PayPal Can Crush Amazon's Offline Strategy

 |  Includes: AAPL, AMZN, BKS, EBAY
by: ValueMax

Amazon (NASDAQ:AMZN) and Ebay's PayPal (NASDAQ:EBAY) are both taking a page out of the Apple (NASDAQ:AAPL) play book: Let's make the virtual a reality. Both titans of the online shopping and payment industries have stepped into the physical world, offering consumers the ability to use their online billing accounts in real stores. While both these companies are voraciously growing their offline market, my prediction is that only PayPal will succeed based on historical example and present leadership strength.

What Is Happening

A San Jose Home Depot (NYSE:HD) has already adopted the technology that allows customers to pay with their PayPal account. Like much in the world of competitive business, this innovative service was swiftly copied by several other area hardware stores.

This innovation came after market testing in partnership with two Swedish developers Accumulate and Point. PayPal completed its 'in-store payment' experiment in two Swedish retailers last month, an electronic store and a sports equipment store. Users were able to download a PayPal in-store iOS or Android app that gave them access to special discounts at the retailers. When users visited the store, they received an NFC sticker, which allowed them to pay at the retailer point of sale systems with the payments deducted from their PayPal accounts.

PayPal will continue to test many different proximity-based payment technologies (including NFC) and is currently exploring numerous partnership opportunities.

Alternatively, Amazon is seeking to circumvent the partnership aspect of its sales. Seattle is prepping to become home to Amazon's new gizmo store, which will offer its line of Kindle products, as well as other key brand merchandise.

The strategy, Amazon execs say, is to serve those consumers who want to 'put their hands on it' before they buy. An opportunity to try it out in a store first gives them the same advantage of the Barnes & Noble (NYSE:BKS) Nook, however, without the sometimes untrained and unknowledgeable salespeople at Best Buy (NYSE:BBY), Target (NYSE:TGT), or other big box retail associates. In their own store, Amazon will have more control over the training, selling, and of course, more of the profits.

What Has Happened

Cutting out the middle man is nothing new. Apple has seen success by not only relying on Best Buy and others to sell iPods, iPhones, and iPads, but by opening its own kiosks and shops in malls via the Apple store and through iTunes. Amazon appears to be playing follow the leader, capitalizing on its record high sales last year for e-readers and tablets.

This is not the first time Amazon has moved offline and infiltrated our physical world. Few investors realize that it previously purchased and is operating BeautyBar, a cosmetics store in New York.

Even so, remember that this strategy is universal in its reversal as well. Retail giants such as Wal-Mart and Target have plowed ahead to bring their online shopping presence as convenient and enjoyable as in-store. Why should we not expect virtual companies to demonstrate the same transformation into brick and mortar businesses?

What Will Happen

The Amazon Goliath has more or less dominated the online purchasing world, both with its own products and others. Likewise, PayPal and its parent eBay, have also gorged on those millions of convenience
seekers (that group to which I proudly raise my hand and affirm my loyalty). But what is better than eclipsing all opponents in one market? Why, reigning supreme in two markets! The online companies now seek to crack the offline market, hoping to thereby grow in value and profit.

Marketing and financial wizards at Lowe's (NYSE:LOW) are already considering how PayPal has opened doors to those Home Depot shoppers who don't want to… open their doors. This company is poised to pioneer this new and convenient payment method to the growing number of smart phone users. It will do so with limited cost (based on partnerships with businesses that absorb the overhead) and considerable return on invested capital. Currently selling at around $33, eBay's stock is set to rise as tests finalize and the in-store payment party rolls out across the country.

For Amazon, however, the drawback will be that pesky problem of overhead. My prediction is that Amazon will not remain as competitive once it must pay 'to keep the lights on' in a brick and mortar store. The costs it will incur - and generously pass on to John and Jane Consumer - will not outweigh the sales made in store. After the novelty wears off, people will retreat back to their online shopping sanctuary where power lies in a few simple clicks and home delivery.

While Amazon shares holds steady at around $192, my prediction is that they will see little movement, as new costs offset new sales in their stores and compress margins.

Why It Will Happen

Leadership is key when it comes to a company's strategy. Truly it was a rock when Scott Thompson announced he was stepping down as president of PayPal to become CEO of Yahoo, yet, now a month later, PayPal has shown it has the depth of leadership necessary to execute its plan to enter the world of in-store payments.

Amazon's strategy team seems to be taking it slow, with only the one Seattle store on the horizon - so they say. Even so, payroll and all other expenses will not generate the desired sales and will lock Amazon stock at its current value. Unlike Amazon's online stores its brick-and-mortar stores will require significant working capital, even if the company pursues sale-leasebacks for its physical buildings. I anticipate operating margins at its brick-and-mortar stores will be half the 1.8% average operating margin for the company overall.


Investors will be wise to jump into eBay stock. I think great returns are on the horizon based on its strength of leadership and strategic partnerships. Imagine the ease at which this process can expand, using our smart phones with a PayPal app to pay for any purchase we make.

On the contrary, investors should not expect Amazon to post big returns. The company is solid, however, and should, for now, be avoided. I would be a buyer below $160 per share. However, as fuel costs increase, real world shoppers will soon grow less interested in driving to the local Amazon store. The competitive advantage that made Amazon great was that it's a low cost, convenient solution to shopping. Its latest move is likely to result in poor stock performance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.