Finanzas: Amazon Retail Business Is Much Larger Than Believed

 

How Amazon handles a lot more than 15 percent of total online sales.

The giant retailer may handle up to 30 percent of all U.S. e-commerce.

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Lack of revenue from some transactions doesn’t matter in the long run.

Amazon will eventually become the largest retailer in the U.S. and the world.
One of the areas Amazon (NASDAQ:AMZN) is vastly underestimated and misunderstood in is in regard to the total number of online business it does when measured by the number of «touches» it has on items sold.

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Investors don’t price in the sales coming from third-party vendors and consider them completely different from sales generated directly from Amazon. The reason for that is sales revenue is much smaller and insignificant when measured against direct Amazon sales.

This is important to understand because it removes as much as half, or possibly even more, of the online business that is done via Amazon, which will eventually have tremendous consequences for its competitors.

For that reason it can confuse investors and pundits as to why some competitors appear to be making some inroads against the online retail giant when if reality they are coming under more pressure because the way Amazon runs its business and what it chooses to reveal to the market.

Amazon’s online sales and total sales «touches»

Retail sales in the U.S. come in at about $5 trillion, with about 8 percent of that being online sales, according to the Department of Commerce and Amazon. That puts e-commerce sales in America at about $400 billion, which would mean Amazon accounts for about 15 percent of the total.

Where the market ignores or underestimates the amount of merchandise handled by Amazon is in regard to third-party sales volume. When taking that into account, the amount of sales handled by Amazon climbs as high as 36 percent, according to sales data ChannelAdvisor, cited by MSN. It said, «When you ‘unpack’ the $63.7 billion revenue, that has transactional value (what Wall St. calls Gross Merchandise Value) of $135 billion ($56 billion direct from Amazon and $79 billion from third party sellers) which is 36% of overall commerce.»

The $63.7 billion in sales come from the total sales in North America for 2015. A small amount of that comes from Canada.

A number of others see it being closer to about 30 percent of the total, which represents more of a consensus. Either way, there’s a lot more merchandise being handled by Amazon than represented by sales numbers.

Since Amazon doesn’t release its gross merchandise volume, we have no way of knowing the overall total sales coming from the various ways they are handled when including third-party sellers.

Amazon gets a commission for these sales, and they can be in a range of 5 percent to 30 percent. Those following the company closely say the average probably is closer to 10 percent. If that’s accurate, it would mean as much as 90 percent of third-party sales aren’t reflected in overall Amazon sales. The sales are still there, but they aren’t part of the top and bottom lines of the company.

Why it matters

At a glance this may appear to be an interesting but irrelevant piece of information, but in fact it’s extremely important when considering its competitors.

Investors in retail companies may be thinking those companies have a much more solid e-commerce business than understood when measured against the direct sales by Amazon, but not including the totality of touches or handling Amazon accounts for altogether.

Everything Amazon has a hand in is something its competitors don’t. So while Amazon doesn’t count the revenue from its third-party vendors, it does result in its competitors not getting those sales.

While at this time we don’t have a clue as to what the gross merchandise volume of Amazon is, it must be included in the analysis of the overall retail sector as it relates to online sales volume that those outside of Amazon aren’t getting.

If Amazon is handling a product, its competitors aren’t handling it or generating sales. The probability that Amazon’s gross merchandise volume is going to continue to grow is very high, which means trouble for all of its competitors. Those holding positions in retailers must start to price this into the future prospects of each company.

Amazon will become largest retailer in the world

I have no doubt Amazon will eventually become the largest retailer on planet earth. It’ll take time because a lot of people that shopped in a certain way before Amazon arrived on the scene, for the most part, continue to do so now. As that gradually changes over time, Amazon will be there waiting for them to use them as their retailer of choice.

One challenge in identifying Amazon as the largest retailer in the future will be how much it moves outside of its core business. It will depend upon whether or not it will keep AWS as a part of Amazon or spins it off in the future, which could be a strong possibility.

Another major part of the timing of this will be how consumers respond as the global economy continues to slow down and the next recession hits. During the Great Recession, consumers, including consumers with more disposal income, flocked back to Wal-Mart (NYSE:WMT) to get low-price products. The question in the next recession will be if that is going to be the practice, or if consumers will instead gravitate more toward Amazon. My thought is consumers will give Amazon a boost during this time, and it will accelerate its move toward being the largest retailer.

That of course doesn’t mean that will be enough to get it done, but it will change consumer habits even more. And as older consumers stop buying, younger consumers will become the key demographic that will decide the overall future retail leader. From that point of view I see it as being Amazon hands down. The question will be whether or not a new player enters the retail sector that isn’t even in business at this time.

Conclusion

The point of all of this is investors aren’t taking into consideration the importance of the overall touching or handling of products represented by Amazon. The value isn’t in how much revenue is being generated, but how much business Amazon is taking away from competitors.

If the 30 percent to 36 percent range is close to being accurate, it’s an extraordinary amount. Not only does that take business away from the competition, but it provides Amazon with an incremental but important income stream that no competitor can take away from it at this time. It also sets it up for a major increase in business as younger consumers become the larger part of retail buying. Without a doubt they prefer e-commerce to all other ways of buying goods.

What remains to be seen is at what cost in regard to margins and earnings Amazon will have to pay to get there. And once it gets there, how will it be able to increase margins and earnings when doing so will open the door to a nimble competitor that doesn’t mind disrupting Amazon in the way Amazon is disrupting others.

We need to seriously look at the growth of Amazon’s gross merchandise volume. It has already being ignored by investors, but we can’t ignore any longer something that can wrest market share away from competitors without it being priced into the market.

Retail holdings some of us may have could be decimated by this if we’re only looking at direct Amazon sales rather than the combination that and sales from third-party vendors. Anything that takes away business from a company is a threat, whether the company doing it gets a lot of revenue and earnings from it or not.


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