The Retail Flywheel: Why Amazon Really Is Just Getting Started

| About: Amazon.com, Inc. (AMZN)
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Summary

Amazon is just getting started in penetrating its largest current business segment: retail.

Applying the company's original flywheel to a "Retail Flywheel," one can illustrate this "Virtuous Cycle" effect.

Through the ability to dominate both e-commerce and brick & mortar, Amazon can monopolize retail as we know it.

Yesterday, I made a post outlining my portfolio strategy, and in the process shared why I am bullish on Amazon (NASDAQ:AMZN). According to one Seeking Alpha member, my bullish view on Amazon made me come across as "yet another Amazon Perma-Bull." While that very much may end up becoming true, I've chosen to write this article to share why I truly feel Amazon is just getting started… despite being worth nearly half a trillion dollars.

Fans of Amazon like myself are sure to recognize the company's infamous Flywheel, pictured below. The Flywheel, dubbed as "The Virtuous Cycle," was created before Amazon added business segments in addition to its retail marketplace such as Amazon Web Services (AWS).

Taking a closer look at the original flywheel, it's evident that all the pieces revolve around a continuous improvement of the customer experience. A strong customer experience will lead to more shoppers, which will in turn bring more sellers. More sellers will lower costs and prices through competition while bolstering selection for customers. Lower prices and more selection will bring in more customers and the cycle repeats itself. Simple as that.

A little while ago, I realized that this "flywheel effect" could also be applied to Amazon's dominance in the retail industry. Let me explain.

Since its beginnings, Amazon has been and continues to increasingly dominate the e-commerce landscape. E-commerce certainly appears the space to be in - just last year it grew by 16% in the US, compared to 2% for overall retail according to Business Insider. On the flip-side, brick and mortar (B&M) retail has certainly faced some troubles in the past few years. With stores like Macy's (NYSE:M), J.C. Penney (NYSE:JCP), Wal-Mart (NYSE:WMT) and many more closing hundreds of stores a year, B&M isn't looking so hot these days.

As a result, we can see the beginnings of our "retail flywheel" coming into effect. As brick and mortar stores shut down, previous shoppers at these stores must now look for new ways to purchase their goods. With one alternative being to have the desired item shipped within two days or less, without the need to get into the car, it would certainly be hard to turn down that option. And it seems like most shoppers are in fact switching to Amazon. While the number of B&M stores continue to decline, the opposite is happening for Amazon's ever-growing Prime account user base.

However, we're not done yet. Amazon has now started launching its own brick and mortar stores. While AMZN is aware e-commerce is certainly the future, the company also knows these types of stores will always serve a purpose, even if limited. With the addition of Amazon Go for groceries, display stores and other in-presence stores, it's evident the company is not going 100% online.

Here's where the retail flywheel really comes into effect. With current brick and mortar stores dropping like flies, the opportunity to buy prime commercial real estate has never been better… and for pennies on the dollar. Amazon finds itself in a perfect situation. Not only does Amazon have growing revenues and cash flows allowing the company to reinvest, AMZN also has huge potential to build its retail in-store presence. Looking at those two statements, I think you'd have to look very wide and far to find another strong retailer who could speak to either, let alone both, of those statements.

We can now see how we've come "full-circle" to create our own Retail Flywheel through this process... Consumers try out Amazon. In doing so, they become hooked and join Prime to further buy in to Amazon… and then never look back. In doing so, the B&M retailers die and Amazon can lure in more new customers - either through its online or in-store presence.

I've attached my own diagram picturing the "Retail Flywheel" below, trying as best possible to mimic Amazon's original flywheel. I've also included information outlining each step of the process.

1. Consumers try out Amazon.

2. Consumers love Amazon, get hooked and purchase an Amazon Prime account.

3. As a result, these consumers stop going back to brick and mortar stores and no longer shop there.

4. With no sales, these retail stores shut down.

5. Consumers who have yet to try out Amazon now do so as the stores they would previously shop at are no longer around. In addition, Amazon buys this prime real estate for pennies on the dollar to set up its own stores, further adding to the Prime benefits, while getting more new customers to try Amazon in-store.

6. The virtuous cycle repeats.

Putting this Flywheel effect into a diagram format makes it clearer as to just how powerful this process can become. If Amazon can execute on this Flywheel effect, I really feel there's the possibility to disrupt much more of retail - to the point where they can achieve a sort of monopoly over the industry. Of course, this is years and decades away even if they can do so. However, at the rate at which things are going, it does seem like the possibility is there.

Finally, it's important to remember that retail is just one segment of this behemoth of a company that keeps adding new business ventures through its capital investments. If Amazon can replicate this Flywheel effect for its other business ventures who knows what the potential for this entire company may end up being one day.

I plan on writing more articles about Amazon. In particular, I am a huge fan of management and Jeff Bezos, the company's ability to keep finding new ways to reinvest capital in fantastic projects and the sheer size of the company's total addressable market, which I feel almost no other company can match.

Please feel free to comment and leave your thoughts - as a young investor, I am always looking for ways to continue learning out here! If you enjoyed this article's content please shoot me a follow - I plan on writing more articles in the near-future.

Disclosure: I am/we are long AMZN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.