 2011 and 61 in 2010, and the pace
is accelerating in 2013, with 122 changes made in 1Q13 (suggesting a run rate of 244 for
2013).
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SPECIAL REPORT
AWS NUMBER OF INNOVATIONS
600
100%
80%
70%
400
60%
300
50%
40%
200
30%
(Annual Growth)
(Number of Innovations)
90%
500
20%
100
10%
0
0%
2011
2012
2013E
2014E
New Service Announcements & Updates
2015E
Annual Growth
AWS INNOVATIONS
2011
2012
2013 YTD
S3 Multi-Object Delete
6 new Direct Connect Sites
Elastic Transcoder
AWS Sao Paulo Region
DynamoDB
Amazon Redshift available to all
customers
AWS Oregon Region
RDS in VPC
AWS OpsWorks
Elastic Beanstalk (Beta)
AWS Trusted Advisor
Amazon SES (Beta)
CloudFormation in VPC
AWS CloudFormation
AWS Storage Gateway
Amazon RDS for Oracle
Amazon Glacier
AWS Direct Connect
CloudFront Live Streaming
AWS GovCloud (US)
Amazon CloudSearch
Amazon ElastiCache
AWS Marketplace
VPC Virtual Networking
Red Hat Reserved Instances
VPC Dedicated Instances
New EC2 Instance Types
SMS Text Notification
Mult-AZ Oracle RDS
CloudFront Live
RDS SQL Server
Streaming
EC2 RI Marketplace
AWS Tokyo Region
VM Export
SAP RDS on EC2
Multiple Ips in VPC
SAP BO on EC2
Provisioned IOPS
Win Srv 2008 R2 on EC2
Oracle data Pump
Win Srv 2003 VM Import
New APAC Region - Sydney
Amazon RDS now supports 3TB and
30,000 provisioned IOPS per database
instance
AWWS GovCloud (US) achieves
FedRamp complaint agency ATO
AWS Data Pipeline
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Low Prices Are Also Part of AWS’s Virtuous Cycle
Similar to Amazon’s retail efforts which leverage a virtuous cycle based on low prices, large
selection, and fast delivery, AWS has its own virtuous circle, which it described at its Amazon
Web Services (AWS) conference in Las Vegas in November 2012. The more customers that
use AWS more frequently, the more AWS is able to buy more infrastructure and take
advantage of economies of scale and, therefore, lower prices which results in more customers
using AWS more frequently, and so on.
Amazon can also make the flywheel spin faster by adding new services and features,
expanding internationally, and expanding the number of partners in its ecosystem enabling
more companies to move to the cloud.
AWS has cut its pricing more than 23 times (as of that time) without competitive pressure to
do so, which is very powerful. For example, the company reduced pricing by at least 24% for
its S3 service in December 2012 (illustrated below).
AWS AMAZON S3 PRICE CUT (US – EAST STANDARD REGION), DECEMBER 2012 (?)
Tier
First 1 TB
Next 49 TB
Next 450 TB
Next 500 TB
Next 4,000 TB
New
Price
$0.095
$0.080
$0.070
$0.065
$0.060
Old
Price
$0.125
$0.110
$0.095
$0.090
$0.080
Change
(24.0%)
(27.3%)
(26.3%)
(27.8%)
(25.0%)
AWS Aiding Internet Startups and Large, Established Firms, Alike.
We believe the company’s service benefits firms of all sizes, including Internet start-ups and
big firms, which are able to leverage Amazon’s tech infrastructure without having to invest in
capital expenditures and then scale up spending with demand. For example, AWS has
positively affected the growth of Internet start-ups including Datadog, Holler, and Mortar, and
of big firms, such as Bristol-Myers Squibb, GE, and NASDAQ, which presented testimonials
during the summit.
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WHO DOES AWS COMPETE WITH?
Company
Amazon.com
Ticker
Market Cap ($B)
Founded
Headquarters
CEO
Sales ($B)
FY10
FY11
FY12
FY13E
FY14E
Adj. Operating Margin
FY10
FY11
FY12
FY13E
FY14E
Capital Expenditures ($B)
FY10
FY11
FY12
FY13E
FY14E
Balance Sheet (3/13) ($MM)
Cash & Equivalents
Debt
Net Cash
Debt/Total Capital
Rackspace
Microsoft
IBM
AMZN
RAX
MSFT
IBM
138.1
5.6
264.9
203.0
1994
1998
1975
1911
Seattle, WA San Antonio, TX Redmond, WA Armonk, NY
Jeff Bezos
Lanham Napier Steve Ballmer Virginia Rometty
34.2
48.1
61.1
77.7
96.1
0.8
1.0
1.3
1.5
1.8
62.5
69.9
74.3
77.3
83.2
99.9
106.9
104.5
102.3
104.8
5.4%
3.0%
2.5%
2.9%
3.1%
10.2%
12.0%
11.3%
9.7%
10.6%
38.7%
38.9%
29.7%
28.3%
33.5%
19.7%
19.6%
21.0%
22.4%
23.8%
1.0
1.8
3.8
4.1
4.3
0.1
0.3
0.3
0.4
0.4
2.0
2.4
2.3
4.3
5.3
4.8
4.7
4.7
3.7
3.9
7,895
4,578
3,317
35.2%
279
106
173
10.7%
77
16
61
14.6%
10
34
(24)
65.8%
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MARGIN POTENTIAL AND LONG-TERM OUTLOOK
Should Amazon.com choose to do so, we believe the company could increase its CSOI
margin to 7.0% over the long term vs. our forecast for 3.9% in 2015, 2.7% in 2012, 6.4% in
2009 and its high-water mark of 7.1% in 2004, through a combination of increasing its
private-label merchandise, and leveraging its expanded fulfillment center footprint. This
scenario compares with Wal-Mart, another highly competitive retailer with a low-margin
culture, which had an operating margin between 5.6% and 6.1% in 2002-2012 (its high-water
mark during that period was 6.1% in 2010). Amazon.com’s CSOI margin does not include
stock-based compensation and other operating expenses. If you include those items in WalMart’s operating margin for comparison’s sake, its average would be 130-230 basis points
higher, or 6.9%-8.4% for 2002-2012.
AMAZON.COM CSOI MARGIN, 2001-2015E
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
(1.0%)
2015E
2014E
2013E
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
(2.0%)
In the following table, we outline our long-term CSOI model for Amazon including its gross
margin and operating expenses from its high-water-mark year in 2004 in addition to the
timeframes included in this report: 2009, 2012, and 2015.
LONG-TERM CSOI MODEL
Gross Margin
Long
2004 2009 2012E 2015E Term
23.1% 22.6% 24.8% 28.1% 29.0%
Fulfillment
Marketing
Technology and Content
G&A
8.5%
2.3%
3.6%
1.6%
8.0% 10.2% 10.9%
2.7% 3.8% 4.1%
4.3% 6.8% 7.9%
1.1% 1.3% 1.3%
8.5%
4.1%
8.0%
1.3%
CSOI Margin
7.1%
6.4%
7.0%
2.7%
3.8%
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MARGIN OPPORTUNITIES
2015
Margin
Lift
from $1B
Sales
(Basis Pts)
Third-Party Sales
65
Membership
46
Advertising
33
Shipping
15
Private Label
7
2015
Margin
Lift
from 1% of
Sales Mix
(Basis Pts)
70
50
35
16
7
Odds of
Achieving
Margin Lift
from 1% of
Sales Mix
in 2015
10%
10%
33%
100%
10%
2015
Margin
Lift
from 5% of
Sales Mix
(Basis Pts)
350
250
177
83
38
Culture
As with Costco, we believe Amazon.com’s culture will dictate its long-term margin as much as
anything. Since the beginning, Amazon has focused on building its business and capturing
market share at the expense of profitability, initially, and higher margins, more recently.
Because of Amazon.com’s culture – for example, CFO Tom Szkutak ended his prepared
remarks on the company’s last 20 quarterly earnings calls with, “We remain heads-down
focused on driving a better customer experience through price, selection and convenience.
We believe putting customers first is the only reliable way to create lasting value for
shareholders – and competition, we believe it will always operate its business to generate low
margins. As we have said before, if you give Amazon.com an incremental $0.10 of gross
profit, it will invest $0.11 to grow its business. This is especially evident today as the company
is in a hyper investment stage. These investments include adding fulfillment centers,
increasing SKUs in company-branded hardware, building AWS, international expansion, and
securing content for Amazon Instant Video. We believe that five years from now,
Amazon.com will continue to invest, but at a slower pace, with a slowdown in the number of
fulfillment centers added per year as the most obvious opportunity for a pullback; the
company added 20 in 2012 and as of 2Q13, it indicated plans to add only five in the US and
fewer than five outside the US in 2013. For that reason, we foresee a margin rebound as a
binary event.
If you give Amazon.com
an incremental $0.10 of
gross profit, it will invest
$0.11 to grow its
business.
That said, we believe the company could pull a number of levers to increase its long-term
CSOI margin, including leveraging its expanded fulfillment center footprint, increasing its
proportion of third-party unit sales, advertising, private-label, and expanding Amazon Prime to
more of a membership service (akin to the warehouse club model operated by Costco).
Increasing Proportion of Third-Party Unit Sales
MARGIN OPPORTUNITY
We estimate that the incremental gross margin from a third-party sale vs. a first-party one is
approximately 7,000 basis points. Therefore, every incremental $1B of revenue from thirdparty sales on Amazon.com would add 65 basis points to our base CSOI margin forecast for
2015.
Our base forecast is for third-party units to increase to 41.0% of total in 2015 vs. 39.7% in
2012 and 29.8% in 2009. The company could raise its CSOI margin by increasing its
proportion of third-party unit sales. A growing proportion of third-party unit sales is the key
contributing factor to the company being able to improve its long-term gross margin.
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Warehouse Club Membership
MARGIN OPPORTUNITY
Membership revenue represents the bulk of operating profits for warehouse club companies
– BJ’s, Costco, and Sam’s Club. If Amazon.com were able to emulate their membership
model more closely, so that the gross margin from Amazon Prime were 50.0% (half of that
of the warehouse clubs, (representing incremental margin of at least 50.0% vs. today’s
negative gross margin) every incremental $1B in revenue would add 46 basis points to our
base CSOI forecast.
We believe Amazon could improve its CSOI margin over the long term if it adopts the
membership model employed by warehouse club operators, such as BJ’s, Costco, and WalMart’s Sam’s Club.
Adoption of the membership model would require the company to enhance its Amazon Prime
program by adding promotions and services similar to those offered by BJ’s, Costco, and
Sam’s Club, such as car buying, insurance, and travel. The company took a small step in this
direction with the February 2011 addition of Amazon Instant Video to Amazon Prime. Since
then it has taken several additional steps, such as its free Kindle lending library.
