Is Amazon too Big?

Many people are asking is Amazon too big because of the sheer size and power of the Everything Store.

The most dramatic and dangerous effect of Amazon’s (NASDAQ: AMZN) size is the incredible amount of money it makes. For instance, Amazon reported revenues of $63.404 billion and a gross profit of $27.067 billion for the quarter that ended on 30 June 2019. America’s largest standalone grocer, Kroger (NYSE: KR) reported revenues of $37.251 billion and a gross profit of $7.367 billion for the quarter ending in May 2019.

Impressively, Amazon had $22.616 billion in cash and equivalents and $18.847 billion in short-term investments on 30 June 2019. Thus, Amazon had $41.463 in cash assets. Conversely, Walmart (NYSE: WMT) had $9.283 billion in cash and equivalents on the same day.

Amazon could buy Macy’s and Kroger for cash if it wants

Meanwhile, Kroger had only $409 million in cash and equivalents in May 2019. Plus America’s best-known department store operator Macy’s (NYSE: M) had just $737 million in cash and equivalents on 4 May 2019.

Under these circumstances, Amazon could buy both Macy’s and Kroger and still have nearly $20 billion in the bank. To explain, Mr. Market gave Macy’s a market capitalization of $4.61 billion on 26 August 2019. Plus Kroger had a Market cap of $18.46 billion on the same day.

I estimate Kroger and Macy combined had a market cap of $23.07 billion on 26 August 2019. Consequently, Amazon could buy both retail icons for cash and still have $17.763 billion in cash.

Impressively, Amazon had a market cap of $865.46 billion on 26 August 2019. How can other retailers compete against that kind of raw economic power?

Can Walmart Compete with Amazon?

Even Walmart (NYSE: WMT); which reported revenues of $130.377 billion and a gross profit of $32.454 billion, on 31 July 2019 has difficulty keeping up with Amazon.

Notably, Walmart reported $9.283 billion in cash and short-term investments on 31 July 2019. Walmart generates far more revenue than Amazon, but it keeps far less cash. Thus, Amazon is the far more powerful retailer.

Significantly, Walmart had a market cap of $316.39 billion on 26 August 2019. Thus, Walmart’s revenues are $66.973 billion greater than Amazon’s. Yet Walmart’s Market Cap is less than half Amazon’s.

Is Growth the Key to Amazon’s Success?

“Growth and value investing are joined at the hip.” – Warren Buffett

One explanation for this difference could be revenue growth. Stockrow estimates Walmart had a revenue growth rate of just 1.83% for the quarter ending on 31 July 2019. Meanwhile, Stockrow gave Amazon a revenue growth rate of 19.89% for the quarter ending on 30 June 2019.

My guess is that most investors believe Amazon will keep growing and making more money. That faith in growth could explain the $1,760 price Amazon shares achieved on 26 August 2019.

Amazon’s seemingly infinite capacity for growth could also explain why companies like Kroger and Walmart are trying so hard to be like Amazon. To explain, both retailers are making massive investments in tech and conducting large amounts of research and development.

Why Walmart and Kroger Want to Be Amazon

Kroger, for example, plans to build six $55 million next-generation customer fulfillment centers across the United States. In those centers, swarms of robots will pack grocery orders. In addition, Kroger tested a robotic delivery van in Arizona last year.

Accordingly, Kroger bought 6% of the British technology company Ocado Group PLC (LON: OCDO). Ocado builds the platforms that operate the robot swarms. In addition, Ocado offers grocery delivery and operates robotic fulfillment centers in the United Kingdom.

Walmart, meanwhile, is deploying swarms of robots in its stores and testing management by artificial intelligence. The company even transformed a Long Island Walmart Neighborhood Market into an Intelligent Retail Lab to test AI on customers.

How Kroger and Walmart are trying to be Amazon

Interestingly, Walmart is moving even faster than Amazon in some areas. For instance, Walmart is applying for cryptocurrency patents, in an effort to develop a stablecoin.

To clarify, a stablecoin is a cryptocurrency that enables customers to make fiat currency purchases through the blockchain. Unfortunately, it is too early to tell what Walmart will do with a stablecoin.

Predictably, both Walmart and Kroger are making massive investments in delivery. In particular, Walmart Canada is offering nationwide delivery through Instacart, Tech Crunch reports. In the United States, Walmart is expanding in-store pickup of online orders and offering a new in home delivery program, The Motley Fool’s Rich Duprey notes.

Moreover, Kroger claims its online grocery orders grew by 66% in 2018, giving that company 33% of America’s online grocery market, Duprey estimates. Notably, Kroger offers Instacart delivery from over 1,600 of its 2,674 supermarkets.

Significantly, the Ocado/Kroger customer fulfillment centers could allow Kroger to offer online grocery delivery direct from a warehouse. Thus, Kroger will become like Amazon, a retailer with few stores. Interestingly, Kroger and Ocado are building a robotic  fulfillment center outside Orlando, a city where Kroger operates no supermarkets, The Orlando Sentinel reports.

Is Amazon Too Powerful?

Therefore, Amazon is transforming the grocery industry and potentially threatening hundreds of thousands of jobs. Statista estimates 2.46 million people worked in America’s grocery stores in 2014.

