Amazon: 3 Key Benefits Of Buy With Prime (NASDAQ:AMZN)

Amazon (NASDAQ:AMZN) is slated to roll out “Buy With Prime” nationwide by the end of this month following a successful beta test run launched last year. The new service will allow Prime members to benefit from fast delivery and safe online check-outs beyond just Amazon.com and on other online vendor platforms too. For merchants, the new service would enable them to better address increasing consumer demand for fast and free shipping – a key value-add service to reinforce sales ahead of an increasingly tough operating backdrop due to the looming economic downturn.

And for Amazon, nationwide roll out of Buy With Prime will come with three key competitive advantages to further bolster its e-commerce moat: 1) address underutilization of fulfillment and logistics capacity; 2) bolster its more profitable third-party (“3P”) fulfillment business, or “Fulfillment by Amazon” (“FBA”); and complement its first-party consumer data advantage over its digital advertising peers. The ensuing advantages will also be key to preserving Amazon’s e-commerce growth and margin expansion trajectory over the longer-term, and complement the company’s ongoing aggressive cost-cutting efforts – spanning an unprecedented reduction in forces (“RIFs”) and curtailment of “experimental and unprofitable” projects – in preparation for the near-term cooldown in demand.

We believe the nationwide roll out of Buy With Prime this month marks another step in the right direction for preserving Amazon’s e-commerce moat and bolstering its profitability outlook. The development is expected to help improve Amazon’s growth and profitability profile going forward, in conjunction with recent adjustments to existing operations, which investors appear to have already taken a positive note of as corroborated by the stock’s responding rally in recent weeks.

An Overview of “Buy With Prime’s” Nationwide Roll Out

Despite rising e-commerce competition from increasing availability of online marketplaces worldwide, spanning Latin America’s MercadoLibre (MELI), China’s Alibaba (BABA), and Southeast Asia’s Shopee (SE), to independent online stores of retail juggernauts like Walmart (WMT) and Target (TGT), Amazon remains the “most attractive first channel to pursue” for third-party (“3P”) vendors looking to build a brand in the digital economy. And Buy With Prime is expected to further reinforce its leading e-commerce moat from material market share loss over the longer-term as the industry becomes increasingly saturated – more than 80% of commerce remains offline, and “trillions of offline retail dollars [will be] moving online over the much longer-term” thanks to the advent of connectivity.

As discussed in a previous coverage on the stock, Buy With Prime will essentially be an extension of Amazon’s FBA business that allows transactions to take place directly on vendors’ respective platforms instead of being limited within Amazon.com. Essentially, merchants enrolled in Buy With Prime will allow Amazon to take care of key parts of transactions made by Prime members via their respective websites / online sales platforms, from payments to fulfilment. The nationwide roll out of the new service will start by the end of the month, following a successful beta run with positive feedback and experience from both vendors and Prime members.

Absorbing Excess Capacity

One of the biggest hurdles for Andy Jassy since he took the helm at Amazon in 2021 was managing the outburst of demand experienced during the peak of the pandemic, and the abrupt slowdown following the reopening of brick-and-mortar stores, and weakening consumer sentiment that ensued briefly thereafter on the back of heightened consumer price sensitivity under generation-high inflationary pressure. This left Amazon in the aftermath of having to unwind excess capacity and combat underutilization over the past year to preserve margins.

In addition to incentivizing demand via multiple Prime member exclusive shopping events last year, the company has been actively closing fulfillment centers, subletting idle warehouse leases, and selling off excess logistics capacity. In the latest development, Amazon is proceeding with plans to shut down its Hemel Hempstead, Doncaster, and Gourock warehouses in the UK in favor of two restructured new sites in “Peddimore in the West Midlands, and Stockton-on-Tees in County Durham” coming online over the next three years as the company adjusts to changes in near-term demand. Amazon, which prides itself in the sprawling “Amazon Logistics” business it has built over the years to enable fast and free shipping for Prime members and fulfilment services for 3P vendors, has also recently turned to selling “excess space on its cargo planes… to adjust from a rapid pandemic-era expansion to a slowdown in line growth”.

The upcoming nationwide roll out of Buy With Prime across the U.S. will likely be a key new service to further absorbing the excess capacity racked up during Amazon’s “rapid pandemic-era expansion”. With about 80% of 3P sellers on Amazon currently adopting a multi-channel sales strategy that might also include their own branded online sales website, expanding those relationships with Buy With Prime will place a positive impact on Amazon’s utilization.

