My favorite subject at the moment is Amazon. The company that spent the first decade of its life devoted to selling paperbacks over the internet has quietly (or not so quietly) morphed into a consumer behemoth, forever changing the way people buy stuff. In this edition of my editorial column, I’m going to examine why – the good, the bad, and the future. No, Jeff Bezos did not pay me to write this (but I am a shareholder).

A brief backstory first. Amazon began in 1994 when Jeff Bezos left his cushy corporate gig to start an online bookstore out of his garage. It went public in 1997 with an initial share price of $18 (yeah, I know… and the stock has split three separate times since then too). Unlike many startups, Bezos intended Amazon to remain unprofitable for some time, and it wasn’t until 2001 that the company turned a profit: just one single penny-per-share in 4Q 2001. Even today, 16 years later, they still swing between net profit and loss quarter-to-quarter because they invest so much in new projects.

After the dot-com bubble burst, Amazon picked up market share from many then-defunct competitors and started rapidly growing its ecommerce business, leaving brick-and-mortar book stores in the dust. Today, Amazon will sell you pretty much anything you can possibly imagine (including some items in some locations delivered within one hour), as well as a strong original content video library and streaming music service. If you’re a corporate customer, Amazon can cover all of your web-hosting needs through Amazon Web Services (AWS). It just acquired the Whole Foods grocery chain, and it’s rumored to be entering the pharmaceutical market soon and has been in talks with generic drug makers. By the way, Jeff Bezos also owns the Washington Post.

Many complain that Amazon has ruined American small business. Shopping malls have trouble keeping their storefronts occupied, bookstores are mostly a thing of the past, and who knows how the grocery and drug businesses will change. But, on the other hand, it can be argued that Amazon has merely exploited the inefficiencies inherent in “old-fashioned” retail operations. Stores that 1) couldn’t keep up with changes in consumer taste, 2) didn’t have a unique and personalized product or service, and/or 3) wouldn’t offer competitive prices are now dead, and deservedly so. That’s basic free-market economic theory in practice.

What’s next? I suspect if you asked Jeff, his answer would be “the world” as he cackled maniacally with a white cat in his lap. But hyperbole aside, that may not be too far off. There are very few retail stores I think are safe (Amazon probably won’t replace Lowes and Home Depot for buying lumber and bathroom tile, for example), but its biggest future hurdle will be regulators. Monopoly laws typically target businesses with market share in one single business segment, but they don’t consider companies with market share in dozens of business segments. Amazon’s diversity of offerings is unprecedented, and it’s only expanding. There will be a point in time when Amazon’s size and reach sends up red flags and it will be interesting to see how the DoJ responds. As far as I know, we’ve never been here before.

The above article is for informational and educational purposes only. Neither the information presented nor any opinion expressed constitutes a recommendation or endorsement by Gore Capital Management nor Cantella & Co., Inc. of a specific investment or the purchase or sale of any securities. 

Submitted by Ben Sadtler - 2018 CFA Program Level III candidate