1 Key Secret to Amazon’s E-Commerce Success

Amazon, both the e-commerce operator and the stock, has thrived in the past two decades. Below is possibly the most important factor that helps to explain the company’s success.
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Amazon  (AMZN) - Get Report is, unquestionably, the king of global e-commerce. The company accounted for nearly 40% of B2C (business-to-consumer) digital retail sales in the US, as the chart below depicts. Retail giants Walmart and eBay come far behind, occupying the second and third spots on the list.

At least one Wall Street analyst claims to know one of Amazon’s key ingredients to success in e-commerce: the company’s massive delivery system. Today, the Amazon Maven looks closer at the thesis.

Figure 1: Share of retail e-commerce sales.

Figure 1: Share of retail e-commerce sales.

Read more from the Amazon Maven: AMZN After Hours: Charging Towards All-Time Highs?

Amazon grows by “one Walmart per year”

According to Bank of America’s Justin Post, Amazon is expected to increase fulfilment real estate by 40% in 2021 to 400 million square feet, after achieving similar levels of growth last year. The added square footage alone expected for 2021 amounts to Walmart’s entire distribution center space.

The massive investment in distribution is needed to support aggressive growth beyond e-commerce sales that surpassed $275 billion in 2020, between Amazon’s online stores and third-party sellers. Fulfilment is likely to require even more capital commitments going forward, as demand for fast delivery increases – something that will likely set Amazon apart from competitors.

BofA’s analyst also makes an interesting correlation: fulfilment square footage has historically moved in tandem with sales. Therefore, it is not a stretch to associate Amazon’s future growth in fulfilment capacity with a possible rise in Amazon stock’s price, which should theoretically trade in line with business fundamentals (i.e. sales) in the long run.

Read more from the Amazon Maven: Amazon Stock: Wall Street Experts Can Agree On One Thing

The Amazon Maven’s take

I generally agree with the idea that Amazon’s success, as an e-commerce company and as a stock, can be greatly attributed to the management team’s willingness to invest heavily in distribution infrastructure.

Since the company’s 1990s origins and even now, valued at a whopping $1.6 trillion, Amazon has set expectations for aggressive top-line growth and “world domination” first and foremost – even if at the expense of narrower margins and more timid free cash flow today. As I explained this time last year:

“Amazon’s [FCF] yield of 1.5% is the worst within the FAAMG group. […] The company is more interested in plowing cash back into the business to fuel its growth initiatives, leaving little of it left for equity investors [for now].”

I believe that Amazon’s key to success in e-commerce will continue to be aggressive development of its distribution network, particularly last-mile capacity. Amazon’s physical presence and ability to distribute goods to over 85% of the US population (not to mention future expansion opportunities worldwide) is the kind of competitive advantage that cannot be easily replicated.

Also read: Has AMZN Produced The Most Alpha In Big Tech?

Twitter speaks

Amazon’s capacity growth is massive, as fulfillment square footage increased 40% in 2020. How important do you think the company’s lavish investments in distribution is to the investment thesis in Amazon stock? Leave your opinion below and follow @AmazonMaven on Twitter!

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)