In the following table, we compare the terms and privileges of Amazon Prime with those of
warehouse club memberships. Warehouse clubs derive a large portion of their profits from
membership fees, and we believe such fees could benefit Amazon.com’s operating profit as
well. In addition, attracting consumers to Amazon.com by offering services that are less costly
to provide than free shipping could expand the company’s operating margin. For example,
warehouse-club-type services could present an opportunity for Amazon to earn higher-margin
commissions like those recorded by Costco and BJ’s on car buying, insurance, and travel. We
estimate that these companies’ operating margins on membership fee revenue exceed 90%.
The annual revenue figure we present in the table for Amazon Prime includes shipping
revenue outside of Amazon Prime and Fulfillment by Amazon because the company does not
break out Amazon Prime-only numbers. Amazon.com will indicate only that it has millions of
members.
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AMAZON PRIME VS. WAREHOUSE CLUB MEMBERSHIPS
Year ending
Total Members (MM)
Costco
2-Sep-12
69.9
BJ's
N/A
Sam's Club
31-Jan-13
Amazon Prime
31-Dec-12
N/A
55
55
110
N/A
50
50
100
45
45
100
79
N/A
N/A
N/A
Annual Fees
Amazon Prime
Business Members
Individual Members
Rewards Members
Annual Fees/Revenues
TTM Fees/Revenues ($MM)
% of Total Revenue
TTM Operating Income ($MM)
% of Operating Income
% of Net Income
2,264
2.2%
3,048
74.3%
111.5%
3,060
5.4%
1,998
153.2%
Priveleges/Services Included
Warehouse shopping privileges
Costco Auto Program
Auto & Home Insurance
(Ameriprise)
Mortgage & Refinancing (First
Choice Bank)
Boat & RV Loans and Refinancing
Vehicle Repair Protection
Domains, Websites and Online
Solutions
Water Delivery (DS Waters)
Identity Protection (Identity Guard)
Mexico Travel Auto Insurance
(BWMIS)
Online Investing (ShareBuilder)
Personal Checks
Warehouse shopping privileges
Warehouse shopping benefits
Free two-day shipping
Health & Wellness services
(Hearing Center / Health
Travel: Car rentals, cruises, hotels
screenings)
and vacation packages
Services: Auto Buying; BJ's Gold
Exchange; BJ's Optical; BJ's Visa
Card; Credit Card Acceptance;
Custom-built sheds; Deli & Bakery
Party Plannig; Discover Savings
Products; Dish; Extended
Warranties; Global Sales; Health
Insurance; Home & Auto
Insurance; Home Improvement;
Tire Center; Verizon Wireless
Free release-date delivery on
Financial Services (Sam's Club
video games, DVDs, books and
Credit, Sam's Club Discover,
Merchant Credit Card Processing, more
SBA Small Business Loans)
Amazon Instant Video
Satisfaction & Freshness
Guarantees
Borrow books for free up to once
a month
Tire and Battery Center
Electronic Services & Technical
Assistance
Advertising
MARGIN OPPORTUNITY
When using Google, the market leader for online advertising as a guidepost for potential
operating margins on advertising revenue, we estimate that for every incremental $1B of
advertising revenue Amazon.com could generate in 2015 it would add 33 basis points to our
CSOI margin forecast. Therefore, if Amazon.com were able to derive 5% of its 2015 sales
from advertising, it could add 177 basis points to our base-level forecast.
Amazon.com could improve its long-term CSOI margin by placing greater emphasis on
advertising. We estimate that it could add 33 basis points to our annual CSOI margin forecast
for every incremental $1B in ad revenue. Today, advertising revenue is the second-largest
component of its North American Other sales component but a distant second to AWS. The
company eMarketer estimates that Amazon.com generated $600MM of advertising revenue in
2012, or 25.5% of its North American Other revenue for that period.
When it comes to its advertising efforts, Forrester noted that Amazon.com could leverage a lot
of valuable information, including purchased-product and post-purchase details. The
challenge for the company is that if it is successful, its advertisers’ efforts on Amazon.com
could result in consumers leaving its website to make e-commerce purchases elsewhere.
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An increasing proportion of advertising sales could be a significant contributor to our longterm gross margin forecast.
Shipping
MARGIN OPPORTUNITY
We estimate Amazon.com could add 1,300-2,000 basis points to its gross margin if it
reduces its ship miles by adding fulfillment centers closer to its customers. At the midpoint
(1,650 basis points) an incremental $1B of revenues would add 15 basis points to our base
CSOI margin forecast.
Amazon could improve its operating margin by leveraging its larger fulfillment center footprint.
The company added 20 fulfillment centers in 2012, which brought the total to 89. Having
fulfillment centers closer to consumers not only enables Amazon.com to offer faster shipping
times but also allows it to reduce transit miles for products. For example, the company is
adding a fulfillment center in New Jersey, following its sales tax agreement with that state; the
center is located about 40 miles from Philadelphia and 60 miles from New York City. We
believe the expanded footprint was one reason the company has recently had leverage on its
shipping costs.
Anecdotally, we purchased a lot of products from Amazon.com during the holidays in 2012,
and many were shipped from its Arizona and Kentucky fulfillment centers to Connecticut..
Were the company able to ship that merchandise from New Jersey that could result in 13%20% savings on UPS’ ground rates as we move from zone 7 in Arizona and zone 4 in
Kentucky to zone 2 in New Jersey.
Leverage on shipping expenses from its increased fulfillment center footprint will be crucial for
the company to reduce its fulfillment expenses from currently elevated levels.
Private Label
MARGIN OPPORTUNITY
In retail, gross margins on private-label merchandise can be 500-1,000 basis points better
than those on branded merchandise. At the midpoint (750 basis points), every incremental
$1B of revenue derived from private-label merchandise would add 7 basis points to our
2015 CSOI margin estimate. In other words, for every 100 basis points of revenue
Amazon.com can derive from private-label merchandise, it could increase its CSOI margin
by 7 basis points. So if Amazon.com were able to match Whole Foods’ proportion of privatelabel merchandise, that could add 83 basis points to our margin forecast; and if it were able
to duplicate Kroger’s proportion of private-label merchandise, it could add 221 basis points
Private label represents a low-hanging-fruit-type opportunity for Amazon to improve its
operating margin, in our view. The company could mirror the efforts of other low-margin
operators, such as Costco and grocery stores, to improve its gross margin. Costco offers
consumers the opportunity to save even more money with private-label merchandise under its
Kirkland brand. Among grocers, Kroger’s supermarkets offer 11K private-label SKUs, which
accounted for 27% of its revenues and 35% of units sold. Whole Foods has approximately
2,600 SKUs for its 365 Everyday Value private-label brand, and 11% of its grocery sales
came from private labels. Today Amazon.com offers private-label merchandise on only a
small number of items, such as the HDMI cords from our Super Bowl case study.
An increasing proportion of private-label sales could be a significant contributor to our longterm gross margin forecast.
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COMPETITION: WHO COULD BE DEVOURED BY
AND WHO COULD DISRUPT AMAZON.COM?
LJM Consultants best
described the competitive
power of Amazon.com, in
our view, when it stated
that Amazon.com could do
whatever it wanted to
because it has the money,
technology, and best
shipping rates in the world
thanks to its volumes.
We asked our industry experts to name the companies they felt were most vulnerable to being
disrupted by Amazon.com and the companies that could most likely disrupt Amazon.com. The
results are outlined in the following figures, with Best Buy, Barnes & Noble, and Walmart
receiving the most votes for the former and Google, Wal-Mart, and eBay for the latter.
Who Could Be Devoured by Amazon?
WHO COULD BE DEVOURED BY AMAZON?
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WHO COULD BE DEVOURED BY AMAZON?
BBY
WMT
BKS
NFLX
TGT
EBAY
UPS
SHLD
M
FB
AAPL
Mr. Price
Truworth's
Edgar's
JCP
OMX
ODP
WAG
FDX
Fresh Direct
LGF
GOOG
Toys "R" Us (pvt)
SPLS
DIS
MSFT
Bass Pro (pvt)
REI (pvt)
CHTR
CVC
CAB
Brighthouse
BAC
0%
2%
4%
6%
8%
10%
12%
14%
16%
Source: TAG research.
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STRAW POLL RESULTS: COMPANIES AT RISK OF BEING DEVOURED BY AMAZON
Regarding those vulnerable to Amazon, rather than focus on the consensus selections, we
comment on some of the more surprising selections – Bank of America, Disney, Facebook,
FedEx, and UPS.
Bank of America
The notion is that Amazon could mirror the efforts of Walmart or PayPal in making bankingrelated services and payments less expensive and more convenient for the consumer. For
example, in October 2012, Walmart and American Express launched Bluebird to provide
consumers with a cheaper alternative to checking and debit accounts. PayPal is a conduit for
consumers to make purchases both online and offline and extends consumers credit through
its Bill Me Later division. As of today, Amazon.com does not allow consumers to pay with
PayPal, but Zappos and the Quidsi family of websites do. Amazon.com has offered an
Amazon.com rewards Visa card and an Amazon.com store card for some time. In May it
launched Amazon Coins virtual currency, which we consider a potential catalyst for purchases
on its Kindle Fire tablets, such as apps.
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Disney
Amazon Studios, the company’s crowd sourced efforts to create proprietary TV and movie
content, was one reason Disney was named. In theory, Amazon’s crowd sourcing efforts to
generate original content should help it avoid major box office bombs, such as John Carter,
Mars Needs Moms, and, more recently, The Lone Ranger. It remains to be seen if
Amazon.com’s crowd-sourcing model for TV shows and movies will be more effective than
Disney’s process, but if it is we could see how the company could pressure Disney and other
TV and movie studios. If its 14 TV pilots are a guide to the company’s ability to create popular
content, its Amazon Studios pilots averaged 4.2 star ratings (out of five stars).
Counterpoints: Our Entertainment and Communications analyst, Jaison Blair, offered the
following counterpoints on why Amazon.com may not be able to disrupt Disney.

Digital competitors can reduce some of the frictional costs of TV and film. However, it
they are going to disrupt TV and film, it is not going to be an overnight bonanza, but
rather a long hard-fought slog.

Ongoing development costs are what Warren Buffet would refer to as the competitive
moat of the TV business. There is no digital shortcut around the hard math of the network
and studio business – TV and film require immense and ongoing costs associated with
processing pitches, developing scripts, paying for pilots, signing up talent, getting shows
on the air, promoting series, and distributing content globally. Even under the best case
scenario, these costs (and the endless dead-ends of a creative business) produce only
an occasional hit show which produces the vast majority of profits.

The back of the envelope math is as follows: the average network processes many
hundreds of pitches per year which requires time and attention of programming
executives. He estimates that only about one in twenty script development deals (which
can cost $10K to $500K per script) gets picked up as a pilot. The average cost of a pilot
is $3MM-$4MM (e.g. the Mad Men pilot required three months of filming during a
Sopranos production team break.) He estimates that only one in ten pilots gets picked up
as a series. New series (~10 episodes for an original order) can cost $30MM-$40MM to
produce based on talent, and $10MM-$50MM to promote. Only one in three series
makes it past season one. In general, series cancelled within the first season run at a
deficit for the network and studio. Only about 7% of all new series make it past five
seasons (>100 episodes) which is generally when they provide high-margin revenues.

