Amazon Prime: Continued Growth All But Guaranteed 9 comments
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While eBay (EBAY) continues to battle the negative "buying experience" of high S&H charges on their platform, Amazon (AMZN) has that problem covered -- it's called Amazon Prime.
In addition to their very successful Super-Saver program, Amazon has seen tremendous growth in Amazon Prime memberships. The company is tight-lipped about its Prime membership numbers, but they wouldn't be expanding internationally if the program were not successful. During the second half of 2007, Amazon rolled out Prime to 3 international marketplaces (Japan, UK and Germany)
According to a research note by Jeetil Patel of Deutsche Bank,
Over the past year, services such as Amazon Prime have helped to shift consumer behavior, fuel cross-category shopping and consolidate wallet share into the hands of Amazon.com. This strategy has helped to accelerate user growth, purchase frequency and unit growth at the company in the past year, while the e-commerce market has deteriorated. Once again, we think Amazon Prime should fuel growth in 1Q 2008, based on shifting consumer behavior.
I've seen this growth first hand. I use Amazon's FBA program to fulfill my Amazon orders, which makes my items eligible for Super-Saver shipping and Prime members. In the 4th quarter of 07, 14% of my shipments were for Amazon Prime customers. So far in the first quarter of this year, 19% of my orders are going to Prime customers. Those are sales I would not be getting if I was self-fulfilling my orders.
For the $79 a year Prime membership fee, Amazon customers get the following benefits:
- Free Two-Day shipping on over a million in-stock items sold by Amazon.com. $3.99 overnight shipping if you order by 6:30PM ET.
- There's no need to group items to save on shipping. Order what you want, when you want.
- Share one membership with up to four additional accounts in the same household and get even more value.
On eBay, sellers must ship product themselves, use a drop-shipper or outside fulfillment house and their actual shipping costs can vary widely depending on the volume in their business. eBay encourages sellers to offer Free Shipping but that becomes a huge financial burden to their bottom line and I certainly can't see any 3P sellers on eBay offering 2-Day shipping for free. But with Amazon's FBA program, 3P sellers like myself can participate in Amazon's Prime program and get access to a customer base that is growing and as Mr. Patel says in his note:
This strategy has helped to accelerate user growth, purchase frequency and unit growth at the company in the past year, while the e-commerce market has deteriorated.
IMO, Amazon Prime will continue to grow and become a larger percentage of Amazon orders. I can't see any reason why today's 3P sellers wouldn't want to have access to that business.
Disclosure: None
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This article has 9 comments:
There are only three items worth addressing in your comments. The first suggesting that Amazon would not be expanding internationally if they weren't successful is purely a subjective comment at best. If there are no known numbers as to how much of an increase prime membership has increased, what metric is being used? An unquantified opinion is by no means a logically equitable argument.
Next, you mention you have seen a 5% increase from prime buyers but fail to put your numbers in perspective. I am sure you have heard the saying that when it comes to statistics it depends on how the numbers are put into context because the “numbers can lie.” What are your numbers for the year not just one quarter which statistically speaking could be an outlier and thus considered irrelevant when it comes to empirical studies?
Lastly, for the average buyer on eBay how many items need to be purchased before there is a breakeven point to even begin to justify paying a $79 membership fee. You realize that Costco has a $50 membership fee and offers many of their products with free shipping. It would appear to me that you have failed to realize that Amazon is using this fee as a shipping subsidy but fails to share this subsidy with its sellers. Is this another way for Amazon to pad the books with another form of revenue thus painting a rosier picture than the average investor realizes?
For a disclosure, please read my bio. I do not own any shares in eBay or Amazon and I shut my eBay busness down in 2006.
You are correct, my assertion that Amazon wouldn't be expanding Prime if it wasn't successful is subjective, but it is also logical.
I've only been selling on Amazon for 2 quarters and the only data I have is from the 4th quarter of 2007 and the first quarter this year and that is the data I used.
As for when Amazon Prime will payoff for members just refer to Greg in Al's comment below yours.
BTW, how about some disclosure on your comments.
