Intensifying Price War can Derail Amazon in the Electronics and General Merchandise Market

Amazon (NASDAQ:AMZN), widely accepted as the king of online retailers is facing increased competition from brick and mortar retail behemoths such as Wal-Mart (NASDAQ: WMT) and Sears who have lowered prices for their offerings. Amazon is known to offer some of the lowest prices and is widely accepted as a reliable retailer. However, a growing perception for Amazon is that it is now becoming a Jack of all trades and a master of none. Some analysts believe that focusing only on select products will help the company stay competitive.

We currently have  $222 estimate for Amazon which is approx. 8% below the market price

Below we take a look at trends which may effect the electronics and general merchandise division and hence our estimate for the company.

Increasing competition from offline retailers could spoil the party

Even though the company started as a book retailer, it later diversified into selling electronics and general merchandise. The electronics and general merchandise division constitutes 68% of our price estimate for the company. While the initial primary advantage of shopping at Amazon was the low prices it offered, offline retailers have been lowering prices to stay competitive. For example, Sears recently advertised that it had the lowest prices on all of the top ten home appliance brands.

We expect Amazon’s market share in the US online electronics and retail goods sales to increase from the current level of almost 9% to 12.5% by the end of our forecast period.

Additionally, proposals to levy sales tax on online sales have been gaining support across various states. If this proposal come into effect, we expect the price advantage offered by Amazon to get diluted. This could level the playing field between offline and online retailers and negatively impact the company’s market share.

Large inventories can bear on the margins

The flip-side of offering a wide range of products is the need to maintain a larger inventory. This results in the need for bigger warehouses and increased complexity in warehouse operations. The company is currently experimenting with new delivery models to cut back on costs associated with personalized delivery. If successful, these innovations could help it stay competitive in this price sensitive segment.

You can also read about the trends that we expect will impact Amazon’s Books, DVDs and Videos, Kindle Hardware and Web Services divisions.

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