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Alex Kimani

Alex Kimani

Writer, Divergente Research LLC

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Divergente Research LLC and Safehaven.com. 

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The Two Trillion Dollar Markets Amazon Hasn’t Conquered

Amazon

President Donald Trump once tweeted that Amazon Inc. (NASDAQ:AMZN) was putting thousands of retailers out of business. Although his polemic might have been motivated by ongoing rancor towards Jeff Bezos and The Washington Post, he was spot on.

Amazon’s aggressive expansion into diverse industries has been terrifying competitors, both big and small. From food delivery, shoe stores and consumer staples to health care companies, apparel and upscale retailers, retail seems to be Amazon’s oyster.

And the e-commerce giant is not done conquering. That’s according to Tom Forte of D.A. Davidson who says that 8 of 10 global market opportunities that exceed $1 trillion are already in the company’s crosshairs. And, he reckons that the two that aren’t—gas stations and travel-- would be a great fit, too.

(Click to enlarge)

Source: CNBC

Borrowing a Leaf from Costco

Quite fittingly, Forte has noted that another retailing giant has made a big success out of the gas business.

Costco Wholesale Corp.(NASDAQ:COST) is the largest warehouse chain in the world with a trailing 12-month revenue of nearly $140 billion and four straight quarters of double-digit revenue growth. Although Costco belongs to the big-box retailing group that Amazon has been laying waste to, the company’s unique revenue model has made it pretty much immune to Amazon’s disruptive practices. Related: What Is Bakkt And Can It Take Bitcoin Mainstream?

First off, Costco sells a huge variety of items in bulk and at low prices. This is made possible by the fact that the popular warehouse is a subscription retailer. To shop there you have to pay an annual membership fee ($60 basic; $110 executive). The membership fee helps pad the company’s bottom line and keep prices low. Many Costco shoppers with large families are likely to save enough to offset the membership fee and therefore find it cost-effective. The executive level gets you extra perks like two percent rewards on some purchases and extra discounts. The arrangement works like a charm—executive members buy  a lot more than regular ones.

But discounts are not the only draw to Costco stores. The company also offers perks that other big-box stores do not, including cheap gas, tires, wine, movie tickets, vacation packages and car rentals through Costco Travel. Costco’s cheap gas gives it an edge over rivals such as WalMart Inc.’s (NYSE:WMT) Sam’s Club and BJ’s Wholesale Stores (NYSE:BJ).

A 2017 survey by Oil Price Information Service found that the company’s beats the two on low gas prices. A MarketForce survey on 11,000 consumers found that the wholesaler is a top pick on fuel quality and price.

Gas is a recurring purchase and a pretty effective way to drive traffic to foot stores.

The result? Costco sells so much gas that a good 10 percent of its revenue comes from the commodity.

Forte suggests that Amazon should follow suit by providing Prime subscriber discounts and add thousands of distribution stores for its products through gas stations.

Travel Is A Wildcard for Amazon

While gas stations might not be too big of a diversion for Amazon, online travel is likely to be a different animal altogether.

Related: Google In Talks With Tencent Over Cloud Business

Amazon has twice dipped its toes into the online travel agency (OTA) business, but ended both ventures with little fanfare shortly thereafter.

It appears that brand loyalty runs deep in the ecommerce space. People go to Amazon to shop; Google for search, Facebook Inc. (NASDAQ:FB) for social networking, and Expedia (NASDAQ:EXPE) and Booking.com (NASDAQ:BKNG) when they need to book a trip.

Forte has a $2,200 price target for Amazon shares (12- 18-month), good for 17 percent upside. AMZN stock is up 61.4 percent in the year-to-date.

By Alex Kimani for Safehaven.com

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