Why Amazon In-Home Delivery Is Brilliant (AMZN)

 

 

Why Amazon Home Delivery is Brilliant

 

Thesis:

Amazon Key and the Hub Locker are solutions to a significant issue for Amazon and other retailers: theft.  In spite of the negative reception from the media, general public, twitter (TWTR), and others, I believe this is a brilliant and innovative approach that will save hundreds of millions of dollars, if not Billions.  In addition, it makes deliveries from Whole Foods, Amazon Fresh, and possibly Amazon pharmacy, much harder to compete with.

Summary:  Why Amazon Home Delivery is great for Amazon (AMZN):

• Innovative and pro-active solution.
• Theft is a serious issue for retailers and shippers. “Porch Pirates”
• Overview of valuation. Buffett is a fan,  but not a buyer.

 

Amazon (AMZN) Key: How It Works

• Amazon Key, a service that integrates with the Cloud Cam and third-party smart locks to allow secure in-home deliveries.
• The Cloud Cam will start recording when the Key unlocks the door to ensure security. Drivers never have access to sensitive codes or keys.
• Amazon is offering the Amazon Key In-Home Kit including the Amazon Cloud Cam and a compatible smart lock at $249.99

 

Initial Reaction:

The initial reaction to the new Amazon concept seemed to be universal outrage. Descriptions like “creepy” and “scary” seemed to be dominant themes. Commentators and pundits universally panned the idea.  Some on Twitter suggested that,

“No female could have possibly agreed that this was a good idea.”

And I am sure the late night comedians are looking to make some jokes at Amazon’s expense.

However, this is not a joke at all.  The term “porch pirate” elicits nearly 2 Million responses on Google. And for retailers and shippers, it is a real drag on earnings.

Porch Pirates: Criminals Stealing Packages Off Doorsteps

“Shorr Packaging Corp surveyed 1,000 consumers and found that 31% have had a package stolen, and 41% of those surveyed said they do not buy certain products online because they fear that the items will be stolen if left outside their front door.” (via CNBC)

And it gets worse during the all-important holiday season.  This issue could have been a drag on Amazon’s future plans because the company wants to sell higher priced items like expensive Nike (NKE) sneakers as well as electronics and fashion merchandise.

Retailers are faced with a lose/lose scenario when items are stolen.  Either absorb the cost of the item or disappoint the customer with failure to reimburse them.

For apartment buildings in urban areas, Amazon is expanding the Hub locker system.  I expect this system to be very successful as well.

Its hard to calculate the exact figure of losses, though I am confident the total has been growing substantially in recent years.  Being pro-active in problem solving and focusing on cost reduction is the sign of quality management. Cost containment strategies are certainly not as sexy as initiatives like Alexa or Echo.  But in my opinion, I find this initiative to be incredibly smart and innovative.

 

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Due to the camera for Amazon key, the consumer is protected from possible theft from the driver.  It is innovative and smart. The risk of a driver attempting to steal from a customer seems very low in my opinion.  Technology prevents it from being worthwhile.

 

Competitive Advantage:

Thanks to the recent purchase of Ring, Amazon now has an incredible competitive advantage over its’ rivals.

Due to their pro-active approach, Amazon is so difficult to compete with, let alone beat. Competitors like Wal-Mart (WMT) and Macy’s (M) are still working to match many of Amazon’s features like free shipping.

I see these new features as a potential competitive advantage. Theft isn’t going away, so the likelihood of theft hurting other companies and shippers will likely increase.  Again, we are talking about Billions of dollars in valuable merchandise.  Amazon’s shipping competitors like FedEx (FDX) and (UPS) will have a hard time matching this approach.  And other retailers will need to address the issue or continue to offer refunds to customers and absorb losses.

 

The future:

As tech companies like Apple (AAPL) and Google (GOOGL) battle for supremacy in customers’ homes, Amazon is taking a giant leap forward in this fight.

Whole Foods/ Amazon Fresh:

I see this as an advantage for food deliveries via Amazon Fresh and possibly via a Whole Foods delivery option. Since this technology would allow delivery when the homeowner is not home, it would also be an advantage in food delivery.  This is less a benefit in terms of loss mitigation.  Rather, it is just another advantage and convenience that Amazon would be able to offer the consumer.

As usual, Amazon is focused on the future and their future involves much more expensive items with higher margins.  Fashion, jewelry, sneakers, electronics. Losses for these items are much more substantial.

Pharmacy:  It’s no secret that Amazon is considering adding Health, Drugs, and Pharmacy to its business lineup.  Having the capability to deliver directly to the consumer would aid in this move.  Is there any better customer service than being able to receive medicine at the customer’s home or apartment building?

  Jeff Bezos is “the most remarkable business person of our age.”

-Warren Buffett

 

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As for the stock, I agree with Warren Buffett, who is a fan of Jeff Bezos and the Amazon business, but has not purchased Amazon  stock due to valuation.  The valuation is just too expensive for me to be a buyer.  And I recognize there are few other companies that have done as well in the last 15 years.

As good as Bezos has been, the p/e above 250 and at a price to book beyond 50 is incredibly rich.  The shares are priced to perfection.  As a shareholder, I would be concerned whether Mr. Bezos will continue to be driven to sustain his excellence at Amazon.  It is possible, as the worlds richest man, he may decide to pursue philanthropy or other pursuits.

For the foreseeable future the company is truly exceptional.  And priced accordingly.

 

Conclusion:

While commentators and skeptics have lampooned the idea of Amazon’s latest in-home delivery, the reality is it is a very pro-active business strategy.  The company is using technology to alleviate a large theft problem.  In addition, the company stands to benefit from increased dependence from the consumer and another leap ahead of competitors.  However, as a value investor with an eye towards undervalued situation, the shares are too pricey for me.