Incumbents’ advantages include network effects and scale. Leading networks and
studios are by definition more efficient because they can spread development costs over
larger average audiences and global distribution platforms. Thus, a leader in a chosen
genre becomes the buyer of choice (e.g. CBS in procedural dramas or ESPN in sports.)
Further, companies like Disney can promote IP across every aspect of their business
(e.g., parks, ABC, film, DisneyChannel).

Incumbents also benefit from customer captivity. TV viewing is a behavior rather than a
discrete purchase. As a result, audiences form viewing habits and market share changes
slowly.
Facebook
Amazon’s advertising efforts were behind this choice, as we do not believe Amazon.com is
going to build or buy a social network to directly compete against Facebook. We expect that
with an estimated $600MM in advertising revenue in 2012 vs. $4.3B for Facebook,
Amazon.com will continue to build upon its efforts in advertising. At a minimum, we believe it
will continue to offer consumers lower-priced hardware in exchange for their willingness to
view advertisements and promotions when they turn on their devices. We also believe the
company will continue to show ads on its shopping websites, primarily Amazon.com.
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FedEx and UPS
With AmazonFresh, the company is delivering products to consumers’ doorsteps. In Seattle, it
is using Amazon trucks and Amazon drivers. In Los Angeles, it is using Amazon trucks and
third-party drivers. Should the company continue to expand AmazonFresh or leverage its
expanded fulfillment center network, it is easy to imagine Amazon disrupting the business of
other expeditors, such as FedEx and UPS.
DHL’s comments suggested to us that one motivation behind Amazon.com disrupting FedEx
and UPS is to break up the duopoly the two companies have in the US market. Deutsche Post
DHL noted that price increases in the German Parcel market, a much more competitive
market than the US, have been much lower than those of FedEx and UPS in the US in the
recent years.
Forrester pointed out the pros and cons of Amazon.com attempting to disrupt FedEx and
UPS. Forrester thinks Amazon.com believes it could ship merchandise for less money than
FedEx and UPS charge; however, it would require investing billions of dollars to do so. The
company is doing just that by adding fulfillment centers and via its Fulfillment by Amazon.com
effort, and it is investing in trucking infrastructure in certain markets. For Amazon.com it would
try to improve its shipping expenses, as Forrester estimates that Amazon.com accounts for as
much as 20% of UPS’s global package volume, but the range in pricing for Amazon.com and
UPS’s other clients is only 30%.
Another industry source suggested that discounts were determined by the skill level of the
negotiator and are not merely dependent on the volume of merchandise shipped, pointing out
times when there were big differences in discounts despite comparable volumes.
Counterpoints: TAG’s freight and logistics analyst, Josh Herrity, offered the following
counterpoints regarding why Amazon.com may not be able to disrupt FedEx and UPS:
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
FedEx and UPS are among Amazon.com’s most important partners and it would be
difficult for Amazon.com to run its business as effectively without being able to use the
services of either one.

He believes Amazon.com accounts for less of UPS’s volume than Forrester suggested.
At a minimum, he pointed out that the company’s top 20 customers accounted for less
than 10% of its global revenues.

Although building fulfillment centers would be a step in the right direction toward
competing against FedEx and UPS, it is only one component of several necessary to
compete in delivery. For example, FedEx and UPS have spent decades building
sophisticated networks. They operate two of the globe’s largest airlines, and UPS alone
has $18B in property, plant, and equipment on its balance sheet, reflecting an expansive
air and ground fleet along with state-of-the-art distribution facilities.

The success of FedEx and UPS has made it very difficult for a third participant to enter
the market at scale. Mr. Herrity noted the difficulties DHL (the leading logistics operator
outside the Americas) had when it tried to penetrate the US market, which resulted in
billions of dollars of losses.
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AMAZON.COM VS. BANK OF AMERICA, FACEBOOK, FEDEX, UPS, SEPTEMBER 2013
Company
Ticker
Market Cap ($B)
Founded
Headquarters
CEO
Sales ($B)
FY10
FY11
FY12
FY13E
FY14E
FY10
FY11
FY12
FY13E
FY14E
FY10
FY11
FY12
FY13E
FY14E
Cash & Equivalents
Debt
Net Cash
Debt/Total Capital
Amazon.com
AMZN
138.1
1994
Seattle, WA
Jeff Bezos
Bank of America
BAC
147.2
1784
Charlotte, NC
Brian Moynihan
Disney
DIS
119.7
1923
Burbank, CA
Bob Iger
Facebook
FB
62.1
2004
Menlo Park, CA
Mark Zuckerberg
FedEx
FDX
32.6
1971
Memphis, TN
Fred Smith
UPS
UPS
81.6
1907
Atlanta, GA
Scott Davis
34.2
48.1
61.1
77.7
96.1
111.4
94.4
84.2
91.4
92.4
38.1
40.9
42.3
45.2
48.0
2.0
3.7
5.1
6.7
7.3
34.7
39.3
42.7
46.0
48.7
49.5
53.1
54.1
56.5
60.0
5.4%
3.0%
2.5%
2.9%
3.1%
12.4%
4.1%
3.7%
27.4%
32.9%
17.4%
19.7%
21.9%
23.2%
24.4%
53.3%
53.2%
43.8%
37.9%
39.5%
5.8%
6.3%
7.8%
7.0%
9.3%
11.4%
11.4%
2.5%
13.3%
13.8%
1.0
1.8
3.8
4.1
4.3
987.0
1,307.0
0.0
N/A
N/A
2.1
3.6
3.8
2.9
2.9
0.3
0.6
1.2
1.8
1.8
2.8
3.4
4.0
3.9
3.9
1.4
2.0
2.2
2.3
2.3
7,463
3,733
3,730
27.4%
98,800
541,559
(442,759)
71.3%
3,932
15,003
(11,071)
27.7%
10,252
1,500
8,752
11.7%
5,096
2,990
2,106
13.5%
6,192
11,923
(5,731)
71.1%
Who Could Disrupt Amazon?
WHO COULD DISRUPT AMAZON.COM
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STRAW POLL RESULTS: COMPANIES WHICH CAN DISRUPT AMAZON.COM
WMT
GOOG
EBAY
FB
AAPL
Uber
TGT
NFLX
GRPN
Fab
COST
Alibaba
0%
5%
10%
15%
20%
25%
Source: TAG research.
Google
Google is to search what Amazon.com is to e-commerce, only it garners even greater market
share in its category. Just as Amazon.com is expanding its tentacles into advertising, Google
is doing the same for e-commerce, with an increasing number of services to compete against
Amazon.com. Forrester noted one competitive advantage Google had over Amazon – when it
comes to data on future purchase intent, Google is the leader.
Similar to eBay, Google is coming after Amazon with its own same-day shipping service,
Google Shopping Express, where it too is leveraging inventory at stores in major metropolitan
areas vs. Amazon.com’s reliance on its fulfillment centers located close to major metropolitan
areas. We discuss Google Shopping Express further on page 86.
The company’s shopping site boasts information on more than 1B products, and many
consumers start their shopping search at Google instead of Amazon.com. A recent initiative
by the company is to prominently offer product listing ads (PLAs) on its website, which makes
it even easier for merchants to showcase their products on Google and for consumers to find
what they are looking for. Channel Advisor noted the influence of Google’s efforts on ecommerce in its August same-store sales report, pointing out the 7.7% comp from Google’s
PLAs vs. only a 0.2% comp for traditional search.
Wal-Mart
With more than $1B per day in sales, Wal-Mart still has a scale advantage over Amazon.com,
which, among other things, enables it to compete against Amazon.com on price. At year-end
2012 the company had many more fulfillment centers than Amazon, at 318 vs. 89. Like
Amazon, Wal-Mart excels at logistics and does a great job of getting products to its stores,
especially in advance of hurricanes. Including its 8,500 stores, Wal-Mart has a lot of points of
distribution at which it sells products to consumers.
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Based on our conversations with industry sources, Wal-Mart could leverage its infrastructure
to transport e-commerce products from other merchants to its stores. For example, a
consumer could purchase items from Walmart.com and L.L. Bean and pick them up at the
local Walmart store.
In its supply chain business DHL also runs warehouses and distribution centers, such as the
Northeast distribution for Toys ‘R’ Us.com. One of the core offerings of DHL Supply Chain is
the operation of distribution centers and warehouses as well as related transportation
management. These services also cover e-fulfillment for B2C markets.
Among Wal-Mart’s e-commerce efforts, one of our favorites as a differentiator from
Amazon.com is allowing consumers to buy online and pick up in store and pay cash. The
company also is testing a same-day shipping initiative with UPS, where it charges consumers
$10 for the service. It owns video-streaming company Vudu, which competes against
Amazon.com for à la carte movie offerings and could offer a streaming subscription service in
the future to compete against Amazon Instant Video.
An industry source suggested Walmart was big enough to be able to compete with
Amazon.com for same-day delivery, including leveraging its store base in selective areas,
such as San Jose.
eBay
eBay has positioned itself as the anti-Amazon – a partner of traditional and multichannel
retailers, rather than a competitor. The company has successfully turned around its
Marketplaces business, which is now, once again, a formidable competitor, having grown its
number of active users at an accelerated rate for the past 15 quarters. Depending on how the
federal legislation shakes out, small-scale sellers on eBay could have a sales tax advantage
over Amazon.com. According to the Performance Market Association, 95% of eBay’s sellers
have less than $1MM in revenue and would therefore be exempt from collecting sales taxes
under the legislation that passed in the Senate.
eBay is increasingly working with traditional and multichannel retailers to drive sales both on
and off the Internet. For example, it is turning showrooming into a sales opportunity via
technology. A customer will be able to visit Toys ‘R’ Us (an eBay Enterprise client) and scan
the price of a toy with a PayPal app. eBay’s Where geolocater technology will recognize that
the customer is at a Toys ‘R’ Us and will offer her an instant coupon to bring the price closer
to parity with merchandise sold on Amazon and eBay. And PayPal wallet will enable her to
pay for the merchandise from her smartphone, automatically earnings her Toys ‘R’ Us
rewards and allowing her to skip the checkout counter on her way out of the store. We believe
this very compelling suite of services will provide brick-and-mortar retailers an opportunity to
convert showrooming to an in-store purchase.
The company is also coming after Amazon.com with its own same-day shipping service, eBay
Now, where it is leveraging inventory at stores in major metropolitan areas vs. Amazon.com’s
reliance on its fulfillment centers located close to major metropolitan areas. We discuss eBay
Now further on pages 85-86.
Uber
On the surface, Uber provides consumers a great way to get a black car to drive them around
town. Below the surface lies what could become a tremendous logistics company, including
an infrastructure to deliver consumers merchandise in a short period of time in major
metropolitan areas. For example, the company delivered roses to consumers on Valentine’s
Day in Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, Minneapolis, New York City,
Philadelphia, Phoenix, San Diego, San Francisco, Seattle, Washington D.C. and Toronto. .
