Amazon Observations

Supported by Greenhaven Road Capital, finding value off the beaten path.

This post isn’t the typical notes posts, feel free to skip. It’s three observations of Amazon.

1. Ordering non-perishables is easy, cheap-enough, and relieves a pair of small burdens.
2. The local and big box hardware stores will be killed by Amazon’s selection and YouTube’s ‘How-to’ videos.
3. Amazon music will head off Spotify and Apple Music at the pass.

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Example 1: My wife wanted cashew butter and our local store doesn’t stock it. The next closest store only occasionally stocks it. Rather than roll the dice, she ordered it on Amazon. It landed not in our shopping cart but something called the Prime Pantry Box.

The box ships for $5.99 so we filled it up. Among our bounty was a single box of cereal, a twelve pack of fancy water, and the cashew butter. The prices were slightly more than those at the local stores.

Six dollars for the box isn’t a great deal but it was a better shopping experience. For one, I didn’t have to go to the store. Second, there was no mental strain. Unlike physical strain, which I can see by how much I sweat on the treadmill, mental strain goes unseen. Though I can’t see it, I still believe in it after reading Thinking Fast and Slow and Misbehaving.

I also know that frictions matter. Mindless Eating is full of supportive case studies. While Amazon still offers Oreos, I didn’t impulsively buy them like I may have in the store. 

I paid more but also got more. 

Example 2: I go out of my way to shop at the local hardware store. I pay cash, saving them the 2% in credit card fees. I pay more than the comparable item at big box stores. I wait for things to be stocked and delay projects. 

I – to use Clayton Christensen’s concept – ‘hired’ the store for 3 jobs:

1. Have the right supplies (inventory).
2. Be there when I need something  (availability).
3. Answer my questions (expertise).

In January our garage door motor crapped out. It was a repair in my circle of competence. I called the hardware only to find out it would be a week until the 1/2 horsepower unit was in stock. “I’ll wait,” I said. When the unit arrived I noticed it wasn’t exactly what I wanted but was close enough. The install went smooth and a few small hiccups were answered by YouTube videos.

Looking back, the Internet offers a better option for the job I’m hiring for. 

1. Amazon has a far larger inventory at cheaper prices and more precision (I would have bought a different motor than the one I ended up with).
2. With Prime shipping, the Amazon motor would have actually arrived sooner, but the hardware store still trumps Amazon for those “in a pinch” moments.
3. The hardware store has two employees who know considerably more than me but none with more knowledge than YouTube. 

Christensen writes that once customers are satisfied with the performance of one area they will switch to another. Laptops demonstrate this as the distinguishing features have progressed; storage, weight, disc drives, processing, and display.  Amazon has passed the local store on price and selection while YouTube has passed expertise. They are neck and neck with availability. It may be time to switch.

Example 3: Music. Amazon Prime members get a nice bundle of service for the $99 annual fee. There’s streaming shows – Ben Carlson likes Sneaky Pete – two-day shipping, cloud storage for photos, and streaming music.

The streaming selections are good, but not great. Fortunately for Amazon, that’s all it needs to be. Christensen wrote in The Innovator’s Solution:

“The companies that are positioned at a spot in a value chain where performance is not yet good enough will capture the profit. That is the circumstance where differentiable products, scale-based cost advantages, and high entry barriers can be created.”

Let’s rephrase in general:

The companies that are positioned at a spot in the value chain where performance is good enough will NOT capture the profit. That is the circumstance where moats will not be created.

Rephrased for Amazon streaming:

If Amazon is positioned at a spot in the value chain for streaming services and provides a service that is good enough (read: selection you use) they will create a moat thanks to scale.

Spotify is screwed. Amazon can offer streaming music at cost as part of the Prime bundle. Facebook is using this same technique via Instagram to cut Snapchat off at the pass. Techcrunch reported that when Instagram released stories, Snapchat growth slowed 82%.

In Exponent episode #102 Ben Thompson and James Allworth talk about this. They agree on copying that companies should copy the strengths of others and focus on their ow. strengths. Nokia failed to play to their strengths, says Thompson “and they went to the grave.” Samsung did, and they’re still around.

I’ve started to think more deeply about Amazon since reading The Everything Store by Brad Stone. If you want to see more of what I read sign up here: http://eepurl.com/bgRZOX. 

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Also, we are trying an experiment this week, an Amazon Giveaway of Organizational Alpha: How to Add Value in Institutional Asset Management. https://giveaway.amazon.com/p/c82ede01f5347009

NO PURCHASE NECESSARY. Ends the earlier of Feb 20, 2017 11:59 PM PST, or when all prizes are claimed. See Official Rules http://amzn.to/GArules.