The Amazon Effect: How Big is The Economic Impact?

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Jeff Bezos, CEO of Amazon, increased his net worth by $6.44 billion dollars just by saying a few words. He announced the company's earnings on October 26, 2017, and Amazon stock jumped 8 percent. How are you impacted by the Amazon Effect?

It’s true. After beating his company’s earnings expectation, the increase in Jeff’s 81 million shares allowed him to regain the title of richest person in the world with a net worth estimated at $90 billion dollars. This immediate wealth expansion phenomenon is simply defined as the "Amazon Effect." And, whether you realize it or not, it impacts all of us.

What is The Amazon Effect?

The Amazon Effect is the ongoing evolution and disruption of the retail market. It’s the continual change in the way we shop, both online and in physical outlets, due to the ever increasing e-commerce. The broad economic impact covers everything from global inflation to the profitability of small businesses.

How big is the impact? According to eMarketer, Amazon now accounts for 43 cents of every dollar spent online in the U.S. No matter what the industry or where the business is located, it is likely that every CEO has had the thought at least once: How could Amazon impact my business?

When Bedel Financial’s Investment Team analyzes individual stocks, private equity, or investments within mutual funds, we often take the “Amazon Effect” into consideration. Will the company compete against Amazon? Or, is it a potential acquisition target to enable Amazon to get into a new industry or sector?

Amazon’s Impact on Wage Growth and Inflation

According to the Bureau of Labor Statistics, the U.S. unemployment rate was 4.2 percent this past September. That is the lowest it has been in the past decade. Basic economics teaches us that when unemployment rates are low, the probability for wage growth increases. That increase is partially due to the limited supply of available talent. Wage growth increases companies’ costs, which in turn, often gets passed on to customers by raising product prices. When the price of products goes up, inflation, the measurement behind the increase in the cost of goods, goes up. That’s the economic pattern we’re all familiar with.

However, if Amazon is able to continue their disruption of traditional retail by cutting overhead costs, passing the savings onto the customers, and decreasing the profit margin of its competition, it can potentially derail the traditional pattern. As other retailers’ profits decrease, so will their opportunity to increase employee wages. Although current unemployment rates are near 10 year lows, the Amazon Effect could potentially create a deflationary environment.

Latest Rumors Surrounding Amazon

Amazon is known for creating customer demand for items its customers didn't even know they demanded! They have read our minds before the thought has even entered. This is how you create a $525 billion company.

Next, is your doorstep not safe enough? The new rumor surrounds the ability for package deliverers to unlock your door remotely and place the package inside your front door while being sensor recorded for security purposes. Are we willing to allow Amazon to invade our private residence for mere convenience? Sure, why not. Please feed my dog while you’re in there!

The rumor is that Amazon is targeting shipment companies like FedEx and UPS with this new delivery service. However, many analysts are critics of this rumor, citing that the costs around infrastructure and logistics are too much for even a company like Amazon. With that said, at this point, would you dare to underestimate Amazon? How much could they cut shipping costs by utilizing drone technology? Maybe FedEx and UPS are creating new technology, more advanced than drone delivery, to stay ahead of future competition.

Another rumor is around drug dealing. What if Amazon was a (legal) drug dealer? What if your prescriptions could be delivered to your door at Amazon Prime speed? Pharmaceutical delivery companies already exist, but Amazon’s capital within this potentially growing industry could be a rumor to take seriously.

The Bottom Line

Over the years, Amazon’s company maturation has provided an enhanced buying experience, customer cost-savings, and a previously unknown level of convenience. In its wake, many retail companies have suffered by not adapting to innovation at Amazon Prime speed. Other industries are taking note of Amazon as a potential competitor, which should be good for the customer’s wallets, but could negatively impact income growth for employees of Amazon’s competitors. Stay tuned!

Evan D. Bedel, CFP, is a Financial Planner and heads Generation NeXt services for Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit the Bedel Financial website at bedelfinancial.com or email Evan at evbedel@bedelfinancial.com.

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