For that reason, we consider Uber a potential acquisition target for Amazon.com in the future.
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No One
A number of our industry sources suggested that Amazon could not be disrupted because it
was executing its strategy so effectively and had positioned itself so well from a competitive
standpoint.
AMAZON.COM VS. EBAY, GOOGLE, AND WAL-MART, JULY 2013
Company
Ticker
Market Cap ($B)
Founded
Headquarters
CEO
Sales ($B)
FY10
FY11
FY12
FY13E
FY14E
FY10
FY11
FY12
FY13E
FY14E
FY10
FY11
FY12
FY13E
FY14E
Cash & Equivalents
Debt
Net Cash
Debt/Total Capital
Amazon.com
AMZN
133.1
1994
Seattle, WA
Jeff Bezos
eBay
EBAY
71.2
1995
San Jose, CA
John Donahoe
Google
GOOG
300.6
1998
Mountain View, CA
Larry Page
Wal-Mart
WMT
251.6
1969
Bentonville, AR
Mike Duke
34.2
48.1
61.1
77.7
96.1
9.2
11.7
14.1
16.5
19.3
29.3
37.9
51.4
60.7
72.2
421.8
447.0
469.2
487.4
509.6
5.4%
3.0%
2.5%
2.9%
3.1%
29.5%
27.7%
27.3%
28.1%
29.0%
53.4%
48.9%
39.4%
39.3%
39.6%
6.1%
5.9%
5.9%
6.0%
6.0%
1.0
1.8
3.8
4.1
4.3
0.7
1.0
1.3
1.1
1.0
4.0
3.4
3.3
4.0
4.2
12.7
13.5
12.9
12.7
12.9
7,463
3,733
3,730
27.4%
10,436
4,533
5,903
16.2%
54,430
4,989
49,441
7.3%
9,020
54,009
(44,989)
43.6%
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CASE STUDY 12: HOW TO COMPETE AGAINST AMAZON.COM
QVC, part of Liberty Interactive Corp., has described how it effectively competes against Amazon.com at its analyst meeting in November
2011. It sells differentiated product, competes effectively on price, and offers an engaging shopping experience.
Differentiated Product
About 70% of the merchandise offered by QVC cannot be found elsewhere. This gives consumers a reason to shop at QVC instead of
Amazon.com. It also insulates QVC from price competition on its merchandise because consumers are unable to compare products
against those of Amazon.com and therefore protects the products from being treated like commodities by consumers. We believe this
opportunity will remain as many premium brands do not want their merchandise sold on Amazon.com, just as they would not want to offer
their merchandise in Walmart or Home Depot stores. Examples include Louis Vuitton handbags or Stihl power tools.
One easy way for companies to succeed in this area is through private-label merchandise. This has two benefits: First, consumers cannot
find this merchandise at Amazon.com; second, prices on private-label merchandise should be lower than those on comparable branded
products at Amazon.com.
Competitive Pricing
At the November 2011 Liberty analyst meeting, QVC indicated that it is able to compete against Amazon.com through its Today’s Special
Value offering – where it features one item daily at a compelling price (lower than Amazon’s, even including shipping, handling, and sales
tax). Today’s Special Value accounts for 25% of its sales.
There is another nuance to QVC’s Today’s Special Value promotion that we believe is worth mentioning. Brands are willing to sell their
products on QVC at low prices because of QVC’s video formatting, which acts as free TV advertising. The brands know that when they
sell on QVC they also sell more merchandise at Bed, Bath & Beyond, Macy’s, and even Amazon.com.com because of this free
advertising. QVC creates demand for products, especially with its use of video, which is a key differentiator of the shopping experience on
QVC vs. Amazon.com.
Best Buy, Target, and others have offered programs where they match Amazon.com’s prices, but they can be misleading and
cumbersome to the consumer to use.
Engaging Shopping Experience
QVC also competes against Amazon.com by offering a more engaging and fun shopping experience. For example, the company has
compared shopping for a particular shoe at Amazon.com with QVC. The Amazon shopping experience is very efficient, as you are able to
locate and purchase the shoes in a short period of time.
The experience at QVC is very engaging. The company’s programming often features a product’s designer, who tells customers about
the inspiration behind the design. A very personable hostess, with whom the customers have built strong bonds, including through social
networking (such as Facebook or Twitter) and one whom the customers trust, tells the shopper about the product’s wonderful attributes.
Like its core customer, the hostess loves shopping. And if the consumer is merely looking for a quick way to purchase an item, QVC
offers that functionality on its mobile app.
Forrester compared the shopping experience on Amazon.com to spear fishing: You see what you want (the fish) and you buy it (stab it
with a spear), and two days later the product is at your door. In that regard, Amazon.com is a fulfillment engine, an excellent tool for
consumers to purchase merchandise when they know what they want.
Other prime examples from retailers are Barnes & Noble’s author events (anecdotally, we saw consumers line up for several blocks in
Manhattan for a book signing by former Met Mike Piazza). Lululemon has turned shopping for yoga pants into an experience, including
offering yoga classes at malls. Apple’s customer service, such as its Genius Bar, and efforts to train consumers on how to use its
products before and after purchase differentiate its stores and are a big reason behind its efforts to expand its stores’ square footage.
Other Factors to Consider
There are other important factors to consider when evaluating a retailer’s ability to compete against Amazon.com. For example, a loyalty
program can entice a consumer to shop at a retailer even if it does not score well on the three criteria above. Credit is another example.
Both HSN and QVC offer their customers certain items on a flex pay basis, allowing them to pay for products over time without interest.
Some companies, such as Home Depot, Macy’s, and Williams Sonoma’s Pottery Barn, offer branded credit cards that have both loyalty
and credit elements. For example, Pottery Barn may offer 12 months same as cash (i.e. no interest charges) when a consumer uses her
Pottery Barn credit card to entice her to purchase a big-ticket item, such as a couch.
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ANCHOR POINTS
Because of its high valuation, by any traditional metric (forward P/E or EV/EBITDA), it is very
important to understand investor sentiment on AMZN. The combination of projecting
Amazon.com’s operating performance (sales and earnings) with limited information from the
company (such as the number of Amazon Prime members and percentage of sales and CSOI
from AWS, to name a few items on a very long list) and trying to determine how investors will
respond to the company’s earnings announcements makes for one extremely challenging
stock to analyze. For example, more and more investors we talk to on the name admit that
even if we were able to read the company’s earnings press release before the company
officially announced its results, it would be very difficult to determine if the stock was going to
go higher or lower afterward.
As we see it, four anchor points are important to track to forecast AMZN’s likely short-term
stock performance: sales growth, unit growth, gross profit growth, and AWS’s sales growth
(the newest one). Over the long term, we believe the stock trades on the company’s ability to
grow market share in US and non-US e-commerce, US retail sales, international retail sales,
and any other markets Amazon can penetrate (as evidenced to date by AWS).
In our efforts to better forecast Amazon.com’s stock performance, we will continue to closely
monitor these data points and investors’ reaction to their gyrations and will look for other data
points that may become anchors for Amazon.com’s short-term share price in the future.
Sales Growth: Primary Anchor Point
In our view, sales growth remains the primary anchor in determining Amazon.com’s shortterm stock price moves. If sales growth meets expectations, the stock should continue to
trade higher even if CSOI is low or even negative.
The challenge for the company and investors is to determine how much sales growth is
enough, especially as Amazon gets bigger and bigger and it is more difficult for it to maintain
FX-adjusted top-line growth of 30% or even 25% or 20%. We forecast a sales CAGR of
20.5% for 2012-2015, which compares against the 35.6% achieved for the three-years ending
2012 and 31.8% for the prior three-year period. We believe that is strong enough growth for
the stock to continue to increase in value over that timeframe.
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SHARE PRICE VS. SALES GROWTH. 3Q04-4Q15E
Unit Growth
After sales growth, based on our conversations with investors, unit growth is the next anchor,
the most important among the secondary anchors (unit growth, gross profit growth, and
AWS’s sales growth). With more units coming from third-party sellers, which, for accounting
reasons have less of an impact on revenue growth, we believe unit growth may be less
important an anchor in the future.
SHARE PRICE VS. UNIT GROWTH. 3Q04-4Q15E
Gross Profit Growth
Amazon.com is currently in a period of hyper investment. The company is investing in building
AWS, adding fulfillment centers, expanding its hardware, and adding content for Amazon
Instant Video. As a result of all of these investments, its CSOI is depressed. Many investors
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SPECIAL REPORT
are focusing on the company’s gross profit growth under the assumption that investments will
slow at some point and that Amazon.com’s CSOI will rebound.
The problem with focusing on gross profit growth is that there has been a fundamental
change in the pricing for e-books following agreements between the US Department of
Justice and publishers, which is distorting gross profit growth numbers.
SHARE PRICE VS. GROSS PROFIT GROWTH. 3Q04-4Q15E
AWS’s Sales Growth
The newest anchor is AWS’s sales growth as large-cap tech investors look at Amazon.com as
a mechanism to invest in the emerging cloud computing market. The surprise here is that
AWS is still a small portion of the company’s total revenue (its North American other segment,
which includes AWS, represented 3.8% of 2012 sales). The company’s willingness to disrupt
its peers with aggressive pricing, however, has investors opting for Amazon.com’s shares
over those of Rackspace and others, in our view.
AMAZON.COM’S SHARE PRICE VS. NA OTHER SALES GROWTH, 1Q06-4Q15E
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Market Share
Long-term, we believe Amazon.com’s market share (initially for e-commerce, but ultimately for
total commerce just as initially it will be for the US market and eventually for the global one)
will be the most important determinant of its share price.
E-Commerce Market Share
4Q15E
1Q15E
2Q14E
0
3Q13E
0.0%
4Q12
50
1Q12
5.0%
2Q11
100
3Q10
10.0%
4Q09
150
1Q09
15.0%
2Q08
200
3Q07
20.0%
4Q06
250
1Q06
25.0%
2Q05
300
3Q04
30.0%
(Stock Price)
(Market Share)
SHARE PRICE VS. US E-COMMERCE MARKET SHARE, 3Q04-4Q15E
Stock Price
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LONG-TERM OUTLOOK AND VALUATION
For valuation, we came up with annual estimates for the next 10-year period, including sales,
free cash flow, and share count. We used our long-term CSOI margin forecast of 7.0% as one
of the cornerstones of our analysis. We projected that the company could achieve a 16.0%
sales CAGR for 2012-2022, compared with 31.6% achieved in the prior 10-year period. (That
would represent a premium to the rate achieved by our comparison group of mature retailers
from the last 10-year period – 2002-2012 – Costco 9.8%, Target 7.0%, and Wal-Mart 8.8%.)
Next, we examined the current free cash flow yields for stocks of more mature retailers –
Costco, Target, and Wal-Mart. When considering the similar cultures – highly competitive,
comfortable operating low-margin businesses – and our view that Amazon.com will have a
more global footprint over the long term, more similar to that of Wal-Mart and less similar to
those of Costco and Target, we used Wal-Mart as the comp for our long-term valuation
analysis of Amazon.com’s shares.
