With Amazon Out There, is E-Commerce Still a Good Investment?

In this particular piece we are talking about e-commerce as an investment for people who are buying stocks rather than whether or not you should consider starting your own e-commerce site. Amazon is the behemoth that cannot be overlooked, and because of this it is fair to ask how much money can an investor expect to make investing in e-commerce companies other than Amazon? The answer is likely to surprise you.

While Amazon is synonymous with online shopping, the company has begun experimenting with its own version of the brick and mortar store with its Amazon Foods brand. Though very limited in scope in its current form, the company realizes that people still like to shop for certain items, and that will require more of a personal experience than an online experience. Amazon is great if you know what you want, the item will be the same no matter where you buy it, and you want the lowest price (or free shipping). But other things such as food or new clothes are a different matter, something the customer wants to be upfront and personal with.

Take Walmart for example. They have recently announced that there will be certain items you can get for a cheaper price by physically going into one of their stores rather than buying it either from Walmart.com or even from Amazon. Many of the items are exactly the kind described above: those that will be the same no matter where you buy them from. Walmart is betting that if people have enough of these lowest priced items in the physical store, people will come and buy more than just the lowest price items.

This is not a new idea. Back in the days of daily newspapers and clipping coupons with scissors, there was what were called “leader” items. A great sale price would get customers into the brick and mortar store where they would inevitably buy more. Walmart is actually going retro here with the idea that while there are times that people absolutely love the idea of shopping online for price and convenience, those same people just don’t want to sit in front of a computer every week to do their shopping. This silent reality is borne out by the fact that although people could buy items on the Internet for the past 20 years, e-commerce shopping only totals 10 percent of total shopping dollars.

What will be called Walmart’s “hybrid model” actually makes perfect business – and investor – sense. There are those who make the case for online customer reviews as a good barometer of the quality of a product, the fact is certain items are exempt from this uniform approach to buying. For many women, clothing may look great in an online 360 view, but when it actually arrives and they try it on – not so much. What about a new perfume (at least the old magazines had scratch and sniff samples) or for men, a new shirt? Ask yourself how many customer reviews are “off topic” when they give a product a one star rating because the shipping was horrible or the item damaged.

Consumers love choice, and the more companies realize that there are advantages to the combination of e-commerce and brick and mortar purchasing for both company and consumer, the more their e-commerce business will become competitive. For e-commerce to become more attractive as a stock, much of the emphasis will have to be on branding. What separates the average product offering from the one that goes viral is how “exciting” the story is behind the product. The same reasoning applies to a business. Online branding has to be about the experience more than the product lines. Social media exposure is essential, but a company that will be attractive to investors will be one where the online presence has a strong connection to a reputable and established brick and mortar retailer. This gives consumers the best of both worlds.

One of the biggest costs of the supply and delivery chain is the cost of the middleman. The rule is, the fewer number of people you have touching your product, the lower the cost to the consumer. Regardless if the product ends up in a warehouse or in a brick and mortar store, the middleman costs can kill the brand’s competitiveness. Using the online presence to sell the product(s) in lieu of a salesperson on the phone or at a physical store location is a simple and effective way to reduce middleman costs. Lower costs translate to higher profit margins, both which are attractive to investors.

Finally, the hybrid model is immensely practical for the consumer. If I need a hammer in the next hour, I may be able to buy one online from Amazon, but how much will it cost me in delivery charges? This “instant sale” factor is something that adds value to the brand and the business. If the case is being made that shopping online is convenient, there is nothing more convenient than jumping in my car, driving 10 minutes, and picking up the item from a reputable store where I searched and found the item online at their e-commerce website.

Investors need to look for the right niche that will make this model work. It will require analytics and a solid knowledge of the specific industry, but the combination of these two will reveal numerous opportunities that can have you entering in on the ground floor.

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