Buy With Prime is also expected to help Amazon capture a greater volume of online dollars spent by Prime members. Despite accounting for “nearly 40% of the overall U.S. e-commerce market”, only about a fifth of Amazon shoppers would actually “shop around” the marketplace – more than 25% of Amazon purchases are completed in under three minutes. Buy With Prime would effectively allow Amazon to partake into partial revenue sharing with the broader e-commerce industry by extending its fulfilment services beyond the namesake marketplace.

The nationwide roll out of the new Prime member feature will also help justify the ever-increasing membership subscription fee and enliven sluggish Prime membership sign-ups this year. Amazon had approximately 170 million U.S. Prime members as of June 30^th, which was consistent with the tally from six months prior, although the figure is likely to have improved in the second half of 2022 thanks to two blockbuster Prime Day shopping events. And Buy With Prime is expected to become a key complement to the growing list of add-on perks that Amazon has been adding to Prime membership benefits to attract new sign-ups, spanning enhanced sports coverage on Prime Video, exclusive Prime shopping deals, and unlimited free deliveries for meals ordered on Grubhub.

Bolstering 3P Fulfillment

3P sellers are a huge driver of Amazon’s e-commerce success. There are currently over two million 3P sellers on Amazon, of which more than 90% use FBA, and accounts for about 7,000 products sold per minute on the platform in the U.S. And Buy With Prime’s nationwide roll out beginning later this month is expected to further leave a positive impact on 3P FBA adoption over the longer-term, with results expected to become more evident on earnings as the full year proceeds.

Specifically, 3P is a critical part of Amazon’s e-commerce economics. While first-party (“1P”) sales generated on goods sold directly by Amazon currently benefit from slim margins, 3P sales completed via FBA services – spanning payments, storage and delivery – boasts significantly greater profitability. Forum Brands, a reputable aggregator of Amazon vendors, has recently noted that Amazon takes about 8% to 15% on 3P sales, with additional fees ranging 8% to 23% of the transaction charged for fulfillment. And even with this hefty cost structure for 3P vendors, Forum Brands noted that many continue to benefit from strong profits on Amazon, with net income averaging 22.5% on sales after taking into consideration of Amazon’s 3P transaction, fulfillment, and additional advertising fees, if applicable. And with Buy With Prime likely to encourage further subscription on FBA capacity from both new and existing 3P vendors beyond the Amazon marketplace, the e-commerce giant is well-positioned to benefit from further top- and bottom-line expansion over the longer-term.

Essentially, not only are 3P sales and FBA critical to the economics of Amazon’s e-commerce business, but it is also a crucial driver of growth for vendors, which further bolsters appeal of the new Buy With Prime service. As mentioned in the earlier section, Amazon remains the primary choice for new vendors looking to build a brand in e-commerce. Amazon is also the primary one-stop-shop for online sellers looking to better cater to consumer needs, preferences, and demands – especially as spending contracts ahead of tightening financial conditions in the near-term. With more than three-quarters of online shoppers having indicated fast delivery times and free shipping as core drivers of online purchase decisions, Buy With Prime is expected to be hot commodity among e-commerce vendors – especially small- and medium-sized businesses new to e-commerce and “do not yet have fulfilment logistics covered”.

A primary feedback from vendors that have been testing out Buy With Prime in beta since April have noted an increase in “shopper conversion by an average of 25%”, underscoring the value that the new service adds as e-commerce adoption gains momentum. The higher shopper conversion rate from Buy With Prime have also been noted to “more than offset the [related] fees” charged by Amazon for the service. Vendors participating in Buy With Prime can now also import reviews from buyers of their products on Amazon.com onto their own online storefronts as a free add-on perk. The key theme observed among vendor feedback for Buy With Prime is that the new service has helped improve margins by fueling better top-line growth via value-add services offered to consumers – such as free shipping and fast deliver times – to enable scale, instead of cutting costs directly which would have hampered business expansion. And we expect this to drive a greater appeal on Buy With Prime for vendors looking to maintain business resilience ahead of the looming economic downturn overhang on the recession-prone retail business.

