Amazon does not have a moat
A contrarian opinion on Amazon
This is going to be a controversial topic, but it needs to be said.
Amazon, the American conglomerate famous for its e-commerce platform is not as good of a company as many investors believe, and it does not have a strong moat.
What is a moat
A moat is a durable competitive advantage that protects it from competition over the long term.
Moats come in many different forms, and the specifics are heavily on not just the company in question, but also the industry, countries and markets in which they operate in.
Some of these moats may be related to their Brand, and the relationship they have with their clients, whereas others may be related to their operational efficiencies.
Their relations and contracts with suppliers and distributors, their credit rating and ease of financing may also constitute part of a companies moat.
Regulation too may be a moat, since it prevents new entrants from coming in to disrupt the business.
Finally, certain industries may have inherent moats to them, due to the need for high capital expenditures in order to even begin to compete.
A clear example of this is the semi-conductor industry where to even begin making a small factory to pump out chips would cost you well in the realm of 10s of Billions of dollars.
In this case, what is normally a bad thing (Intensive Capital requirements) can be turned into a shield to guard against competitors, if only for a time.
Particularly strong companies have more than one moat, perhaps they have a particularly strong brand awareness and customer loyalty, while also having particularly large cost savings inherent to their processes.
For example, Tobacco companies like Altria have very strong brand awareness and customer loyalty, while simultaneously enjoying from the benefits (and drawbacks) of being a highly regulated business and also having particularly high operational efficiencies in their production methods.
Why Amazon does not have a moat
Alright, so first of all I want to clear something up.
When i say that Amazon does not have a moat, I do not mean that they have no competitive advantage, or even that some of those advantages are not durable, or “good enough” to otherwise be considered a moat.
The bulk of my argument is based around the following points:
Amazons Brand is controversial and provides only a small moat
Amazons success in one local area cannot be translated elsewhere
Amazon has no meaningful operational efficiencies
Let’s break this down a bit:
Amazons Brand is Controversial
I don’t think it’s a stretch to say that Amazons Brand image has had a rough few years.
While it came out of the gate strong with being famed for great customer service, in the recent past issues with counterfeiting and low quality goods has tarnished that image somewhat.
In addition to this, the ongoing strife against “Big Tech” and the “poor working conditions” and “low pay” at Amazon too has weighed heavily on the Brand.
While they have taken some steps to remedy these PR issues, with the 15$/hr Amazon minimum wage, ultimately the controversies are still weighting heavily on the company.
Success cannot be translated elsewhere
Amazon has had some failures, most notably in China where they effectively exited the market.
Part of the issue there is cultural, Amazon is a very american company, which can bring PR and Brand issues elsewhere. This was also partly visible in Europe where strikes have hit the company.
The problem isn’t just cultural though, whenever Amazon tries to compete in a new market, its previous success can’t usually be leveraged to assist that.
Indeed, entering new markets simply results in additional capital expenditures building fulfillment centers, and logistics infrastructure.
While Amazon does have some global efficiencies of scale, at the end of the day their retail business is a patchwork of local markets where Amazon needs to compete with existing competitors and new entrants.
Every time Amazon begins operations in a new region, they have to compete with existing companies. And at any time competitors can pick and choose in which markets to compete with Amazon in, where they may have some advantage over Amazon.
There are no operational efficiencies
Finally we get to the rub here.
Amazon’s business is simply not a good one.
Amazon is competing in a commoditized market with a lot of competitors and where efficiency is high, and margins are low.
This is a highly competitive market, and Amazons fulfillment centers, while effective, have failed to show any meaningful competitive advantage over their competitors.
Amazons pre-tax profit margins on their retail business is either in line with, or below their major competitors.
Given that Amazon is no longer being seen as the “Low-cost” option, that is concerning, because it means that their cost structure is not meaningfully different from their competitors.
That is, they do not have a competitive advantage.
Do you have a different perspective? Do you think the Amazon brand is strong? Do you see operational efficiencies that I didn’t?
Go ahead and let me know in the comments down below!