Thank you for your reply. Let me begin with full disclosure. I do own shares of eBay. However, my investment perspective for this company is more for the longer term over the next 3-5 years not the next six months. With that being said, from a comparative standpoint, there are some similarities to Amazon and eBay but overall when comparing the complete business model these companies are quite different. Amazon has extensive overhead in the other portions of their business which constitutes a majority of their revenues and has only recently experimented with becoming a portal for web-sellers. eBay has essentially created a “Blue Ocean” in a previous non-existing business concept meaning that it has completely changed a process of buying on the internet and thus has paved the way for companies like Amazon among others to replicate.
Regarding the reference to gas savings from the previous poster, how long do you think this price will last with rising fuel costs? Since this is not a manufacturing company the only way they can potentially increase productivity would be through either additional modules to an ERP software system which could very well cost into the hundreds of millions or find a way to increase web traffic by offering a service as you reference that very well may be below actual costs so as to increase their market share. If the later is the case then this is not sustainable over the long term with Blockbuster being a prime example of market share tactics. Either way both are indicators of price increases to come. Regardless, I think it is only a matter of time before you will see prices rise since Amazon like eBay is but a mere cork in the ocean that will rise and fall with the tide of the economy.
Great dialogue…let’s keep it going!
Thank you for your reply. Let me begin with full disclosure. I do own shares of eBay. However, my investment perspective for this company is more for the longer term over the next 3-5 years not the next six months. With that being said, from a comparative standpoint, there are some similarities to Amazon and eBay but overall when comparing the complete business model these companies are quite different. Amazon has extensive overhead in the other portions of their business which constitutes a majority of their revenues and has only recently experimented with becoming a portal for web-sellers. eBay has essentially created a “Blue Ocean” in a previous non-existing business concept meaning that it has completely changed a process of buying on the internet and thus has paved the way for companies like Amazon among others to replicate.
Regarding the reference to gas savings from the previous poster, how long do you think this price will last with rising fuel costs? Since this is not a manufacturing company the only way they can potentially increase productivity would be through either additional modules to an ERP software system which could very well cost into the hundreds of millions or find a way to increase web traffic by offering a service as you reference that very well may be below actual costs so as to increase their market share. If the later is the case then this is not sustainable over the long term with Blockbuster being a prime example of market share tactics. Either way both are indicators of price increases to come. Regardless, I think it is only a matter of time before you will see prices rise since Amazon like eBay is but a mere cork in the ocean that will rise and fall with the tide of the economy.
Great dialogue…let’s keep it going!
I agree that Amazon and eBay have significantly different business models and that eBay certainly has the preferable profit model, but Amazon is addressing that by expanding their 3P business, which will allow them to expand margins while maintaining their competitive advantage as an online retailer.
I don’t look at either of these companies from the perspective of the investor. I like the fact that Amazon pushes the envelope and has long-term goals for their business while on the other hand I don’t like that eBay “milks” profits from a supposed mature business and seems to manage their business quarter by quarter.
I believe that eBay should take a longer-term approach to the Marketplace business and get back to growing rather than just managing. Unfortunately this would call for some short-term pain and their margins would be squeezed a little. Recently I’ve seen some signs that eBay’s new management team gets it, but the jury is still out.
I come from the perspective of the online seller so if I seem negative toward eBay it is because I often disagree with the direction they are taking. I think Amazon has issues as well but I like their approach. I can see their vision for the Amazon of the future. I can’t figure out what eBay wants to be “when they grow up”.
I’m an advocate for the online merchant and believe that 3P sellers should have their own website in addition to selling on Amazon and eBay. Call it the “Power of Three” Website, Amazon and eBay. Right now there is too much uncertainty surrounding eBay but hopefully that will change.
Good points indeed but I think the answer lies somewhere in between. While eBay has a mature business model when it comes to their services, they also have Wall Street and shareholders to answer to which essentially means they cannot afford to operate completely autonomously thus increasing revenues via fee increases etc. I do agree with you that there needs to be a concentration on their core strategy rather than over diversifying themselves with anything that is not aligned to their business plan. There seems to be a bit of clarity for their strategic vision starting to develop with the new leadership in place. I will be interested to hear the new CEO outline how he will tactically employ action steps to attain his vision. This next earnings call will be quite interesting to hear and could very well be a tell tale sign of the future of this company.
I was looking through the items I bought on eBay and noticed that back in 2004 I bought a Leaving Las Vegas movie soundtrack from you. It is funny how our paths have crossed on such seperate circumstances. From a contrarian standpoint, your thoughts and opinions could very well assist and influence eBay to becoming a stronger company.