Retail

Luxury May Be the Next Driver of Amazon's Growth Ambitions

Amazon.com Inc. (NASDAQ: AMZN) is a market force to be reckoned with. Whether it is the stock price or the actual business, Amazon is formidable. As the e-commerce giant looks to extend its reach into new markets, one analyst sees more upside for Amazon.

Justin Post of BofA Securities reiterated a Buy rating with a $3,560 price objective on Amazon, which implies an upside of 6% from the most recent closing price of $3,346.49. Post cited reports that Amazon was launching a luxury platform in September as the reason for this call.

Women’s Wear Daily issued a report that Amazon will launch a new luxury platform in September with a dozen luxury brands from the United States and Europe (though, reportedly, only one brand will participate in the initial launch).

The luxury site will operate under a concession model whereby brands operate their own place to sell on Amazon.com with control over product placement and branding, pricing and promotions, and inventory. Accordingly, the site operators would be able to leverage Amazon’s fulfillment/logistics/returns network, and the report suggests Amazon is building a new $100 million fulfillment center in Arizona specifically for luxury goods.

According to Post:

Luxury retail represents a significant category to unlock, with a large TAM and high profit potentially, especially given very low penetration by Amazon currently. Bain estimates luxury brands represent a $90bn annual opportunity in the US alone ($300bn Globally).

This move seems to be in part as a reaction for the loss of Nike in 2019 as well as some other brands like Birkenstock. So getting more luxury brands for Amazon is an important positive for the company.

Many brands have still never been on Amazon, and Post suggests that this is likely driven by problems like:

1) Inability to maintain a distinct brand image on Amazon without much flexibility in site layout or product imagery; 2) Concerns around competition on Amazon from substitute products or private-label products; 3) Potential for counterfeiting from 3P sellers that list similar items on the site; 4) Concerns on brand erosion given Amazon’s general merchandise offering; and 5) Concern on paying commissions to Amazon.

Amazon appears to have taken some steps to address the issues, such as its Project Zero initiative to prevent counterfeiting. As a result, BofA Securities sees a material revenue opportunity in the category in a blue sky case, assuming Amazon’s 40% Western markets e-commerce share in luxury (which would take 10 or more years to achieve) yields a $120 billion gross merchandise value opportunity in the category.

Amazon stock closed Wednesday at $3,441.85, in a 52-week range of $1,626.03 to $3,451.74. The consensus price target is $3,636.42.