Amazon and the Long View

Jeff Bezos made waves this week when he said that investors should “take a seat,” and that Amazon would be ploughing all its profits into COVID-19-related investments. Cue investors fainting, an immediate 5% stock price downturn. But Amazon’s approach is entirely to be expected: in what universe would Amazon NOT invest to meet a new opportunity?

In the first Bezos letter to shareholders in 1997, Bezos said: “We believe that a fundamental measure of our success will be the shareholder value we create over the long term… We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions… We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages.”

And Amazon executed. It effectively spent all of its profits between 2002 and 2018 on investments, mostly on its unmatched logistics network, transforming it from this:

into this:

COVID-19 is another such opportunity. The online share of retail – and especially groceries – has made a step jump; while some will return to bricks and mortar later, a good share will not. In general ecommerce, Amazon is already dominant and will simply benefit more as legacy retailers collapse. In groceries, Amazon is looking at a gold rush – it’s racing partly to attract new customers (though a large majority of US households already have Amazon Prime) but more to build new grocery shopping habits centered on Amazon, and to create the capacity to meet all that new demand.

Right now, Amazon doesn’t have the infrastructure to fully deliver. Buying Whole Foods seemed surprising at the time, but in hindsight was just prescient. Still, that’s not enough to crack online groceries. Amazon Go is not going to solve it either – it may mostly be a licensing play – and automated hubs are nearly but not quite ready.

So Amazon will spend money now to fully exploit this unique opportunity to bust into groceries in a big way. Amazon is investing to crack open a $632 billion market, where only 2.8% was online in 2018. Only on Wall St. is this entirely inevitable strategic choice somehow seen as a negative.

Do you really want to bet that Amazon won’t execute on this?

A final note. It’s not as though Amazon was deciding between more investments on the one hand and dividends or stock buy backs on the other. It always uses its money to invest further. So, does it matter that it is pouring its profits into an immediate opportunity rather than adding to its $55 billion cash hoard to fund other investments later?

Investors should be ecstatic that Amazon has found yet another multi-billion dollar opportunity. Walmart and the rest should deeply worried: while it’s hard to drastically grow delivery capability overnight, online groceries in the end will be a game played on Amazon’s home field.

Dr Robin Gaster

Dr. Robin Gaster
rgaster@nullincumetrics.com
240-462-4409