Amazon Could Roll Out Same-Day Delivery To Counter State Sales Tax Impact

After fighting a number of state administrations over collection of sales tax from consumers, Amazon (NASDAQ:AMZN) has surprisingly changed its approach over the last few months. It has negotiated deals with states individually and agreed to collect sales tax starting at various points in time over the next one year. In exchange for states agreeing to defer legislatio making it mandatory for Amazon to collect sales tax from consumers, it has promised to generate a large number of jobs in various functions. Previously, Amazon didn’t have to collect or pay sales taxes on items sold to customers residing in states where Amazon had no physical presence. To protect this privilege the company has fought prolonged court battles in the past with state administrations.

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On the face of it, the change of heart in Amazon’s approach seems to have been brought about by sustained pressure from political parties and interest groups comprising of brick-and-mortar retail stores. But it still seemed puzzling why it would give up such a crucial cost advantage over rivals without fighting it out till the very end in courts. After all, it used to explicitly tell shoppers that they wouldn’t have to pay sales tax if they shopped with Amazon. According to a Citigroup survey, 52% of the respondents said that they would stop buying from Amazon if it started collecting sales taxes. ((Amazon To Focus On Same Day Delivery?,Wltx.com))

The real motive – and how it might transform the retail landscape

An article in Financial Times suggested that the real motive was to begin same-day delivery of its products and has set off a ton of speculation in the retail industry. ^[1] Amazon has long thrived on a model whereby it establishes warehouses in states with friendly tax regimes and then ships goods to those with large consumer bases but strict tax regimes. These states are typically far away geographically from its warehouse locations. By establishing local warehouses, Amazon will be able to cut down on the time it takes to ship goods to consumers in these places. Already at some locations, it is able to offer next-day delivery at no extra cost.

It is likely that success in perfecting same-day delivery will kill the one competitive advantage physical retailers hold over online ones- instant gratification. ^[2] While a customer at a physical retail store can simply walk away with the desired goods at that very instant, he does have to take the time and trouble to get up, get into the car, use up gas and drive to the store and back. If an online store is able to deliver a bunch of goods in a matter of hours rather than days, it may not seem like a bad deal to a customer who has to do nothing but make a few clicks sitting at home.

Another feature Amazon has been selectively offering is that of automated lockers. Customers can order something from Amazon, they will deliver it to a locker convenient to them (set up in drug or convenience stores) and one can simply punch in a code and collect the items on the way back home. ^[3]

In our opinion, what’s interesting is that this strategy spells trouble not just for the neighborhood mom-and-pop stores, but also for behemoths like Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY) and Target (NYSE:TGT). There’s no reason why somebody would want to go all the way to one of these stores and take the time to search, select items and stand in a long queue at the cash counter when the alternative is so enticing- the best quality goods delivered at the doorstep within hours at little or no shipping cost. In short, if Amazon manages to pull this off, we might be looking at a paradigm shift in the way retail business is done. Competitors would have no choice but to evolve and follow suit.

What it means for Amazon

Regardless of whether this latest strategy eventually turns out to be successful, it will take time to execute. Hence we expect no impact on revenues in the short term.

On the other hand, we believe that levying sales taxes will erode Amazon’s overall competitive advantage in the short term and pull away some customers. Low margin businesses are especially likely to take a hit. The full effect will take about a year to reflect as tax agreements come into force. Deferrals on the other hand, give Amazon time to execute its new strategy so it’s too early to comment on long term revenue trends.

For now, we maintain our $222 Trefis price estimate for Amazon which stands near its market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Amazon finds upside to sales tax payment, Financial Times [↩]
2. Amazon Hints at Instant Gratification [↩]
3. Amazon’s New Push For Same-Day Delivery May Destroy Local Retail, Huffington Post [↩]