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U.S. President Donald Trump said on Thursday he would take a serious look at policies to address what he says are the unfair business advantages of online retailer Amazon.com. Rough Cut (no reporter narration).
Video provided by Reuters
It’s been a rough month for big tech. Concerns about data and privacy have dragged down the FAANG cohort (Facebook, Amazon (NASDAQ: AMZN), Apple, Netflix, and Google parent Alphabet), particularly Facebook and Alphabet, while concerns about possible trade wars have dinged the entire technology sector.
Amazon has been hit particularly hard in recent days as it finds itself embroiled in a one-way battle with Donald Trump. The mercurial president has tweeted multiple times about the company, accusing it of being bailed out by the American taxpayer. However, Amazon investors should take the president’s tirades in stride and worry more about competition from legacy retailers that are increasingly copying its business model.
A difference of perspective
Trump’s complaints about Amazon center on two issues: The first is his assertion that the company is undercutting mom-and-pop retailers by not paying taxes, and the second is its usage of the U.S. Post Office. Amazon did not pay taxes regularly until recently, as it has been an unprofitable entity for the bulk of its corporate life.
The second part of the tax argument is more nuanced: Amazon collects taxes on items it sells directly, but does not collect taxes on items sold through its third-party Amazon Marketplace because it only acts as a logistical middleman. If Amazon reverses this and requires sellers to collect taxes, or does this for them, it’s unlikely shoppers will significantly modify their purchasing behavior to save on taxes, especially if it remains the lowest all-in cost provider.
Amazon’s relationship with the U.S. Post Office is mutually beneficial, especially as the post office has seen first-class mail volumes slide amid competition from electric communication. One area that has been growing is package delivery, which increased 12% last year, partially by riding Amazon’s growth coattails. It’s also illegal for the post office to deliver packages below cost thanks to the 2006 Postal Accountability and Enhancement Act.
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Amazon’s biggest risk is increasing competition from disruption-focused retailers
The biggest risk to Amazon isn’t regulation or the whims of the president, it’s increasing competition with its business model. Amazon’s most-viable retail competitor has been Walmart (NYSE: WMT). For years Wal-Mart treated e-commerce as an afterthought, essentially allowing Amazon to consolidate market share in the space.
After buying e-commerce company Jet.com approximately two years ago, Wal-Mart has seen its digital sales increase significantly, along with its share price. Walmart is making overtures to steal market share from the tech-savvy demographic, a cohort considered Amazon’s core consumer.
Walmart’s digital sales still trail Amazon by a wide margin, but the company expects to grow digital sales 40% this year. And it’s not just Walmart that is doubling down on the digital channel: Target is quickly building out its online capabilities, both in delivery and in-store pickup, with a 29% increase in online sales last quarter.
Watch the health care space closely
Another thing Amazon investors should consider is that traditional retailers are looking beyond simply competing in the core retail market. Increasingly, retailers are incorporating a disruption-focused mindset to compete with Amazon, most recently in healthcare, with an emphasis on health insurance companies.
After Amazon’s plans for moving into healthcare were announced, including a partnership with JPMorgan and Berkshire Hathaway and private-label over-the-counter medicine, Walmart upped the ante, with The Wall Street Journal reporting that the company is in early talks to potentially acquire health insurer Humana. Flying below the radar is Walmart’s potential purchase of online pharmaceutical start-up Pill Pack. Pharmacy retailer CVS is also becoming more involved in the healthcare space by buying health insurer Aetna for $69 billion.
For Amazon investors, it’s likely President Trump’s ire will eventually pass. However, the increased competition is just getting started.
There will be over 700 by the end of 2018.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jamal Carnette, CFA owns shares of Alphabet (C shares), Amazon, Apple, and Target. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Berkshire Hathaway (B shares), Facebook, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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