Amazon.com (NASDAQ:AMZN) has built its reputation on being the cheapest option to buy almost anything online. Thanks to its cost advantages from being an online-only retailer, analysts argued, the company could underprice brick-and-mortar competitors, and Founder and CEO Jeff Bezos famously taunted rivals by saying, "Your margin is my opportunity," meaning he's happy to operate without a profit if it makes Amazon the lowest-priced option.
Recently, however, Amazon seems to have departed from that guiding principle, or it's become much more selective about what products they offer at rock-bottom prices. A recent study by Wells Fargo and market researcher 360 pi tracked 100,000 products over the last year sold by Amazon, Wal-Mart (NYSE:WMT), and Target, and found that the items were 10% cheaper on average at Wal-Mart, compared to Amazon, and 5% cheaper at Target. The study focused on major categories like clothing and shoes, electronics, housewares, and health and beauty products. Outside of those categories, it found that Amazon was generally the price leader, saying that Amazon was cheaper when it came to like-for-like comparisons. However, Wal-Mart and other brick-and-mortar stores have made significant investments to beef up their e-commerce offerings and to match Amazon's prices when they are lower. For instance, the study also found that Wal-Mart's price advantage improved from 1% lower in February of this year to 10% lower in August.
A change in strategy
Prices aren't just going up on the four categories that Wells Fargo looked at. As Amazon has opened distribution centers across the country, the company has begun charging sales tax in many states, further eroding its price advantage. It now collects sales tax in 23 states, making up a majority of the nation's population.
Most clearly though, Amazon has changed its strategy on book pricing. In its younger years, when the company's primary interest was disrupting book retail, it offered discounts of 30% off the list price on titles selling for $20 or more. That discount, which was announced in 2001, helped win it a solid customer base, but has since evaporated as the competition has receded. Now, many books receive discounts off the cover price in only the single digits, and more obscure books receive smaller discounts. Jeff Bezos even called the physical book division "very profitable," a striking admission for a company with a reputation resting on rock-bottom prices.
It's easy to see why Amazon is doing this. Having established a dominant position in book-selling, the company is using profits from that segment to push new business in other areas, including adding new benefits for Amazon Prime members such as original programming and faster delivery options. It's textbook corporate strategy.
What it means for Wal-Mart and the others
Amazon's pivot has also come at a time when brick-and-mortar retailers recognize the opportunity in e-commerce. Wal-Mart announced plans to invest over $1 billion in its e-commerce platform, and it is also matching prices from online retailers including Amazon.com throughout the holiday season. The move will eat into Wal-Mart's profits for the sake of gaining market share, borrowing a move from Amazon. Best Buy, the retailer that's perhaps most victimized by Amazon "showrooming," also announced its own price-matching policy and saw online sales grow 22% as it has made e-commerce its No. 1 priority.
So who's really cheaper?
It depends. A new survey from ShopSavvy found that Wal-Mart was cheaper than Amazon over 50% of the time on like-for-like items, however, a comparison of the two websites shows that many products listed as best-sellers on Amazon aren't even available on Walmart.com, and of those that are available on each site, the cheapest option varies or they are often the same.
For shoppers, the answer seems to be do your homework. Despite its reputation, Amazon is not always the cheapest, and customers need to compare options online as they would in the real world. When it comes to selection, however, Amazon still appears to be the best.
For investors though, the lesson seems to be that Amazon is losing its status as the default lowest-price option, which could present problems down the road. Some evidence already indicates its rivals are growing online market share faster than Amazon is, a trend that poses a greater threat to the company the longer it persists. For now, Amazon still remains the king of e-commerce, but its competitive advantage may not be as strong as some investors think.
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