Amazon is most well-known for its e-commerce segment, which has more than 304 million global users (19% compound annual growth rate over the past five years) and a 41% share of online commerce. The next largest competitor is Best Buy with a 2.7% share. And yet despite its dominant position, Amazon continues to grow faster than the competition – capturing 60% of total US online sales growth in 2015, according to Forrester Research. Amazon’s competitors are at such a significant disadvantage in selection and pricing one could argue that Amazon’s e-commerce business has no credible competition.
Despite Amazon’s dominant position within online commerce, the company has years of explosive growth ahead. It may be surprising to some, it was to us, that e-commerce stills represents less than 10% of all retail spending. According to the US Census Bureau, e-commerce sales represented 7.8% of all domestic retail sales as of March, 2016. Rates of penetration are even lower internationally at 7%.
What to Expect When You’re Inflecting
It is interesting to note that growth within technological products and services tends to see a dramatic acceleration at around 20% penetration levels. This is what is known as the “S-curve.” Both smart phones and notebook computers reached a material inflection point once market adoption hit 20%. Contrary to how Wall Street typically prices growth companies, it is later-stage rather than early-stage growth that should be most highly valued. Once the S-curve has been breached, growth can be explosive. For example, digital music took a decade to reach 20% penetration but leaped to 50% in just four years. We are not there yet, but many will increasingly view the idea of driving all over the city to fill a shopping basket as an archaic exercise.
With Amazon’s domestic infrastructure largely in place, we expect margins within the company’s e-commerce segment to inflect materially higher as operating leverage continues to ramp.
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The above post has been excerpted from a letter to partners of Coho Capital Management.
Josh Tarasoff on Amazon vs. Walmart
The Manual of Ideas sat down with Josh Tarasoff, founder of Greenlea Lane Capital, for a wide-ranging 87-minute interview in 2012, years before Amazon.com’s business model became recognized by investors as a superior long-term model.
Watch Josh delve into the competitive dynamics of the retail industry and why Amazon would be dominant:
(Watch the full conversation in The Manual of Ideas Members Area.)