We discounted the long-term figure back at 10.0% per year to arrive at our new 12-month
price target for the shares of Amazon.com of $400.
FREE CASH FLOW YIELD AND LONG-TERM VALUATION
Costco
Target
Wal-Mart
Current
Share
Price
Target
NA
NA
NA
Current
Share
Price
117.94
64.55
75.83
12-Month
Share
Price
Target
NA
NA
NA
Long-Term
Share
Price
Target
NA
NA
NA
Amazon.com's valuation based on the free-cash flow yields for:
Costco
NA
666
732
1,427
Target
NA
241
266
518
Wal-Mart
NA
369
400
790
Free Cash Flow Yield
2013
2014
2015
2020
2021
2022
1.8%
2.3%
3.0%
7.8%
4.8%
8.2%
5.8%
4.7%
5.4%
NA
NA
NA
NA
NA
NA
3.0%
8.2%
5.4%
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APPENDIX
Our Method for Estimating Amazon.com’s GMV,
Third-Party Sales, and Third-Party CSOI
Amazon.com provides quarterly data on revenues, unit sales growth, and percent of paid
units that come from third-party. To estimate its gross merchandise volume (GMV) we needed
to come up with our own estimates for average selling prices and take rate (the amount of
money Amazon.com receives in commissions for sales by third parties on its website). Based
on our GMV and take rates estimates we derived a projection for its revenues from third-party
sales. To project its consolidated segment operating income on a by-segment basis (first
party, third party, and AWS we needed to estimate its gross margins by segment and allocate
its operating expenses.
AMAZON.COM REVENUE BREAKDOWN
Line
North America
Media
Electronics and Other General Merchandise
Other
Total North America
Includes
AWS, Advertising, Co-Branded Credit Card
International
Media
Electronics and Other General Merchandise
Other
Total International
Advertising, Co-Branded Credit Card
ANNUAL REVENUES, 2011-2015E
35.00%
60,000.0
30.00%
50,000.0
25.00%
40,000.0
20.00%
30,000.0
15.00%
20,000.0
10.00%
10,000.0
5.00%
0.0
0.00%
Annual Revenue
2015E
70,000.0
2014E
40.00%
2013E
80,000.0
2012
45.00%
2011
90,000.0
YoY Growth
th
YoY Growth
Annual Revenues
QUARTERLY REVENUES, 2011-2015E
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SEPTEMBER 23, 2013
SPECIAL REPORT
QUARTERLY UNIT SALES GROWTH, 2011-2015E
50.0%
60.0%
40.0%
30.0%
20.0%
40.0%
10.0%
0.0%
30.0%
(10.0.%)
20.0%
YoY Change
Unit Grow th
50.0%
(20.0.%)
(30.0.%)
10.0%
(40.0.%)
(50.0.%)
Unit Growth
3Q15E
1Q15E
3Q14E
1Q14E
1Q13
3Q13E
3Q12
1Q12
3Q11
1Q11
0.0%
YoY Change
QUARTERLY THIRD-PARTY UNITS MIX, 2011-2015E
ANNUAL THIRD-PARTY UNITS MIX, 2011-2015E
43.0%
42.0%
41.0%
40.0%
39.0%
38.0%
37.0%
36.0%
35.0%
34.0%
33.0%
32.0%
Amazon’s Average Selling Price
One way to ballpark Amazon.com’s average selling prices (ASPs) is to look at the average
and median selling prices of its top-selling units on a by-category basis. This analysis
suggests an ASP of $40-$62, based on the average, and $16-$20, when using the median.
We chose to go with the median at $20 because we believe it more accurately reflects the
large number of lower-ticker items the company sells, such as e-books.
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SPECIAL REPORT
TOP ITEM SALES AT AMAZON AND AVERAGE SELLING PRICES, JUNE 2013
Category
Appliances
Appstore for Android (Paid only)
Automotive
Baby
Beauty
Books
Camera & Photo
Cell Phones & Accessories
Clothing
Computers & Accessories
Electronics
Gift Cards Store
Home & Kitchen
Home Improvement
Jewelry
Kindle Store
#1
Item
GE MWF Refrigerator
Dentist Office Kids
15pcs Nail Art Painting
Pen Brush
Viking 912600 8-Way
Heavy Duty Spray…
Vulli Sophie the Giraffe
Teether
Dotting 5 X 2 Way
Marbleizing Dotting…
Inferno, by Dan Brown
GoPro HERO3: Black
Edition
iPhone 4 / 4S Anti-Glare,
Anti-Scratc…
Ray-Ban RB2132 New
Wayfarer Sunglasses
Samsung Galaxy Tab 2 (7Inch, Wi-Fi)
Kindle Fire HD 7", Dolby
Audio, Dual-…
Amazon Gift Card - E-mail
Donut Shop K-Cup packs
for Keurig Bre…
Playtex Diaper Genie Refill
(810 coun…
GE MWF Refrigerator
Emergency Mylar Thermal
Blankets (Pac…
Vintage, Retro Colorful
Crystal Owl P…
Price
33.99
0.99
2.43
5.64
19.99
1.76
16.19
399.99
0.85
127.68
169.00
199.00
50.00
29.99
16.99
37.49
33.99
6.60
0.97
26.49
MP3 Downloads (Paid only)
Up the Down Staircase
A4982799 Tri-Bl…
101 - The Essential Blues
Album, Various
Magazines
National Geographic
15.99
Movies & TV
Favors
13 [Deluxe Edition], by
Black Sabbath
1.99
Kitchen & Dining
Music
Musical Instruments
Office Products
Patio, Lawn & Garden
Pet Supplies
Shoes
Software
Sports & Outdoors
Toys & Games
Video Games
Watches
8.08
2.99
14.99
Snark SN-1 Tuner
8.34
GP Spectrum Multi-Use
Paper, 8.5 x 11…
13.99
37.49
Merial Frontline Plus Flea
and Tick C…
57.15
Reef Men's Fanning
Sandal
59.25
Norton 360 2013 - 1 User /
3 PC [Down…
22.99
Insanity 60 Day 13 Dvd
Workout
144.80
Cards Against Humanity
PlayStation 4 Standard
Edition
Geneva Rose Gold Plated
Classic Round…
Average
Median
25.00
399.96
7.50
57.16
19.99
#2
Item
10103LGW 300-Pou...
Minecraft - Pocket Edition
Brother CS6000i FeatureRich Sewing M…
BAFX Products (TM) PIC18F2480 Bluet…
Nosefrida The Snotsucker
Nasal Aspirator
Extra Strength Hair
Nutrient Tablets,…
A Song of Ice and Fire,
Books 1-4, by G. Martin
Canon PowerShot A2300
16.0 MP Digital…
Apple Lightning to USB
Cable
Carhartt Men's Workwear
Pocket T-Shir…
Tech Armor Apple iPad
Mini Premium HD…
Kindle Paperwhite, 6" High
Resolution…
Amazon Gift Card - E-mail #1 Dad
Nature's Way Organic
Extra Virgin Coc…
Pampers Sensitive Wipes
12x Box with…
A4982799 Tri-Bl…
10103LGW 300-Pou…
Commercial Chalkboard
Contact Paper,…
316L Surgical Steel 14
Guage Leaf Dan…
Price
349.99
6.99
154.99
23.99
12.29
29.05
19.79
79.00
16.99
22.95
7.95
119.00
50.00
8.89
22.89
26.49
349.99
8.02
1.59
Forever Too Far
3.99
BlenderBottle® Classic 28ounce Black
6.53
Tomorrow's Harvest, by
Boards of Canada
6.99
Popular Science (1-year
auto-renewal)
7.00
Star Trek: The Complete
Original Seri…
106.41
Random Access
Memories, by Daft Punk
11.88
Planet Waves Assorted
Pearl Celluloid…
3.68
Velcro Reusable SelfGripping Cable T…
7.10
Weber 7416 Rapidfire
Chimney Starter
14.99
Precious Cat Ultra
Premium Clumping C…
22.56
Crocs Unisex Classic Clog
Premium SP1 64bit
(OEM…
32.23
Camelbak Eddy Bottle
First Expansion
Xbox One Console - Day
One Edition
U.S. Polo Assn. Sport
Men's US9061 Bl…
16.99
90.91
#3
Item
Price
Maytag UKF8001 Pur
Refrigerator Cyst...
29.50
Plants vs. Zombies (Kindle
Tablet Edi…
0.99
Art Advantage Oil and
Acrylic Brush S…
14.98
Autel MaxiScan MS300
CAN Diagnostic S…
16.99
Baby Einstein Take Along
Tunes
8.99
Lovely Vintage Jewelry
Crystal Peacoc…
0.95
Joyland (Hard Case
Crime)
6.79
Dropcam HD Wi-Fi
Wireless Video Monit…
147.99
iPhone 5 USB Cable, Car
Charger 5V 1A…
3.32
Levi's Men's 501 Jean
Samsung Chromebook
(Wi-Fi, 11.6-Inch)
Kindle, 6" E Ink Display, WiFi - Inc…
Amazon Gift Card Upload
Your Photo -…
Brooklyn Beans Variety
Pack Coffee K-…
Fitbit One Wireless Activity
Plus Sle…
Face Shape Cooki…
Maytag UKF8001 Pur
Refrigerator Cyst…
Kapro 990V-41-48 Zeus
Vision Box Leve…
2.00 Carat Cubic Zirconia
Earrings. S…
Inferno: A Novel (Robert
Langdon)
Face Shape Cooki…
13, by Black Sabbath
Cosmopolitan (1-year autorenewal)
Skyfall (Blu-ray/ DVD +
Digital Copy)
Wrote a Song For
Everyone, by J. Fogerty
On Stage XCG4 Tubular
Guitar Stand wi…
Brother Laminated Black
On White Tape…
Weber 6424 21-Inch TBrush
Bayer Advantage II Purple
6-Month Fle…
KEEN Newport H2 Sandal
(Toddler/Littl…
Office Mac Home and
Student 2011 - 1P…
55.50
249.00
69.00
50.00
22.00
89.00
0.64
29.50
79.00
0.01
12.99
0.64
7.99
15.00
12.00
11.88
9.95
19.26
12.33
50.84
127.49
119.99
21.99
Hip Hop Abs DVD Workout 27.94
Second Expansion
10.00
PlayStation 4 Launch Day
Edition
N/A
Casio Men's DW9052-1V
G-Shock Classic…
39.42
62.12
19.79
39.76
16.00
10.00
499.96
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QUARTERLY AMAZON.COM ASPs, 2011-2015E
SPECIAL REPORT
AMAZON.COM ANNUAL ASPs, 2011-2015E
$25.00
$25.00
$20.00
$20.00
$15.00
$15.00
$10.00
$10.00
$5.00
$5.00
$-
2015E
2014E
2013E
2012
2011
3Q15E
1Q15E
3Q14E
1Q14E
3Q13E
1Q13
3Q12
1Q12
3Q11
1Q11
$-
Amazon.com’s Take Rate
To calculate Amazon’s revenue from third-party unit sales we had to estimate the company’s
commission rate, or take rate – the amount of money it receives for sales of third-party
merchandise on its platform. In the following table we illustrate the company’s commission
rates for third-party sales in different categories. We conservatively chose a take rate of 11%,
which is lower than the average rate, because we would rather under-state and overstate its
third-party sales.