Reinforcing Ad Growth With 1P Data Advantage

Buy With Prime is also expected to favorably expand Amazon’s collection of 1P data on consumer behavior and preferences beyond Amazon.com. By fulfilling transactions completed outside of Amazon.com via Buy With Prime, Amazon can now gain access to valuable consumer trends – such as average basket sizes, preferred products, and seasonality purchase behavior / preferences – critical to its digital advertising business. And many vendors that have previously been testing out Buy With Prime during the beta run have given their blessings to Amazon to do so, citing the reward benefitted from the new service far exceeded the risks of sharing data on consumer trends / behavior with the e-commerce giant.

As discussed in our recent coverage on Amazon’s digital advertising opportunities, the company is well-positioned to benefit from a structural shift in advertisers’ preference for retail media ads to bolster conversion. Specifically, retail media ads are typically distributed / displayed directly on e-commerce platforms, and have been gaining momentum over the past year, as previously preferred channels like social media ads continue to struggle with Apple’s (AAPL) newly implemented privacy policies that have hampered the effectiveness of targeted ads delivered to iPhone users.

Growing retail media advertising demand builds on the back of search ads, as it follows closely with the transition in consumer shopping patterns from offline venues to online platforms, which has been fast-tracked during the pandemic…Retail media ad formats are viewed by advertisers as a potential compensatory channel for app-based advertising performance that has been hampered by user data privacy restrictions enforced by Apple last year. Specifically, the emerging ad format benefits from a competitive advantage in 1P data that can be used to effectively deploy targeted ads and enable performance measurability demanded by advertisers.

Source: “Ad-Tech Round-Up: Why We Think Google And Amazon Will Rise On Top”

Specifically, retail media advertising is expected to expand by 10% this year, compared with a “tepid uptick of 4.6% in the global ad market” due to the inherently cyclical and recession-prone nature of the industry.

E-commerce ads should make up 14% of the entire global ad market, with $121.9 billion in revenue this year…, up from 7% five years ago.

Source: Bloomberg

This makes strong tailwinds for Amazon’s growing advertising business, and Buy With Prime is expected to further complement the said looming demand trends. The company already boasts a rapidly expanding and already-profitable advertising business – with 30% y/y growth (9% sequential growth) in ad sales during the third quarter despite an increasingly cautious ad spending environment during the third quarter, we view the segment as a key upside driver for Amazon over the longer-term as AWS’ days of lucrative growth start to normalize. Essentially, Buy With Prime makes a perfect complement to Amazon’s “fly-wheel” advertising business model – by bolstering 1P consumer purchase data collected from Buy With Prime on 3P vendor sites, Amazon can now improve targeted ads displayed on Amazon.com to reinforce shopper conversion, which will then generate more 1P data on consumer behavior and preferences to further improve the delivery of targeted ads, and strengthen demand from advertisers to drive additional growth in the company’s higher-margin advertising business.

The Bottom Line

Despite the anticipation for near-term weakness in Amazon’s fundamentals ahead of the looming economic downturn – especially at its more recession-prone e-commerce business – the stock remains an attractive long-term investment. And continued market volatility expected over the coming months as evolving macroeconomic uncertainties play out could potentially create even more compelling risk-reward entry opportunities – especially with a likely dire earnings season coming Amazon’s way considering mounting macroeconomic headwinds that could further dampen investors’ sentiment on risky assets.

The Amazon stock has lost close to half of its market value since the beginning of 2022, given its sensitivity to surging inflation and aggressively rising borrowing costs that have compressed growth valuations. But with consensus estimates currently suggesting growth of about 10% in the current year, and a return to profit expansion after a difficult 2022, Amazon is expected to outperform the broader tech sector – average revenue growth across tech constituents in the S&P 500 are currently projected at approximately 2.4% for the current year, with earnings expected to decline by 2.2% over the same period. And continued Buy With Prime ramp up will not only benefit Amazon’s e-commerce business, but also its growing digital ads business. As discuss earlier, Amazon’s advertising segment is now viewed as the next potential growth and profit focus area as AWS’ lucrative market share gains previously buoyed by its first-mover advantage continue to normalize on the back of growing enterprise adoption of a multi-cloud strategy. We believe Buy With Prime will drive benefits beyond Amazon’s e-commerce and Prime segments, and further favor Amazon’s longer-term growth and profitability story, underpinning sustained upside potential over the longer-term.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.