Online buying is off to the races this holiday shopping season, but on Wall Street, the figures that count aren't absolute numbers. Investors are more interested in how those numbers compare to what was expected. If sales numbers beat expectations, stocks will rise as those who bet against companies achieving expectations scramble to cover their short positions. Stronger sales would also lure others who were on the sidelines to jump in and buy based on the good news.
That point is worth keeping in mind as one scrutinizes this year's Black Friday online sales results, which were great. Research company Coremetrics reports that online sales for the holiday were 16% higher than last year, according to the Associated Press. The average order rose 12% to $190.80.
Overall, post-Thanksgiving online spending was up 33% in 2010 compared to a 30.2% rise in 2009. But in the past, online sales accounted for only a small fraction of total holiday spending -- between 8% and 10%. According to the National Retail Federation, about 33.6% of shoppers during the four-day Black Friday weekend shopped online in 2010.
So how did the results compare to expectations? Measured against industry forecasts, sales were better than expected, although it's way too early to draw definitive conclusions about the season as a whole. On Nov. 17, eMarketer predicted that U.S. online holiday season sales, defined as all online sales in November and December, would rise 14.3% over 2009. This would bring holiday retail e-commerce sales to $38.5 billion, compared to 2009's $33.7 billion. If the 16% rise that was seen on Black Friday persists for the rest of the year, online sales could be $570 million higher than eMarketer predicted.
Amazon Vs. Walmart: Bytes Outpaced Bricks
Behind consumers' move online is a hunger for bargains. According to eMarketer, consumers will "remain extremely price-focused. Online consumers have become savvy at finding coupons, comparing prices, locating cheaper product alternatives, and exchanging shopping tactics and information about bargains with peers through social media."
Of all the companies likely to enjoy a stock pop Monday as a result of this news, the one that comes to mind first is Amazon (AMZN). This company has put in an amazing performance over the last decade as its competitors have struggled. Consider by contrast Walmart (WMT), which is a competitor online and the biggest player in the bricks-and-mortar world.
While Walmart is bigger, its stock has gone nowhere, and its growth and profits have not kept pace with Amazon. In the last decade, Amazon's stock has risen 617.7%. Between 2000 and 2009, its sales climbed 775% to $24.5 billion, and its net income skyrocketed from a $1.4 billion loss to $902 million profit. During the same time frames, Walmart stock rose a mere 3.3%, while its sales rose 112% to $405 billion, and its net income climbed 129% to $14.4 billion.
Nevertheless, it's remarkable how well Amazon has adapted to changing technology and competitive threats. How has it done this? Amazon's success can be linked to four business strategies:
- Strong core business. As Forbes pointed out, in the third quarter, Amazon's revenues climbed 39%, and it raised expectations to 40% growth for the fourth quarter. Its performance has been bolstered by Amazon Prime -- which guarantees delivery of products within two days for an annual fee of $79, and boosts revenue per customer dramatically.
- Lower sales taxes, prices. Amazon does not base its operations in many states with sales taxes, and according to a 1992 Supreme Court ruling, it doesn't have to collect out-of-state sales taxes in those states. Amazon thus pays significantly lower sales taxes, a savings that it passes on to consumers as lower prices. As a source with over 20 years of online retailing experience pointed out in a Nov. 28 email to me: "It is a 5% to 12% government granted price advantage. Amazon achieves this by putting its warehouses in shell companies and other methods, circumventing tax laws. The net effect is that for most consumers, a $100 item at Amazon is $105 to $112 everywhere else."
- Consumer innovation. Amazon's innovations include its easy-to-use mobile storefront app and its popular Kindle e-reader. In the second quarter of 2010, for every 100 hardcover books Amazon.com sold, consumers bought 143 Kindle books. According to Forbes, "Amazon was the first to create advanced personalization algorithms when it introduced book suggestions years ago. Now that technology combined with the breadth of retail offerings by Amazon and one-click purchasing (both online and mobile) establishes Amazon's market leadership and sustainability."
- Dominance of the cloud. Amazon's EC2 cloud "back office" support for online and mobile storefronts accounts for 80% of the Internet-based retailing infrastructure and support market, according to Forbes.