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SPECIAL REPORT
AMAZON COMMISION RATES BY CATEGORY, JULY 2013
Category
Automotive Parts & Accessories
Baby Products
Beauty
Camera & Photo
Clothing, Accessories & Luggage
Consumer Electronics
Electronic Accessories
Gift Cards
Home & Gardening
Jewelry
Kindle Accessories
Kitchen
Media (ex-Video Game Consoles)
Media (Video Game Consoles)
Motorcyles, ATV & Protective Gear
Musical Instruments
Office Products
Personal Computer
Shoes
Sports & Outdoors
Sports and Entertainment Collectibles
Tools & Home Improvement
Toys & Games
Unlocked Cell Phone
Watches
Everything Else
Commission
Rate
12%
15%
15%
8%
15%
8%
8%, 15%
20%
15%
15%
15%
12%
20%
25%
15%
15%
8%
12%
15%
15%
6%
15%
15%
6%-20%
12%
15%
8%
15%
15%
Range
Median
Average
6%-25%
15%
14%
Notes: Home & Gardening includes pet supplies.
Media products also include a variable closing fee of $1.35 per.
Commission rates are staggered for Sports and Entertainment Collectibles and Electronic Accessories and decrease as the price of the merchandise increases.
78.0%
77.0%
76.0%
75.0%
74.0%
73.0%
72.0%
71.0%
70.0%
69.0%
68.0%
AMAZON.COM ANNUAL TAKE RATE 2011-2015E
74.1%
74.1%
Take Rate
74.1%
74.1%
74.1%
74.1%
74.1%
74.1%
74.1%
2015E
th
2014E
2013E
2012
2011
3Q15E
1Q15E
3Q14E
1Q14E
3Q13E
1Q13
3Q12
1Q12
3Q11
74.1%
1Q11
Take Rate
AMAZON.COM QUARTERLY TAKE RATE, 2011-2015E
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SPECIAL REPORT
Amazon.com’s GMV
In the following table we illustrate Amazon.com’s GMV, based on the assumptions we
outlined above for ASPs and Take Rate and the company’s data on unit growth and
proportion of third-party units.
AMAZON.COM QUARTERLY GMV, 2011-2015E
AMAZON.COM ANNUAL GMV, 2011-2015E
50,000.0
45,000.0
40,000.0
35,000.0
30,000.0
25,000.0
20,000.0
15,000.0
10,000.0
5,000.0
0.0
160,000.0
140,000.0
120,000.0
100,000.0
80,000.0
60,000.0
40,000.0
2015E
2014E
2013E
2012
0.0
2011
3Q15E
1Q15E
3Q14E
1Q14E
3Q13E
1Q13
3Q12
1Q12
3Q11
1Q11
20,000.0
In the following table, we illustrate how our numbers fare against those of Channel Advisor for
2012. Many of the differences stem from our lower ASP assumption on both first-party and
third-party unit sales.
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SPECIAL REPORT
AMAZON.COM’S GMV: OUR ESTIMATE VS. CHANNEL ADVISOR’S, 2012E
First-Party Average Selling Price
First-Party Units (MM)
First-Party Units (Mix)
First-Party GMV (MM)
First-Party GMV (Mix)
First-Party Revenue ($MM)
First-Party Revenue (Mix)
TAG
20
2,825
71%
56,039
71%
56,039
96%
Channel
Advisor
30
1,500
60%
45,000
47%
45,000
90%
Third-Party Average Selling Price
Third-Party Units (MM)
Third-Party Units (Mix)
Third-Party GMV (MM)
Third-Party GMV (Mix)
Take Rate
Third-Party Revenue ($MM)
Third-Party Revenue (Mix)
20
1,157
29%
23,022
29%
11%
2,532
4%
50
1,000
40%
50,000
53%
10%
5,000
10%
Total Units (MM)
Total GMV
Total Revenue ($MM)
3,981
79,061
58,571
2,500
95,000
50,000
Gross Margin Assumptions
To project by-segment gross profits, we made the following assumptions: the gross margin on
third-party sales is 90.0%, North American Other revenue is 100.0% and International Other
revenue is 100.0%. We also assumed that Amazon.com’s first-party sales of physical
merchandise are profitable on both a gross margin and by-segment CSOI bases.
AMAZON.COM QUARTERLY GROSS MARGIN, 2011-2015E
35.0%
60.0%
30.0%
50.0%
Annual Gross Margin
20.0%
10.0%
35.0%
20.0%
30.0%
25.0%
15.0%
20.0%
15.0%
10.0%
10.0%
5.0%
5.0%
10.0%
5.0%
0.0%
Quarterly Gross Margin
YoY Growth
Annual Gross Margin
2015E
2014E
2013E
0.0%
2012
3Q15E
1Q15E
3Q14E
1Q14E
3Q13E
1Q13
3Q12
1Q12
3Q11
1Q11
0.0%
2011
0.0%
YoY Growth
th
YoY Change
15.0%
YoY Change
30.0%
40.0%
25.0%
40.0%
20.0%
45.0%
30.0%
25.0%
Gross Margin
AMAZON.COM ANNUAL GROSS MARGIN, 2011-2015E
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SPECIAL REPORT
Operating Expenses Estimates
To project by-segment CSOI, we allocated operating expenses on a percentage of sales
basis.
AMAZON.COM QUARTERLY CSOI, 2011-2015E
AMAZON.COM ANNUAL CSOI, 2011-2015E
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
3Q15E
1Q15E
3Q14E
1Q14E
3Q13E
1Q13
3Q12
1Q12
3Q11
1Q11
0.0%
2015E
3.0%
3.0%
2014E
3.5%
3.5%
2012
4.0%
4.0%
2011
4.5%
2013E
5.0%
Historical Performance Vs. Guidance and Our Estimates
In the following table we compare Amazon.com’s historical operating results against its
guidance and our projections. Typically, the company provides quarterly guidance on
revenue, the impact on currency exchange rates on sales growth, and GAAP operating
income.
PERFORMANCE VS. GUIDANCE AND TAG ESTIMATES, 1Q08–3Q13E
Date Provided
1Q10
1/28/10
2Q10
4/22/10
3Q10
7/22/10
4Q10
10/21/10
1Q11
1/27/11
2Q11
4/26/11
3Q11
7/26/11
4Q11
10/25/11
1Q12
1/31/12
2Q12
4/26/12
3Q12
7/26/12
4Q12
10/25/12
1Q13
1/29/13
2Q13E
4/25/13
3Q13
7/25/13
Q1
Net Sales ($MM)
Low
High
TAG Estimate
Actual
6,450
7,000
NA
7,131
6,100
6,700
NA
6,566
6,900
7,625
NA
7,560
12,000
13,300
NA
12,948
9,100
9,900
NA
9,857
8,850
9,650
9,757
9,913
10,300
11,100
11,000
10,876
16,450
18,650
18,597
17,431
12,000
13,400
12,828
13,185
11,900
13,300
12,700
13,185
12,900
14,300
13,655
13,806
20,250
22,750
22,523
21,268
15,000
16,600
16,678
16,070
14,500
16,200
16,332
15,704
15,450
17,150
17,000
NA
Net Sales Growth
Low
High
TAG Estimate
Actual
32%
43%
NA
46%
31%
44%
NA
41%
27%
40%
NA
39%
26%
40%
NA
36%
28%
39%
NA
38%
35%
47%
49%
51%
36%
47%
46%
44%
27%
44%
44%
35%
22%
36%
30%
34%
20%
34%
28%
34%
19%
31%
26%
27%
20%
34%
29%
22%
14%
26%
26%
22%
13%
26%
27%
22%
12%
24%
23%
NA
FX Impact on Growth Rate (Basis Points)
500
100
(300)
(70)
140
640
490
130
(50)
(280)
(400)
(280)
(414)
(275)
(300)
GAAP Operating Income ($MM)
Low
High
TAG Estimate
Actual
275
365
NA
394
220
320
NA
270
210
310
NA
268
360
560
NA
474
260
285
NA
322
95
245
222
201
20
170
158
79
(200)
250
25
260
(200)
100
62
192
(260)
40
39
107
(350)
(50)
(65)
(28)
(490)
310
164
405
(285)
65
61
181
(340)
10
254
79
(440)
(65)
32
NA
GAAP Operating Income Growth
Low
High
TAG Estimate
Actual
13%
50%
NA
61%
39%
102%
NA
70%
(16%)
24%
NA
7%
(24%)
18%
NA
(0%)
(34%)
(2%)
NA
(18%)
(65%)
9%
(18%)
(26%)
(93%)
(37%)
(41%)
(71%)
(47%)
142%
(95%)
(3%)
(162%)
69%
(81%)
(40%)
(162%)
69%
(80%)
(40%)
NMF
NMF
NMF
NMF
NMF
NMF
NMF
NMF
NMF
(66%)
(68%)
(5.7%)
NMF
(91%)
(26%)
NMF
NMF
NMF
(216%)
NA
th
130
SEPTEMBER 23, 2013
SPECIAL REPORT
ShopRunner
In the following table, we show the participating merchants in ShopRunner, a competing
shipping membership program that was initially started by GSI Commerce, which is now part
of eBay.
SHOPRUNNER—PARTICIPATING RETAILERS, JULY 2013
aerie
Chefs
Haggar
PetSmart
AEO Factory Store
Claire's
Helly Hansen
RadioShack
American Eagle Outfitters
Costume Express
Icing
Readingglasses.com
Anne Klein
David's Cookies
igourmet.com
Reeds Jewelers
Auto Zone
Destination Kona
kimi's korner
Shoes.com
Babies R Us
Domino's Pizza
Landing Zone
Shop PBS
bare necessities
Drugstore.com
Lord & Taylor
SleepyHeads.com
Beauty.com
Eastern Mountain Sports
Luxury Lane
Speedo
Beauty.com
eBags
MacMall
Sports Authority
Birthday Express
ESPN Shop
MLB.com Shop
The Organized Parent
Blue Nile
eToys.com
Nascar.com Superstore
The Perfume Spot
Blue Sky Co.
