Intensifying price wars could derail Amazon
Offline retailers like Wal-Mart and Sears are lowering prices to stay competitive with the e-tail giant.
Below we take a look at trends that may affect Amazon's electronics and general merchandise division and hence our price for the company's stock. We currently have a $222 estimate for Amazon, which is approximately 8% below the market price.
Increasing competition could spoil party
While the company started as a book retailer, it later diversified into selling electronics and general merchandise. The electronics and general merchandise division constitutes 68% of our price estimate for the company. While the initial primary advantage of shopping at Amazon was the low prices it offered, offline retailers have been lowering prices to stay competitive. For example, Sears recently advertised that it had the lowest prices on all of the top 10 home appliance brands.
Yet we expect Amazon's market share in the U.S. online electronics and retail goods sales to increase from the current level of almost 9% to 12.5% by the end of our forecast period.
Additionally, proposals to levy sales tax on online sales have been gaining support across various states. If these proposals come into effect, we expect the price advantage offered by Amazon to weaken. This could level the playing field between offline and online retailers and negatively affect the company's market share.
Large inventories could weigh on margins
The flip side of offering a wide range of products is the need to maintain a larger inventory. This results in the need for bigger warehouses and increased complexity in warehouse operations. The company is experimenting with new delivery models to cut costs associated with personalized delivery. If successful, these innovations could help the company stay competitive in this price-sensitive segment.
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I shop at Amazon often enough to be a prime member. However, I use them for hard to find DVD's new books and general merchandise (most of which is from their partners). They have been a boon for their small business partners. As for electronics and many other purchases it's Costco.com. I also recommend Powell Books (free freight on orders >$50)
Prime membership also allowed me to axe Netflex and there monthly charges.
When comparing merchandise among very large retailers, appliances for instance, be sure to compare the same model numbers. The biggest of the retailers are able to specify the individual components to reduce prices and increase profits.
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