August 30, 2018


Structural change, disinflation and 'Amazonisation' (JANUS HENDERSON, 8/29/18, New Stateman)

Information technology has powered almost every form of growth and development in the past 10 years. There are so many billion-dollar companies that did not exist 30 years ago, but the FANG stocks (Facebook, Amazon, Netflix and Google - now Alphabet) are probably the most well-known. And among them, the story of Amazon is perhaps the most impressive.

The e-commerce giant started life in 1994 as an online book store and has evolved into the second-largest retailer in the US, after Walmart. The company has gradually eaten into the market share of traditional retailers and entered markets no one would have thought about. Its membership programme, Amazon Prime, is an awesome customer acquisition tool with discounts on Amazon products and discount partnerships at various other outlets. Prime has a household penetration rate of between 40% and 60% in the US, according to Wall Street analysts, which only adds weight to Amazon's frightening disruptive capability.

For example, Amazon announced it would enter the home security market with its February acquisition of Ring, which offers a do-it-yourself, state-of-the-art home security system, Ring Alarm, that undercuts similar products offered by market leader ADT and Google's Nest Secure product. ADT floated in January with an initial price of $14 per share, but fell as low as $7 in the aftermath of Amazon's announcement and now the company faces a daunting battle against a serial disruptor. [...]

Another recent example of Amazon's frightening reach across industry came in June when it revealed its intention to acquire US online pharmacy PillPack for a reported $1bn. Soon after the announcement, some $14bn was wiped from the market cap of the US drug distribution industry, according to analysts at Reuters. These are simply the most recent examples of Amazon's disruptive reputation, there are plenty more to tell and we're pretty confident there will be plenty more to come, too.

The point is that this is all massively deflationary. Economies of scale, whereby behemoths like Amazon use their might to undercut rivals in new markets, means the prices of goods comes down. We are all used to seeing reduced prices or deals whereby you can buy a number of goods for a similar price to a product on its own.

We are used to disinflation (slowing down of inflation) and sometimes deflation (opposite of inflation). We live in a world where people expect a discount, are given a discount or where retailers will throw away their margin and just give you a discount sometimes without anyone asking for it; and that is a generational change.

Posted by at August 30, 2018 1:29 PM