FAO Schwarz
NBA Store
Tiny Nirvana
Brooks Brothers
Fathead
Newegg.com
Timberland
Buycostumes.com
Fogdog Sports
NFLshop.com
Tommy Hilfiger
Calvin Klein
FranklinPlanner
Shop.NHL.com
Toys R US
Candy.com
FTD
Nine West
WatchWear.com
Case HQ
Geekorize
Olly
Wilsons Leather
Celebrate Express
GNC
OnlineShoes
Wireless Emporium
Tracking Amazon.com Shipments
Using our own experience as an example, we are noticing more packages originating on the
East Coast, which suggests Amazon is leveraging its expanded network of fulfillment centers
to cut miles shipped, which should enable it to save significant dollars on shipping. For 31 of
our 34 orders (91.2%) we were able to take advantage of our Amazon Prime membership for
two-day delivery. Twenty five (73.5%) were delivered by UPS, 7 (20.6%) came via FedEx,
and 1 (2.9%) was DHL and 1 (2.9%) was USPS.
th
131
SEPTEMBER 23, 2013
SPECIAL REPORT
TRACKING OUR AMAZON.COM ORDERS, 2013
Ordered
Sun
Sat
Thu
Sun
Mon
Thu
Tue
Tue
Sat
Thu
Thu
Thu
Mon
Mon
Tue
Sat
Sat
Fri
Mon
Wed
Sun
Wed
Sun
Wed
Tue
Mon
Mon
Mon
Mon
Sun
Sun
Mon
Sat
Fri
Date
9/15/13
9/7/13
9/5/13
8/4/13
7/29/13
7/18/13
7/9/13
7/9/13
6/29/13
6/13/13
6/13/13
6/13/13
6/10/13
6/10/13
6/11/13
6/8/13
6/8/13
6/7/13
5/20/13
5/15/13
5/5/13
4/24/13
4/21/13
4/3/13
3/26/13
3/25/13
3/25/13
3/25/13
3/25/13
3/24/13
3/24/13
3/11/13
1/19/13
1/18/13
Seller
Drill Spot
Zulera
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Heart Rate Monitors USA
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Health and Beauty and More for Less
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Amazon.com
Shevos World of Products
E Shop
Amazon.com
Amazon.com
Amazon.com
ClosedoutBats
Amazon.com
Amazon.com
Amazon.com
Average
Two-Day Shipping
Delivery Type
Carrier Days
Two-Day Shipping
UPS
4
Two-Day Shipping FedEx
5
3
Two-Day Shipping
UPS
4
Two-Day Shipping
UPS
2
3
Two-Day Shipping
UPS
3
Two-Day Shipping
UPS
3
Two-Day Shipping
UPS
4
Two-Day Shipping
UPS
2
3
Two-Day Shipping
UPS
2
Two-Day Shipping
UPS
3
Standard
DHL
5
2
Two-Day Shipping
UPS
5
Two-Day Shipping
UPS
4
Two-Day Shipping
UPS
5
Two-Day Shipping
UPS
3
3
Two-Day Shipping
UPS
3
Two-Day Shipping
UPS
3
Two-Day Shipping
UPS
3
Two-Day Shipping
UPS
3
Two-Day Shipping
UPS
3
Standard
UPS
5
Standard
USPS
6
Two-Day Shipping
UPS
4
Two-Day Shipping
UPS
3
Two-Day Shipping
UPS
3
Two-Day Shipping
UPS
3
3
Two-Day Shipping
UPS
4
Two-Day Shipping
UPS
6
Business
Days
3
3
2
3
2
2
3
3
2
2
2
2
3
5
2
3
3
3
3
3
2
3
2
3
3
5
5
4
3
2
2
3
3
4
3.5
3.4
2.9
2.7
th
132
SEPTEMBER 23, 2013
SPECIAL REPORT
A Dashboard on Amazon’s Operating Results.
We have included several graphs on the following pages to provide investors a dashboard to
evaluate Amazon’s results and our projections for 2013 and 2014.
ACTIVE CUSTOMER ACCOUNTS, 1Q11 – 4Q13
30.0%
25.0%
250
25.0%
200
20.0%
150
15.0%
100
10.0%
50
5.0%
20.0%
150
15.0%
100
10.0%
50
5.0%
0
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0.0%
Active Customer Accounts
2010
2011
2012
Active Customer Accounts
Annual Growth
2013E
2014E
Annual Growth
ACTIVE SELLER ACCOUNTS, 1Q11 – 4Q13
2.1
ACTIVE SELLER ACCOUNTS, 2010-2014
6.0%
2.3
5.0%
2.2
2.1
6.0%
5.0%
2.1
4.0%
3.0%
2.0
2.0
2.0%
2.0
1.0%
2.2
4.0%
2.1
2.1
3.0%
2.0
2.0%
2.0
2.0
1.9
Active Seller Accounts
Annual Growth
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0.0%
(Annual Growth)
2.0
(Acitve Sellers - MM)
2.1
(Annual Growth)
(Active Seller Accounts - MM)
0.0%
0
1.0%
1.9
1.9
0.0%
2010
2011
2012
Active Seller Accounts
2013E
2014E
Annual Growth
th
(Annual Growth)
300
(Acitve Customers - MM)
200
30.0%
(Annual Growth)
(Active Customer Accounts - MM)
250
ACTIVE CUSTOMER ACCOUNTS, 2010-2014
133
SEPTEMBER 23, 2013
NORTH AMERICA MEDIA REVENUE ($MM), 1Q11-4Q13
NORTH AMERICA MEDIA REVENUE ($MM), 2010 - 2014
25.0%
15.0%
2,000
10.0%
1,500
1,000
5.0%
500
0
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0.0%
12,000
70.0%
60.0%
10,000
6,000
30.0%
4,000
20.0%
2,000
10.0%
0
North America - EGM
Annual Growth
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
0.0%
2Q12
8.0%
6.0%
4,000
4.0%
2,000
2.0%
0
0.0%
2010
2011
2012
2013E
Annual Growth
45,000
80.0%
40,000
70.0%
35,000
60.0%
30,000
50.0%
25,000
40.0%
20,000
30.0%
15,000
20.0%
10,000
10.0%
5,000
0.0%
0
2010
2011
2012
North America - EGM
2013E
2014E
Annual Growth
th
2014E
134
(Annual Growth)
40.0%
(Annual Growth)
50.0%
8,000
1Q12
6,000
NORTH AMERICA EGM REVENUE ($MM), 2010-2014
(North American Media Sales - $MM)
80.0%
4Q11
10.0%
14,000
3Q11
12.0%
8,000
North America - Media
NORTH AMERICA EGM REVENUE ($MM), 1Q11 – 4Q13
2Q11
14.0%
10,000
Annual Growth
1Q11
16.0%
12,000
(Annual Growth)
2,500
20.0%
3,000
North America - Media
(North American EGM Sales - $MM)
18.0%
14,000
3,500
(Annual Growth)
4,000
SPECIAL REPORT
SEPTEMBER 23, 2013
NORTH AMERICA OTHER REVENUE ($MM), 1Q11 - 4Q13
6,000
80.0%
1,200
60.0%
50.0%
600
40.0%
30.0%
400
20.0%
200
10.0%
0.0%
North America - Other
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0
80.0%
70.0%
5,000
60.0%
4,000
50.0%
3,000
40.0%
30.0%
2,000
20.0%
1,000
10.0%
0
0.0%
2010
2011
2012
2013E
North America - Other
Annual Growth
NORTH AMERICA TOTAL REVENUE ($MM), 1Q11 – 4Q13
NORTH AMERICA TOTAL REVENUE ($MM), 2010 - 2014
60.0%
18,000
70,000
50.0%
16,000
50.0%
20.0%
6,000
4,000
10.0%
2,000
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
0.0%
1Q11
0
(North America Total Sales - $MM)
30.0%
8,000
40.0%
50,000
35.0%
30.0%
40,000
25.0%
30,000
20.0%
15.0%
20,000
(Annual Growth)
10,000
(Annual Growth)
40.0%
12,000
45.0%
60,000
14,000
10.0%
10,000
5.0%
0.0%
0
2010
2011
2012
North America - Total
2013E
2014E
Annual Growth
Annual Growth
th
2014E
Annual Growth
North America - Total
(Annual Growth)
800
(North American Other Sales - $MM)
70.0%
1,000
(Annual Growth)
(North American Other Sales - $MM)
NORTH AMERICA OTHER REVENUE ($MM), 2010 - 2014
90.0%
1,400
(North America Total Sales - $MM)
SPECIAL REPORT
135
SEPTEMBER 23, 2013
INTERNATIONAL MEDIA REVENUE ($MM), 2009 - 2014
40.0%
3,500
35.0%
12,000
3,000
30.0%
10,000
25.0%
2,500
15.0%
1,500
10.0%
1,000
5.0%
500
0.0%
0
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
(5.0%)
25.0%
20.0%
8,000
15.0%
6,000
10.0%
4,000
5.0%
2,000
0.0%
0
2010
2011
2012
International - Media
International - Media
70.0%
6,000
60.0%
5,000
50.0%
4,000
40.0%
3,000
30.0%
2,000
20.0%
1,000
10.0%
0
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
0.0%
25,000
(International EGM Sales - $MM)
7,000
60.0%
50.0%
20,000
40.0%
15,000
30.0%
10,000
20.0%
5,000
(Annual Growth)
80.0%
(Annual Growth)
8,000
1Q11
Annual Growth
INTERNATIONAL EGM REVENUE ($MM), 2009 – 2014E
10.0%
0.0%
0
2010
2011
2012
International - EGM
2013E
2014E
Annual Growth
Annual Growth
th
2014E
INTERNATIONAL EGM REVENUE ($MM), 1Q11 -4Q13E
(International EGM Sales - $MM)
2013E
Annual Growth
International - EGM
(Annual Growth)
20.0%
2,000
(International Media Sales - $MM)
4,000
(Annual Growth)
(International Media Sales - $MM)
INTERNATIONAL MEDIA REVENUE ($MM), 1Q11 – 4Q13
SPECIAL REPORT
136
10
5.0%
0
0.0%
International - Other
3Q13E
4Q13E
10.0%
2Q13
20
1Q13
15.0%
4Q12
30
3Q12
20.0%
2Q12
40
1Q12
25.0%
4Q11
50
3Q11
30.0%
2Q11
60
1Q11
35.0%
INTERNATIONAL OTHER REVENUE ($MM), 2010 – 2014E
300
30.0%
250
25.0%
200
20.0%
150
15.0%
100
10.0%
50
5.0%
0
0.0%
2010
2011
2012
International - Other
Annual Growth
2013E
2014E
Annual Growth
INTERNATIONAL TOTAL REVENUE ($MM), 1Q11 – 4Q13E
INTERNATIONAL TOTAL REVENUE ($MM), 2010 – 2014E
40,000
40.0%
12,000
30.0%
35,000
35.0%
10,000
25.0%
30,000
30.0%
8,000
20.0%
25,000
25.0%
6,000
15.0%
20,000
20.0%
4,000
10.0%
15,000
15.0%
10,000
10.0%
5,000
5.0%
International - Total
Annual Growth
4Q14E
3Q14E
2Q14E
1Q14E
4Q13E
3Q13E
2Q13
1Q13
4Q12
0.0%
3Q12
0
2Q12
5.0%
1Q12
2,000
(International Total Sales - $MM)
35.0%
0.0%
0
2010
2011
2012
International - Total
2013E
2014E
Annual Growth
th
(Annual Growth)
14,000
(Annual Growth)
(International Total Sales - $MM)
SPECIAL REPORT
(Annual Growth)
70
(Annual Growth)
(International Other Sales - $MM)
INTERNATIONAL OTHER REVENUE ($MM), 1Q11 – 4Q13E
(International Other Sales - $MM)
SEPTEMBER 23, 2013
137
SEPTEMBER 23, 2013
TOTAL REVENUES ($MM), 1Q11-4Q13E
TOTAL REVENUES, 2010 – 2014E
60.0%
50.0%
20,000
40.0%
30.0%
10,000
20.0%
5,000
10.0%
0
Total Revenues
50.0%
90,000
45.0%
80,000
40.0%
70,000
35.0%
60,000
30.0%
50,000
25.0%
40,000
20.0%
30,000
15.0%
20,000
10.0%
10,000
5.0%
4Q13E
2Q13
3Q13E
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0.0%
100,000
0.0%
0
2010
Annual Growth
2011
2012
Total Revenues
NET SHIPPING COSTS (% OF SALES), 1Q11 – 4Q13E
10.0%
(Annual Growth)
15,000
(Total Revenues - $MM)
25,000
(Annual Growth)
(Total Revenues - $MM)
30,000
SPECIAL REPORT
2013E
2014E
Annual Growth
NET SHIPPING COSTS (% OF SALES), 2010 – 2014E
8.0%
9.0%
7.0%
8.0%
6.0%
7.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
Shipping Revenue (% of Sales)
Shipping Costs (% of Sales)
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0.0%
0.0%
2010
2011
2012
Shipping Revenue (% of Sales)
2013E
Shipping Costs (% of Sales)
