E-commerce has been like a massive wave that has washed over much of the traditional retail footprint in the U.S. and Europe. Globally, e-commerce retail sales are projected to hit $6.5 trillion USD in 2024, from $4.0 trillion USD in 2020.1 In the U.S., growth in e-commerce retail sales more than doubled in 2020 due to the COVID-19 outbreak, and is projected to grow at 12% annually over the coming years.1
Amazon has established itself as the dominant player in the U.S. and yet, virtually every general merchandise retailer has a website that looks every bit as good as Amazon’s. So why is Amazon’s market capitalization three times Wal-Mart’s and 10 times Target Stores’?2
A history of innovation
Getting to the bottom of this question is critical to the way we manage Invesco Global Endeavour Fund.3 Our team looks for structural, durable tailwinds that can drive sustainable growth, avoids commoditized industries and businesses, and seeks to identify companies that we believe can compound growth at attractive rates over the next several years.
In our team’s view, Amazon is built for where we are now and where we are going — and we are going that way in part because Amazon and a few others are taking us there. Amazon has invested in clever, thoughtful ways to make their business model massively scalable and efficient — including back-end infrastructure to scale delivery capacity, lower costs and manage inventory. When they concluded that their last-mile delivery was not as efficient as it could be, via UPS and the like, they developed their own delivery capability. Over the last few years, they have deployed their own over-the-road truck fleet and invested heavily in automation. Don’t be surprised if air cargo follows in the not too distant future. All of this is a path devoted to efficiency, scale and optimization — and it is winning, with a stock price that’s outperformed its peers.4
A focus on R&D
The difference between how Amazon has deployed capital, and how the retail incumbents have done it, is stark. Tellingly, Amazon first recorded research and development (R&D) expense in 2009. Since that time, they’ve spent a whopping $234 billion dollars USD, to scale and optimize.5 Wal-Mart, by contrast, has not spent a single cent on R&D, and we can’t find any evidence that, in their entire history, that they ever have spent anything on it.5 Target, Costco, and Marks and Spencer also spent nothing.5 Who has been building the advantage over that time? Our answer: Amazon.
Although investing is not an exercise in accounting, there is something important to note about how different types of spending are captured in financial statements. R&D is an everyday operating expense that flows right through the income statement. Due to this, it effectively understates current earnings and helps create future earnings, a not uncommon characteristic found in innovators. In contrast, capital expenses (capex) are amortized over time — they don’t immediately impact the income statement. In this regard, they can, in some sense, overstate current earnings.
Wal-Mart spent $129 billion USD in capex over the last decade.5 Amazon has spent not that much less at $99 billion USD.5 However, given the relatively newer asset base at Amazon, it’s likely that more of their capex is focused on growth and not the replacement of existing assets due to wear and tear.
Amazon has built a business that is, as we say, fit for purpose, while its traditional retail competitors have not shown significant inclination to invest in R&D and innovate — in our view, they are merely adapting what they already have, which is akin to taking a horse-drawn buggy and slapping an engine and wheels on it. Amazon just went ahead and built a car.
Some of the traditional retail incumbents will certainly survive, but we believe they are likely to be fighting over a smaller and smaller domain, lacking the margin structure and top-line growth necessary to compete, as the future comes towards them faster than ever. As much as anything else, this is a narrative about the development and sustainability of competitive advantage, which is a critical element we look for in business that can sustain high economic returns.
We are reminded of a quote from the philosopher Eric Hoffer that seems especially fitting: “In a time of drastic change, it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.”