Intensifying price wars could derail Amazon

Offline retailers like Wal-Mart and Sears are lowering prices to stay competitive with the e-tail giant.

By Trefis Aug 27, 2012 12:08PM
Trefis© Spencer Platt/Getty ImagesAmazon (AMZN), widely accepted as the king of online retailers, is facing increased competition from brick-and-mortar retail behemoths like Wal-Mart (WMT) and Sears (SHLD), which have lowered prices for their products. 

Amazon is known to offer some of the
lowest prices and is widely accepted as a reliable retailer. However, a growing perception about Amazon is that it is now becoming a Jack of all trades, master of none. 

Some analysts believe that focusing only on select products will help the company stay competitive.

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.


Amazon Share of US Online Electronics & Gen. Merchandise Sales

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.


You can also read about the trends we expect will affect Amazon's Books, DVDs and Videos, Kindle Hardware and Web Services divisions.

4Comments
Aug 29, 2012 9:24PM
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Well, sometimes Amazon will have the best price for what you want; other times it won't.  That's why we all shop and compare.  Isn't it great that we no longer have to drive all over to do that.  The web discount aggregators like Slickdeals, dealsofamerica, bensbargains, etc. do that for us with a lot of items each day. As to sales taxes, it has been reported that many states allow Walmart to retain the "sales taxes" they collect for a period of time just for the privilege of having them compete in their jurisdictions with tax-paying smaller merchants already there.
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.

Aug 29, 2012 1:40AM
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Online sales taxes are a big ripoff.  The states need to learn to live within their means.  Get lean and cut the overhead costs and fix the roads.  Project oversight and quality control are needed.  Focus on education and real needs.
Aug 27, 2012 1:12PM
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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.

Aug 27, 2012 12:29PM
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Also more and more states are collecting taxes on Amazon sales. Now they have a distribution center in Texas we are getting taxed by Amazon . Their prices are not competitive when you add our 8.25% sales tax.
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