How Companies Stay Amazon-Proof

With its meteoric rise to success over the past two decades, Amazon is now perceived as a threat to almost every industry. But here’s how some companies have managed to stay ‘Amazon-Proof’…

Here’s some not-so-big news… Amazon is huge!

Just over two decades ago, the e-commerce giant was little more than an online bookstore operating out of Jeff Bezos’ garage. Now, Amazon is one of the most influential companies in the world, sitting as the fifth largest U.S business by market cap.

With over 40 subsidiaries, not to mention countless global partnerships with various brands, it’s likely that you have been a customer of Amazon in one way or another over the past few years.

So that’s why you might forgive investors for asking themselves before they invest in a new company—is this Amazon-proof?

Amazon-Proof

‘Amazon-proof’ refers to those companies that are perceived to be in some way protected from a market incursion by Amazon.

As we witnessed recently with the disastrous IPO of Blue Apron, even a hint of competition from Bezos & Co. can be enough to send investors running. Traditional ‘bricks-and-mortar’ retailers have been having a torrid time, and as Amazon expands its interests into more and more sectors, it seems like it’s only a matter of time before we all become Prime-citizens rather than Prime-customers.

It’s not all gloom and doom though. The retail industry is undoubtedly experiencing some seismic shifts, but we can’t simply apply the concerns of some companies to all.

In fact, Morgan Stanley recently identified some industries that it believes to be immune from Amazon-disruption to some degree, including sectors like the healthcare industry, banks, airlines, and other industrials. Even some companies within retail are prospering in spite of Amazon’s intentions.

But what is it that makes them less susceptible to being bullied by Amazon than others?

Unique Products

The first characteristic Morgan Stanley identified in an ‘Amazon-proof’ company was the unique nature of the products it sells—items that are inimitable by large multinationals like Amazon.

Take, for example, a company like Tiffany & Co. Jewellery might seem all too easy a target for a company like Amazon because it’s relatively easy to mass produce, it has a high profit-margin, and it’s easily shipped across the world.

However, Tiffany jewellery is something that Amazon can never copy and therein lies the economic moat. Tiffany has fostered a brand over the decades that is now synonymous with luxury and value. Another company could produce an identical bracelet to one of Tiffany’s, and yet it will never command the same respect (or price) as Tiffany’s version.

This branding power is the same for other companies like Apple, Coca-Cola, and Nike. If a company manages to build a loyal legion of brand advocates through its products, it’s extremely hard for someone else to move in on its turf. Just look at how Amazon’s Fire phone bombed in comparison to Apple’s iPhones.

Legal/Regulatory Complexity

Various news outlets reported back in May that Amazon was considering out a move into the pharmaceutical industry. With net sales of about $136 billion in 2016 alone, it’s little wonder that Jeff Bezos wants some of the pharma pie.

However, let’s not forget that it also remains one of the most heavily regulated sectors on the planet.

Pharmaceutical companies are completely entrenched in the various regulatory and safety restrictions related to the products they produce. They have grown by producing pharmaceutical goods and have molded their operations to adhere to regulations. For an outside company like Amazon to adapt to these necessities would be extremely cumbersome and prone to error. Error is definitely something you want to avoid in pharma.

Maybe Amazon will move towards the distribution of medicine in an attempt to disrupt companies like CVS and Walgreens. However, this is not without caveat either, especially considering the complexity of things like doctor authorizations, prescription transfers, and insurance company deductions involved.

Other industries have similar regulatory baggage like automotive manufacturing, commercial airlines, and banking. Of course, we can’t say that Amazon won’t try to move into these sectors in the future.

What we do know though is that it’ll be a long—and very costly—process.

Business Model

One of the most attractive elements of Amazon’s retail platform is the efficacy of Prime delivery. Customers can avail of free delivery on most of the products they buy and receive it in a matter of hours, much to the detriment of traditional stores and malls.

Not every product is suitable for rapid delivery though. The value/weight ratio is a way of helping companies to determine the actual cost of sending products out to customers, and can best be summarized like this:

Three of the four sections are suitable for rapid delivery. However, products in the top right-hand corner of the quadrant are the worst for companies to sell online because their bulkiness outweighs the actual value of the product.

This is why companies like The Home Depot are still thriving against the tide of home-delivery. Things like cans of paint or lumber can be bought on Amazon, but don’t expect any significant discounts. They are low-value products that require expensive delivery and ultimately eat into company margins.

For the consumer, it’s a lot easier to just go to your local store on a Saturday morning and pick these things up. At least you’ll get to inspect them and make sure the product is exactly what you need. You also won’t get any packages full of exploded paint cans to your door.

For the companies, the selling of products like this is unlikely to ever become a big focus. It’s just not profitable enough when more valuable and easily shipped things like consumer electrics can be delivered at much better margins.

Customer Experience

Why would we get into our car and go to the mall when we can buy everything we need from the comfort of our couch? Well, for one thing, to experience the product we’re about to buy.

The Home Depot might benefit from the sale of unsuitable shipping items, but a bigger benefit for the company is the advice its employees can give customers on DIY projects. There’s only so much a YouTube tutorial can teach you, and consumers still place a lot of value on the expertise of industry professionals.

The same applies to stores like Ulta Beauty. Sure, you might be able to get your makeup off an online merchant for cheaper. But many customers still prefer the experience of actually going into the stores and trying out different products for themselves. The fact that Ulta already offers in-store beauty salon treatments for customers means that you can go in for a pampering and leave with a bag full of cosmetics.

Online shopping puts convenience first, but you can never underestimate the value of an experience.

This Means…

Well, for one thing, it means that we don’t all have to go out and invest in Amazon if we want to add some retail to our portfolio. Amazon is a fantastic company that has had more of an impact over the past few years than most… but it’s certainly not the be-all and end-all of retail.

There are lots of companies that are extremely good at what they do. For investors, it’s important to be cognizant of future trends and the companies that are best poised to take advantage of that.

Jeff Bezos might have created a multinational, multi-industry beast, but there will always be certain things that other ‘Amazon-proof’ companies manage to do better.

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