There's no denying that that the trend toward internet retail is changing the way consumers do business. Many purchases once made in stores are now being made online, and the biggest beneficiary of that trend has been Amazon.com, Inc. (NASDAQ: AMZN). Deloitte's Global Powers of Retailing 2017 report reveals that the e-commerce juggernaut has become not only the largest online seller in the world, but also the 10th largest retailer of any kind.
The company has made many ingenious decisions that have contributed to its dominance, including such moves as offering free shipping on orders over a certain dollar amount, adding third-party sellers, and using data and algorithms to suggest other items you might like to purchase. There are two tactics, however, that stand out as Amazon's crown jewels and will continue to pay dividends for years to come.
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Customer loyalty program Amazon Prime has been successful beyond imagination. A subscription to the program costs $99 per year or $10.99 per month and offers a variety of benefits. The most touted is two-day free shipping, which can also be same-day delivery for certain products in eligible ZIP codes. This benefit lowers a key barrier for members making continuing purchases on the site. Members also gain access to a host of other benefits. Amazon Prime Video provides unlimited video streaming from its library of movies and TV shows, similar to the service Netflix, Inc. provides. Customers can also stream unlimited ad-free music from its library of more than a million songs.
Many consumers now expect free shipping or two-day shipping based solely on their experience with Amazon, which has put pressure on many other retailers, including competitor Wal-Mart Stores, Inc. (NYSE: WMT). Wal-Mart has countered by offering free shipping on orders over $35 and offering discounts for items that aren't available in stores if they're ordered online and scheduled for in-store pickup.
While Amazon itself doesn't provide metrics on Prime subscribers, Consumer Intelligence Research Partners (CIRP) reports that Amazon Prime subscriptions have soared to 85 million -- double the amount from two years ago and equal to 70% of the U.S. population of 126 million households. Another key finding in the report is that Amazon Prime members spend $1,300 a year on average, nearly double the $700 non-member customers spend per year. This finding shows why Amazon has a vested interest in increasing the roles of Prime customers.
May I take your order?
Amazon's release of a smart speaker in late 2014 was a stroke of pure genius. It might be tempting to downplay the significance of the rise of virtual assistants, but for Amazon this was serious business. With no smartphone to showcase Amazon's digital darling, the development of the smart speaker was inspired. The Echo has become a hit with consumers and spawned a host of imitators, with virtually every major tech company developing its own. Many investors have questioned how these novelty items could produce much in the way of revenue, but Amazon has already cracked the code.
CIRP estimates that 10.7 million homes have one of the Echo family of products in their home, providing Amazon with a Trojan horse that has gone largely unrecognized. A recent analyst note from RBC Capital Markets reveals that an estimated 17% of Echo owners have already used the device to purchase products. As familiarity with the devices increases, consumers will become more comfortable making voice-initiated purchases.
The Alexa-based devices will continue to proliferate, if last holiday season is any indication. Amazon revealed that sales of the Echo family of products were up more than ninefold over the previous holiday season and that Alexa voice-controlled devices were the top-selling products across all categories at Amazon.com.
The one-two punch
Amazon Prime Day 2017 is upon us, the day when customers are encouraged to sign up for a 30-day free trial of Prime to take advantage of the 30-hour sale. While Amazon is usually vague on specifics, the results from last year's event may provide insight into what we can expect this year. In the 2016 press release at the close of the event, Amazon revealed that it was the biggest sales day in the company's history, as well as the biggest day ever for Amazon devices. This year's event is likely to add to the growing list of Prime members and place more voice-controlled products in the homes of the faithful.
This one-two punch of increasing Prime members and the growing installed base of Echo smart speakers will provide a continuing catalyst for the online retailer's dominance in the field.
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Danny Vena owns shares of Amazon and Netflix. Danny Vena has the following options: short December 2017 $75 calls on Wal-Mart Stores, long January 2018 $57.5 calls on Wal-Mart Stores, long January 2018 $55 calls on Wal-Mart Stores, and short December 2017 $75 calls on Wal-Mart Stores. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.