Yet, grocery is just one of many industries Amazon could transform. The Everything Store is a major player in advertising, gaming, entertainment, television, fashion, cloud storage, and many areas of technology. In addition, Amazon is moving into robotics, trucking, air freight, van leasing, and delivery just to expand its delivery foot print.

Consequently, Amazon is transforming our economy and the face of many of our communities. Ultimately, Amazon is disrupting our day-to-day lives.

All this raises the question is Amazon too powerful. However, that observation raises the conclusion how do we control Amazon without hurting the economy?

Can Antitrust Control Amazon?

Under these circumstances, anti-trust is becoming one of the most popular political agendas in America.

For instance, the most popular presidential primary candidate among Democrats is U.S. Senator Elizabeth Warren (D-Massachusetts). Warren is an outspoken anti-trust crusader who posts long essays about breaking up Amazon, Google, and Facebook on Medium.

In detail, 44% of Democrats view Warren favorably, YouGov estimates. Conversely, only 36% of Democrats view media favorite and former Vice President Joe Biden (D-Delaware) favorably, and only 30% view U.S. Senator Bernie Sanders (I-Vermont) favorably. If the Democrat primary is a popularity contest, Warren could be winning.

As a result, the U.S. Justice Department is conducting a broad anti-trust review of tech companies, Yahoo reports. Not coincidentally, President Donald J. Trump (R-New York) is the likely Republican presidential nominee for 2020.

Thus Antitrust will be a major political issue next year but how will it affect Amazon and its competitors? Notably, Facebook (NASDAQ: FB) is facing a $5 billion fine from the Federal Trade Commission (FTC) for alleged privacy violations.

Can Amazon Survive Antitrust?

Antitrust’s effect on Amazon is hard to gauge, because  the term antitrust is vague. For instance, is the problem Amazon’s size, Amazon’s market share, the number of businesses it operates, its ability to distort markets, or its technological edge in some fields?

Amazon Prime; in particular, raises serious questions because Statista estimates it could have 103 million US customers. Thus, Amazon Prime controls access to market that could include nearly one third of America’s population. Worldometers estimated the US population at 329.065 million in August 2019.

I think Prime could give Amazon an unfair advantage in many businesses. Entertainment; for instance, Amazon can distribute its streaming videos to 103 million potential viewers. In addition, Amazon could lock products out of Prime, give its private label products away to Prime members, or free delivery on private label merchandise to drive competing brands out of the market.

What Antitrust could do to Amazon

On the other hand, antitrust enforcers have many potential strategies for clipping Amazon’s wings.

Regulators could force Amazon to sell off Prime, Amazon Web Services (AWS), and Amazon Fulfillment for instance. In addition, regulators could force Amazon out of businesses such as trucking, brick and mortar stores, air freight, movie and TV production, advertising, and streaming video.

Moreover, regulators could block Amazon from entering markets like financial services. Plus, the government could stop Amazon from offering its own private label brands. Blocking private labels could limit Amazon’s ability to set prices and dominate markets.

Thus investors need to watch Amazon and antitrust carefully, because those moves could cut Amazon’s profits and revenues. Moreover, history shows there are many ways government can hurt Amazon.

What History Tells Us About Antitrust 

For instance, back in 1911 President William Howard Taft’s (R-Ohio) administration ordered the breakup of the gigantic Standard Oil Company of New Jersey into 34 companies, The Visual Capitalist observes. In detail, Taft used the Sherman Antitrust Act to split up Standard Oil, which controlled 64% of America’s petroleum market.

Like Amazon today, in 1911 Standard Oil was the creation of America’s richest man; John D. Rockefeller Sr. In his day, Rockefeller was as controversial and unpopular as Jeff Bezos is today.

Likewise, in 1984, the federal government ordered AT&T, which controlled most of America telephone service, to break up into eight companies. Antitrust action can take a long time, the investigation that led to AT&T’s breakup began in 1949, Business Insider reports.

Notably, the government ordered AT&T’s breakup because it provided both telephone service and telephone equipment. To elaborate, AT&T owned both the phone lines and the nation’s largest manufacturer of telephones, Western Electric. In fact, when I was growing nobody bought their own phones. Instead, you leased telephones from Western Electric.

Yes the government can legally Break Amazon Up

The government has the legal power to breakup companies for antitrust reasons. In the 1949 case called United States vs. Paramount the U.S. Supreme Court ruled the Hollywood movie studios were violating the Sherman Antitrust Act by controlling the production, distribution, and showing of movies.

To explain, the same companies owned the movie studios, the theaters, and the movie distributors. To settle, studios sold their movie theaters and agreed not to buy television stations or networks. Thus, radio networks based in New York; and not the Hollywood stood based in Los Angeles, controlled television and American entertainment in the 1950s.

Notably, I think the United States vs. Paramount precedent could apply to AWS, Amazon video, and Amazon Prime. Amazon Prime, in particular, could constitute a monopoly under United States vs. Paramount because it controls all levels of the market.

In conclusion, Amazon’s size and power could be the greatest threat to its survival in today’s political climate. Only time will tell if politicians are serious about antitrust but I suspect Amazon will face political pressure and government scrutiny for a long time.