Amazon Is Successful Because They Care About Consumers

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The video below shows graphically the phenomenal rise in the stock market valuation of online retailer Amazon compared to the market capitalization of one of its main retail competitors – the brick-and-mortar retail giant Walmart (special thanks to AEI’s Olivier Ballou for graphical assistance and Scott Grannis for providing the data). Here’s some history:

  1. Amazon stock was first offered for sale to the public on May 15, 1997 through an Initial Public Offering (IPO) at $18 per share, and that put Amazon’s initial market cap at about $438 million. At that time, the market value of Walmart’s stock was $68.3 billion, or 156 times greater than the value of Amazon.
  2. Over the next several years following Amazon’s IPO, Walmart’s value rose from less than $70 billion to more than $200 billion in March 1999 before topping $300 billion briefly at the end of that year. Since then the retail giant’s market cap has remained flat at around $225 billion for almost the last two decades (see video above) and is currently $239 billion based on Walmart’s closing price yesterday of $77.54 per share.
  3. After Amazon’s IPO in 1997, it took 14 years before the market valuation of its stock exceeded $100 billion in July of 2011, and another four years to surpass $200 billion in June of 2015. Then it took only five months to top $300 billion in market value in November 2015, and another 15 months to exceed $400 billion for the first time in February of this year. As of yesterday, Amazon’s market value was $462 billion.
  4. The video helps to tell the amazing story of Amazon’s value as a company – it took slightly more than 18 years from Amazon’s IPO in May 1997 until its market capitalization matched Walmart’s in July of 2015 at about $231 billion. Then it took less than two years for Amazon’s market cap to double and grow to twice the size of Walmart’s market cap: $457 billion for Amazon vs. $228 billion for Walmart when the video was produced and finalized yesterday.

The Bottom Line

Amazon’s increase in market value from less than $500 million in 1997 to more than $450 billion today might be the most remarkable example of wealth creation and business success that has ever taken place in the history of the world, at least over such a short period of time. As the Wall Street Journal’s editorial board pointed out today:

Amazon marks 20 years as a public company this week, and if you got in on the ground floor you have a lot to celebrate. A $100 investment in the initial public offering of the three-year-old Internet company in 1997 is worth more than $49,000 today. Even by the standards of successful Silicon Valley start-ups, that’s hitting the jackpot. Wealth creation is the business of democratic capitalism, and by taking its market capitalization to $460 billion from $660 million in two decades, Amazon has delivered. It’s worth a moment to consider some business and policy lessons.

The beauty of the free market is that entrepreneurs seeking to get rich have to make their customers better off at the same time. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest,” Adam Smith wrote in the 18th century.

On a visit to the Wall Street Journal some years ago, founder Jeff Bezos said Amazon employees focus relentlessly on what its customers need – even if they don’t know they need it. That might explain how a company that started out as an online bookstore has become the most popular U.S. supplier of consumer goods.”

Amazon’s laser-like focus on creating value for consumers and keeping them satisfied with low prices, huge selection, speedy delivery and great customer service goes a long way towards explaining its phenomenal success as a retailer, which gets reflected in the meteoric rise in its stock price and market capitalization.

The online retail giant perfectly embodies the economic concept of “consumer sovereignty,” which describes the reality that profit-seeking sellers like Amazon make the greatest profits when they provide consumers with the best possible products at the lowest possible prices with the best service and fastest delivery. That is, companies like Amazon maximize their profits, share price and market cap when they treat their customers like royalty, i.e., the kings and queens of the marketplace.

The Amazon Doctrine

Amazon’s official corporate version of consumer sovereignty is known as The Amazon Doctrine, as Amazon CEO Jeff Bezos explained in 2012 when he unveiled the new Kindle Fire HD tablets:

Above all else, align with customers.

Win when they win.

Win only when they win.

There may be no other large company operating today that better illustrates the economic concept of consumer sovereignty than Amazon – to the significant benefit of consumers, who are the direct beneficiaries of Amazon’s success as an internet-based online retailer.

The phenomenal rise in Amazon’s market cap illustrated in the video above is a market measure of its success at fulfilling The Amazon Doctrine of aligning with customers – its stock is winning in the equity market only because its customers are winning daily in the retail sector with low prices, a wide selection of great products and the convenience of shopping online from home – or from anywhere with a Smartphone. And Amazon customers now increasingly get their orders delivered the same day or next day.

Kudos to Amazon for reaching nearly half-a-trillion dollars in market value in just 20 years and in the process epitomizing perfectly so many important economic concepts: consumer sovereignty, the invisible hand, entrepreneurship, wealth creation, and creative destruction. Amazon’s spectacular rise in market value reflects an equally spectacular rise in the value it is creating for its hundreds of millions of customers.

In recognition of its success at serving consumers, I hereby nominate Amazon for the 2017 Nobel Peace Prize for doing more to create consumer value and improve the lives of the average person in America and in the other countries where Amazon operates than any other single corporation, charitable organization or government agency in the world.

Related Facts about Amazon:

  1. Amazon’s stock has been split three times: a 2-for-1 split in 1998, a 3-for-1 split in January of 1999 and a 2-for-1 split in September 1999. That would mean that somebody who owned a share of Amazon stock in 1997 would have owned 12 shares of stock several years later. Adjusted for those splits, the closing price of Amazon on the first day of trading was $1.96 and it is now trading at about $997 per share. Therefore, a $1,000 investment in Amazon in May of 1997 (510.2 shares @ $1.96) would be worth more than half-a-million dollars today ($508,673)! A $5,000 investment in Amazon in 1997 would be worth more than $2.5 million today! On an annual basis, an investment in Amazon would have generated an average annual compounded rate of return of 36.6% since 1997, and your investment would have doubled nine times over the last 20 years!
  2. There are now a whopping 80 million Amazon Prime subscribers in the US, which represents close to two-thirds of America’s 125 million households. Interestingly, Prime membership has doubled from 40 million in March 2015 to 80 million in March 2017, over roughly the same period that Amazon’s market cap has doubled. Roughly 60% of the people who shop at Amazon are now Prime members, and those members generate more than $8 billion in revenue annually for their membership fees. An estimated 26% of Prime members now pay $10.99 per month, rather than $99 for an annual subscription, and the introduction of the monthly pricing option in April of 2016 is one reason for the nearly 50% increase in Prime memberships from 54 million in early 2016 to 80 million in March of this year. Therefore, the growing popularity of Amazon Prime is definitely responsible for much of the growth in its revenue, profits, stock price and market cap.
  3. Amazon is expanding its Prime program expanding internationally; it launched Prime in Germany, Japan, and the United Kingdom in 2007; in France (as “Amazon Premium”) in 2008, in Italy in 2011, in Canada in 2013, in India in July 2016 and in Mexico in March 2017. Source.
  4. Amazon now wants to help you furnish your home as the online retailer makes a major push into furniture.
  5. Amazon’s profits last year at $2.4 billion made 2016 the most profitable year in the company’s history. And with $724 million profits in the first quarter of this year (40% above first quarter earnings last year), Amazon is on track to surpass last year’s record profits. Amazon’s sales revenues last year of $136 billion were the highest in the company’s history, and up 27% from the previous year. First quarter sales this year of $35.7 billion are ahead of the same period last year by nearly 23%.

Reprinted from American Enterprise Institute.

Mark J. Perry

Mark J. Perry

Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

This article was originally published on FEE.org. Read the original article.

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