Net Shipping Costs (% of Sales)
Net Shipping Costs (% of Sales)
th
2014E
138
SEPTEMBER 23, 2013
SPECIAL REPORT
GROSS MARGIN, 1Q11 – 4Q13E
GROSS MARGIN, 2010 – 2014E
35.0%
30.0%
30.0%
25.0%
25.0%
20.0%
20.0%
15.0%
15.0%
10.0%
10.0%
5.0%
5.0%
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0.0%
0.0%
2010
2011
2012
2013E
2014E
OPERATING MARGIN, 1Q11 – 4Q13E
OPERATING MARGIN, 2010 – 2014E
3.5%
4.5%
3.0%
4.0%
2.5%
3.5%
2.0%
3.0%
1.5%
2.5%
1.0%
2.0%
1.5%
0.5%
1.0%
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
-0.5%
1Q11
0.0%
0.5%
0.0%
2010
2011
2012
2013E
th
2014E
139
SEPTEMBER 23, 2013
SPECIAL REPORT
EBITDA MARGIN, 1Q11 – 4Q13E
EBITDA MARGIN, 2010 – 2014E
6.0%
7.0%
5.0%
6.0%
4.0%
5.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
0.0%
0.0%
2010
90.0%
50.0%
80.0%
4Q13E
2Q13
3Q13E
-100.0%
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
0.0%
2Q11
2013E
2014E
EFFECTIVE TAX RATE, 2010 – 2014E
100.0%
1Q11
2012
EFFECTIVE TAX RATE, 1Q11 – 4Q13E
-50.0%
2011
70.0%
60.0%
-150.0%
50.0%
-200.0%
40.0%
-250.0%
30.0%
-300.0%
20.0%
-350.0%
10.0%
-400.0%
0.0%
2010
2011
2012
2013E
th
2014E
140
SEPTEMBER 23, 2013
SHARES OUTSTANDING, 1Q11 – 4Q14E
SHARES OUTSTANDING, 2010 – 2014E
1.2%
464
1.0%
0.6%
0.4%
458
0.2%
0.0%
456
(0.2%)
454
(0.4%)
(0.6%)
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
452
468
3.5%
466
3.0%
464
2.5%
462
2.0%
460
1.5%
458
1.0%
456
0.5%
454
0.0%
452
(0.5%)
450
(1.0%)
2010
2011
2012
Shares Outstanding
Shares Outstanding
400.0%
$0.80
300.0%
$0.60
200.0%
100.0%
(100.0%)
4Q13E
2Q13
($0.40)
3Q13E
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
$0.00
(200.0%)
(300.0%)
(400.0%)
($0.60)
(500.0%)
($0.80)
(600.0%)
200%
$2.50
0%
(200%)
$2.00
(400%)
(EPS)
$0.20
$3.00
$1.50
(600%)
$1.00
(800%)
$0.50
(1000%)
$0.00
2010
2011
2012
2013E
2014E
($0.50)
EPS
Annual Growth
th
(1200%)
(1400%)
EPS
Annual Growth
(Annual Growth)
0.0%
(Annual Growth)
$0.40
2Q11
Annual Growth
EPS, 2010 – 2014E
$1.00
1Q11
2014E
EPS, 1Q11 – 4Q13E
(EPS)
2013E
Annual Growth
($0.20)
(Annual Growth)
(Shares Outstanding - MM)
0.8%
(Annual Growth)
(Shares Outstanding - MM)
462
460
SPECIAL REPORT
141
SEPTEMBER 23, 2013
CAPITAL EXPENDITURES, 1Q11 – 4Q13E
CAPITAL EXPENDITURES, 2010 – 2014
300.0%
2,500
2,000
200.0%
0.0%
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
(500)
(1,000)
1Q11
0
(100.0%)
(200.0%)
(1,500)
(300.0%)
(2,000)
(2,500)
(400.0%)
5,000
180.0%
4,500
160.0%
4,000
140.0%
3,500
120.0%
3,000
100.0%
2,500
80.0%
2,000
60.0%
1,500
1,000
40.0%
500
20.0%
0.0%
0
2010
Capital Expenditures
Annual Growth
4,000
300.0%
3,500
0.0%
500
(100.0%)
0
Annual Growth
4Q13E
3Q13E
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
(200.0%)
(LTM Free Cash Flow - $MM)
1,000
100.0%
2Q11
Annual Growth
500.0%
400.0%
300.0%
3,000
2,500
200.0%
2,000
100.0%
1,500
0.0%
(Annual Growth)
200.0%
(Annual Growth)
1,500
1,000
(100.0%)
500
0
(200.0%)
2010
2011
2012
LTM Free Cash Flow
2013E
2014E
Annual Growth
th
2014E
4,500
400.0%
2,000
1Q11
2013E
LTM FREE CASH FLOW, 2010 - 2014
500.0%
2,500
(LTM Free Cash Flow - $MM)
2012
LTM FREE CASH FLOW, 1Q11 – 4Q13E
LTM Free Cash Flow
2011
Capital Expenditures
(Annual Growth)
500
(Capital Expenditures - $MM)
100.0%
(Annual Growth)
(Capital Expenditures - $MM)
1,500
1,000
SPECIAL REPORT
142
SEPTEMBER 23, 2013
SPECIAL REPORT
ADDENDUM
Important Disclosures:
Valuation Method for Target Price: Price-to-Earnings, price-to-EBITDA, P/E to growth, price to free cash flow, and discounted cash flow analysis.
Investment Risks: Telsey Advisory Group’s (TAG’s) equity research department covers consumer-focused sectors including apparel, footwear and
sporting goods, casinos, consumer finance and payments, cosmetics, cruise lines, department stores, discounters, entertainment and communications,
gaming, hardlines, internet, lodging, luxury, restaurants, and specialty apparel. Risks across or specific to one or more of these sectors include volatility
of commodity costs, consumer spending, currency, rising interest rates, weaker consumer confidence and unemployment rates. In addition, access to
capital, supply chain disruptions, commodity costs, private-label distribution, currency, geopolitical uncertainly, unfavorable government regulations, lack
of appropriate real estate sites, and the use of the World Wide Web to sell merchandise represent unique industry risks.
Analyst Certification
The Research Analyst(s) who prepared the research report hereby certify that the views expressed in this report accurately reflect the Analyst(s)
personal views about the subject companies and their securities. The Research Analyst(s) also certify that the Analyst(s) have not been, are not, and
will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report.
Tom Forte, CFA, James Cakmak, CFA
Historical Price Targets
To see price charts and TAG’s historical price targets please click the following link: http://www.telseygroup.com/files/historicalprices.pdf
Company-Specific Disclosures
None
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or
co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed
public offerings in prior periods; directorships; market making and/or specialist role.
The following are additional required disclosures:
Ownership and material conflicts of interest: TAG prohibits its analysts, professionals reporting to analysts and members of their households from
owning securities of any company in the analyst's area of coverage.
Analyst compensation: Neither TAG nor its employees/analysts receives any compensation from subject companies for inclusion in our research.
Analysts are paid in part based on the overall profitability of TAG which may include investment banking revenues.
Analyst as officer or director: TAG analysts, persons reporting to analysts or members of their households do not serve as officers, directors, advisory
board members or employees of any of our subject companies in the analyst's area of coverage.
Investment banking activities: TAG provides investment banking, other non-investment banking securities related services, and non-securities services
and may seek such relationships from subject companies. Distribution of ratings: TAG analysts do not assign ratings to covered companies.
Price chart: See the price chart, with price targets in prior periods, above, or, if distributed in electronic format or if multiple companies are the subject of
this report, on the TAG website at http://www.telseygroup.com/files/historicalprices.pdf.
TAG is a member of FINRA (http://www.finra.org) and SIPC (http://www.sipc.org).
Other Disclaimers
TAG is a registered broker dealer offering equity research, trading and investment banking services. The Equity Research Department of TAG produces and
distributes research products for institutional clients of TAG and is for our institutional clients only. This research is based on current public information that
we consider reliable. We seek to update our research as appropriate. Other than certain industry reports published on a periodic basis, the large majority of
reports are published at irregular intervals as appropriate in the analyst's judgment. TAG updates research reports as it deems appropriate, based on
developments with the subject company, the sector or the market that may have a material impact on the research views or opinions of TAG analysts. All
TAG publications are prepared in accordance with TAG compliance and conflict management policies. TAG is committed to the integrity, objectivity, and
independence of our research. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our
clients, which may reflect opinions that are contrary to the opinions expressed in this research. This research is not an offer to sell or the solicitation of an
offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. These publications are furnished for informational purposes
only and on the condition that it will not form the sole basis for any investment decision. Any opinion contained herein may not be suitable for all investors or
investment decisions. Each investor must make its own determination of the appropriateness of an investment in any company referred to herein based on
considerations applicable to such investor and its own investment strategy. By virtue of these publications, neither TAG nor any of its employees, nor any
data provider or any of its employees shall be responsible for any investment decision. The price and value of the investments referred to in this research
and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original
capital may occur.
TAG publications may not be reproduced, distributed, or published without the prior consent of TAG.
© 2013. All rights reserved by Telsey Advisory Group. Telsey Advisory Group and its logo are registered trademarks of Telsey Advisory Group LLC.
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the future of amazon.com - UConn School of Law

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