The Growing Cult of Amazon Prime: Will it Make the Company, or Sink it?
I love free shipping as much as the next person, and also find the level of service at Amazon to be fabulous, so I read with great interest Jason Calacanis’ latest post on the Launch blog, “The Cult of Amazon Prime.”
“There are two types of people in the world: those with Amazon (AMZN) Prime and those without,” Calacanis begins. He has it and loves it, estimating it saves him 250 hours a year by keeping him out of stores and also lets him avoid “the most horrifying experience of all: retail employees.” He adds: “One of the greatest joys of the cult membership is never again having to deal with an apathetic teenager or bitter baby boomer forced to work retail.”
Calacanis even has his Listerine on automatic every-60-day delivery from Amazon Prime; so we now know the free-shipping service kills bad breath, too.
Estimating Amazon has 5 million Prime members and that the total will double every 18 months or so – Calacanis’ Law? – he expects one in four American households to have Prime in the next four years, or between 30 and 40 million households (using 20 million accounts).
The trouble is, Prime costs Amazon a lot of money. And unless users become so loyal that they’ll tolerate less than the cheapest price on the web, it’s hard to see how the growth of the service won’t continue to suppress Amazon profits. As one sees here, awesome revenue growth hasn’t yet led to awesome profits:
The problem, or at least one big problem, is all that free shipping. Annually at least, Amazon, which is tight with financial data, discloses its shipping costs, and thanks to Prime they’re rising faster than sales. For 2010, net shipping costs – total shipping costs minus what Amazon collects from dummies who aren’t in the Prime cult – was $1.39 billion. That was up 63% from the prior year. And sales in 2010 grew by only 40%.
Net shipping costs chewed up 4% of 2010 sales, up from 3.4% in 2009. With profits down in 2011, we may see when Amazon files its 10-K that net shipping costs accelerated. It’s a cult after all. An increase in Prime membership (and usage) of the sort Calacanis is projecting could render Amazon’s financials U.S. Post Office-like.
Calacanis – and let’s give him credit for the post being at least party tongue-in-cheek -- justifiably wants the good times to continue. He sees Amazon increasingly producing goods, selling them and delivering them, all in one seamless business, vanquishing so many other companies. “If you’re part of the cult, brands like Netflix (NFLX), UPS (UPS), Paypal (EBAY), WalMart (WMT), iTunes (AAPL), Barnes & Noble (BKS), iPad, HTC, Target (TGT), Logitech (LOGI), Best Buy (BBY), Dell (DELL), Belkin, Random House, Harper Collins are all becoming meaningless.” (Stock symbols inserted by us here at YCharts.)
Before you run out and short all those companies against a massive Amazon position, look at what the cult of Prime is doing to margins.
As we noted in a recent post on Amazon, the Prime cult may be creating the sort of moat that Warren Buffett likes to see. But does the moat encircle Amazon protectively, or is it instead a moat encircling bricks-and-mortar retailers into a market-share-losing ghetto?
Even if Best Buy and other competitors are forced out of business, it seems unlikely that others wanting to sell appliances or other stuff won’t replace them. At some point, Amazon will be forced to either raise product prices or raise shipping revenues. And that will disturb the cult. But, while it lasts, it’s beautiful.
Read more articles about: Company Analysis
Timeless thoughts for serious business minds
- pharma stocks
- tech stocks
- stocks that look cheap
- stocks that look pricey
- money managers
- retail stocks
- earnings season
- growth stocks
- dividend growth
- bank stocks
- energy stocks
- short sellers
- warren buffett
- entertainment stocks
- value investing
- executive compensation
- federal reserve
- fast food stocks
- overall market
- broader market
- stock screener
- stock buybacks
- cyclical stocks
- industrial stocks