Why Amazon Prime Is the Future
Anybody who knows me knows that I am a proud member of the Amazon Prime Cult. I only clean my house with products I can order through Amazon.com's (NAS: AMZN) Prime service. In December, I chose holiday gifts for my family based on what I could order through Prime. I scoff at brick-and-mortar prices when I do make my way out into the world. And, dear Fools, I say this with as little bias as possible: You will one day join me. Convenience is king, and if history is any indicator of consumer shopping habits, Prime is the future.
Pioneers in retail: Sears and Roebuck
In 1888, Richard Sears released the first Sears, Roebuck and Co. mailer to sell watches and jewelry. By 1894, he had expanded the catalog's selection and declared it the "Book of Bargains: A Money Saver for Everyone." Eventually the company released specialized versions of the catalog, including the iconic Wish Book.
The company grew like a well-fertilized weed. By 1914, Sears' annual mail-order sales were over $100 million, doubled from $50 million just nine years before. With westward expansion, more Americans were living in rural areas. They were essentially cut off from the rest of the country -- no cars, no TV, no Internet. Sears, Roebuck and Co. (now Sears Holdings (NAS: SHLD) ) disrupted the way people shopped, and gave them a new set of expectations. Thus the modern consumer was born.
Taking it to the next level: Wal-Mart
Next on the list to help mold consumers' expectations for maximum convenience coupled with low prices was Sam Walton and his big-box powerhouse, Wal-Mart Stores (NYS: WMT) .
What's the only thing better than ordering your low-priced goods from the comfort of your own home and having them delivered weeks later? In the 1960s, it was going to a huge warehouse near your home and choosing your low-priced goods by hand for immediate gratification.
In less than a decade, the company grew from one store to 276 stores in 11 states. Today, they operate over 10,000 stores in over 28 different countries. According to the 2006 book The Wal-Mart Effect, 90% of Americans live within 15 miles of a Wal-Mart store.
Again, the company was able to disrupt the way people shopped and reframe their expectations. Immediate gratification had been introduced to the low-price game, and shoppers were hooked.
Taking it to the next next level: Amazon
In the book Influence: The Psychology of Persuasion, Robert Cialdini explains that humans are wired for efficiency. That's why consumers' shopping habits evolved in the direction of Sears catalogs and Wal-Mart stores.
Enter Amazon Prime, the new disruptive force that will once again redefine consumers' shopping expectations. Prime was launched in 2005, and four years later, it only had 2 million members. By 2011, though, that more than doubled to 5 million members. Take a look at how that growth has correlated both with the company's stock price and total revenue:
Keep in mind that even after these booms, Prime still only represents 4% of the company's total customers, is growing at over 20% year over year, and that Prime customers spend 130% more than regular Amazon customers.
Prime gives us everything we've been conditioned to appreciate and even expect: ordering without leaving the house, home delivery, and nearly instant gratification with free two-day delivery. And over the next decade I definitely see this shifting toward even quicker shipping times.
Other companies have caught on as well. In December, Google (NYS: GOOG) announced a plan to partner up with other online retailers to offer low-cost next-day delivery. The war for impatient consumer loyalties has begun, and while Google may give it a run for its money, Amazon is still best positioned for victory.
Threats do exist from other more established retailers as well. If Wal-Mart or Best Buy could figure out a way to leverage their existing store locations to get same-day delivery, it would greatly threaten one of Prime's greatest benefits. But with the 17 new fulfillment centers Amazon opened last quarter, bringing its current total to 69, I don't see that happening. These fulfillment centers not only mean faster shipping for Amazon, but also lower shipping costs, making this an even more sustainable business model for Amazon in the long run, and an easy thumbs-up CAPScall for me.
Sears and Wal-Mart have proven that retailers can change the way people shop if they just pay attention to consumers' needs. Some of our top analysts have found another retailer ready to change the way people shop in Latin America. It's our top pick for 2012, and would make a great addition to your portfolio. To read more about The Motley Fool's Top Stock for 2012, click here.
At the time this article was published Fool contributor Amanda Buchanan is not actually a member of a cult. She holds no position in any company mentioned. Click here to see her holdings. The Motley Fool owns shares of Best Buy, Amazon.com, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Amazon.com and Wal-Mart Stores. Motley Fool newsletter services have also recommended writing covered calls in Best Buy and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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