Amazon’s Impressive Holiday Season Performance Sends A Message To Retail Giants

by Trefis Team
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Over the years, Amazon (NASDAQ:AMZN) has evolved from a bookseller to the go-to shopping place for all kinds of purchases for customers across age groups. It has had a deep impact on the retail industry, with many large retailers contemplating strategies to compete with Amazon online or to make brick-and-mortar more attractive for customers. It is an interesting conundrum, because competing online means taking the battle to Amazon’s own backyard, while sticking to physical stores is tough in a landscape with declining foot traffic, particularly among millenials.

The holiday season is an interesting period to gauge market trends, as the advantages of online shopping get accentuated in the busy period. For instance, the most obvious reason for customers to transition to online shopping is that it eliminates the need to actually go to a store, choose an item from dozens of aisles and then wait in line to pay. This process understandably gets exacerbated in the holiday season with massive discounts, more store traffic and longer lines; in particular on Black Friday. As a result, customers are increasingly moving to online shopping during the holiday season. According to estimates by the National Retail Federation (NRF), the total online consumer spend in this year’s holiday season will be higher than the total consumer spend in physical stores for the first time ever.

Amazon: Biggest Online Presence By A Margin

In recent years, most large retailers have launched e-commerce operations to have at least some online presence. Most retailers have reported higher growth in their online sales as compared to in-store sales. However, Amazon has outpaced industry-wide online sales in the U.S. despite a significantly larger base for year-on-year comparisons. This trend was further highlighted in the Thanksgiving week this year, especially on Black Friday and Cyber Monday.

As shown in the table above, the total sales on Amazon’s platforms stood at around $1.4 billion on Black Friday, or 27% of total online sales of $5 billion. The share of next biggest retailer, Best Buy (NYSE:BBY), stood at around 8% while Wal-Mart (NYSE: WMT) could only manage a 4% share of sales on Black Friday. Similarly, for Cyber Monday, Amazon’s estimated sales stood at over 30% of total sales, or almost $2 billion, while the next biggest retailer Target (NYSE: TGT) had an estimated 6.4% of sales on that day. We used Adobe estimates for the total online sales on Black Friday ($5 billion), Thanksgiving Day ($2.9 billion) and Cyber Monday ($6.6 billion). Through Thanksgiving week (Tuesday to Monday), the total online spend can estimated at over $15 billion. Of this, Amazon’s share stood at around 28%, while most large retailers including Best-Buy, Target and Wal-Mart were in the mid single digits.

Holiday Sales To Drive Q4 Results

Estimating Amazon’s revenues through the week can be tricky, mainly because unlike most retailers and rival e-commerce players, Amazon does not report gross merchandise value (GMV) figures or a “take rate” on items sold on its platforms. The two main reasons why the company doesn’t report these figures is because a) Amazon “owns” a lot of inventory and acts as seller to customers rather than purely listing website; and b) Amazon sells some of its own products including Echo and Kindle. These sales are counted as ‘retail product’ sales in Amazon’s filings, and revenue generated by Amazon is the same as GMV in this case.

However, some sellers may choose to use Amazon’s fulfillment services but remain independent sellers on the website and app, while other sellers may choose to only use Amazon as a listing venue and manage shipping, warehousing themselves. For these retail third-party seller services, Amazon charges an estimated 12-15% of GMV sold, excluding fulfillment charges. In 2016, Amazon’s revenues from retail third-party services stood at around $23 billion while revenues from retail product sales ($91 billion), subscription and other services ($9.5 billion) made up the remaining non-AWS revenues.

For the December quarter, Amazon expects overall revenue to grow between 28-38% on a y-o-y basis to around $56-60 billion, of which $50-55 billion is expected to be non-AWS revenues. While the Thanksgiving weekend might contribute only marginally to the company’s overall revenues for the quarter, it indicates continued dominance of the online market in the U.S.

Our $1,000 price estimate for Amazon’s stock is around 15% lower than the current market price. You can modify the interactive charts in the note to gauge how a change in individual drivers can have on our price estimate for Amazon.

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