Originally Published in Investopedia, April 26, 2019 https://www.investopedia.com/insights/amazon-effect-us-economy/
Amazon.com (AMZN) is everywhere. By disrupting the way people shop, Amazon has created economic ripple effects that go far beyond the customer’s wallet to, directly and indirectly, impact economic activity, whether that impact is inflation, jobs or investment. Currently, Amazon is looking to expand its presence by opening a second full-fledged headquarters in a soon-to-be-announced city.
The Retail Giant
Amazon started with books and then added pretty much everything you can think of, from engagement rings to coffins, for sale on their site. Add the convenience of having it delivered promptly to your doorstep and customers have rewarded Amazon with open wallets. According to a study from One Click Retail, Amazon accounted for 4% of US retail sales and 44% of US e-commerce sales in 2017. Consumer electronics was the biggest product category in 2017 for Amazon, bringing in an estimated $8.5 billion in sales.
If you consider a more macro picture, consumers spending more is a good sign because it contributes to the GDP. Having said that, in no way is consumer spending on Amazon significant enough yet to tip the GDP scale. But it could be in the future.
How Amazon Kills Inflation
Amazon has disrupted traditional retail and accelerated the demise of struggling players. Without storefronts, the company’s overhead costs are significantly lower than other retailers giving them an edge to undercut on prices and operate on super-thin profit margins.
That makes some economy watchers nervous about Amazon’s deflationary impact. Ideally, low unemployment is accompanied by wage growth, which in turn fuels inflation as companies pass on the cost to consumers. This is the logic of Phillip’s curve, but Amazon has disrupted that as well.
Higher competition and lower prices limit the companies’ ability to pass on any wage increases to consumers. Those worries were echoed in the wake of the Whole Foods acquisition in 2017 where remarks by Chicago Federal Reserve President Charles Evans were interpreted in that context.
Jobs at Amazon
At the end of December 2017, Amazon had 566,000 employees worldwide, and that number has grown to 575,000 by October 2018, according to a press release. This includes both full-time and part-time employees. That number is low for a company of that size but expected because Amazon does not have a significant storefront presence like Walmart (WMT), which employs approximately 2.3 million people worldwide.
Amazon also engages a number of third-party contractors and companies for tasks like deliveries. Those people go door-to-door dropping off Amazon packages but are not employees for the company. Does that matter? Yes and no.
In a way, these are jobs that people are doing, therefore, some credit could go to Amazon for job creation. On the other hand, hiring contractual workers helps the company keep its costs in check. In the past, Amazon has been sued by contingent workers claiming they received less than minimum wage. Meanwhile, others have criticized the company for harsh working conditions.
The Amazon Effect: Retail Jobs
Another angle of the jobs conversation is how many jobs Amazon is eliminating. Considering the company is hurting other retailers, forcing them to shutter stores and cut back on costs, any job gains at Amazon may not, in fact, mean anything.
The company has come under fire from Senator Bernie Sanders who introduced a bill, Stop Bad Employers by Zeroing Out Subsidies or the Stop BEZOS Act, in September 2018 that proposed levying taxes on large companies to the extent of public benefits its employees relied on. Sanders had attacked Amazon and Jeff Bezos on account of worker pay and worker safety conditions. On October 1, 2018, Amazon announced that it would raise its minimum wage to $15 per hour, much higher than the federal minimum wage of $7.25 per hour.
The company is also currently on the hunt for a city in which to build a second headquarters. The proposed HQ2 would reportedly bring in over 50,000 jobs and an estimated $5 billion investment to whichever city the company chooses. Amazon is looking for a city that will offer significant tax breaks and subsidies, as well as a built-in tech talent pool.
Amazon’s quest for innovation and technology to achieve operational efficiency has people worried about the elimination of jobs. Those worries are not far-fetched considering that the company is testing its Amazon Go stores in a number of large U.S. cities.
The Facilitator of Small Businesses
Amazon’s logistics infrastructure doesn’t just help it ship to consumers all across the globe, it also aids another group of people: small businesses. Listing their products on Amazon helps them increase their customer reach and the delivery essentially becomes Amazon’s headache.
“More than 20,000 small and medium-sized businesses worldwide on Amazon surpassed $1 million in sales in 2017,” the company said in a press release earlier in 2018.
As small businesses thrive, further job creation and spending are bound to happen. Amazon says that 900,000 jobs were created outside of the company as a result of the Amazon Marketplace for small businesses and entrepreneurs.
Amazon as a Taxpayer
Does Amazon pay tax? Yes. Is it a lot? No.
Principally, President Trump’s claim about Amazon not paying any tax is wrong. However, a 2016 analysis by The New York Times and S&P Global Market Intelligence reveals that from 2007 to 2015, Amazon paid taxes at an average rate of 13%, nearly half of the 26.9% average for the S&P 500 companies. But it wasn’t alone. Other tech giants like Facebook, Alphabet, and Apple also had an average tax rate significantly lower than the average.
Not having a physical presence or employees in certain states also saved Amazon from having to collect sales tax. Sales tax is a complicated subject with rates and rules varying across states. The most simple explanation in this context is that tax laws in many states need the physical presence of an online retailer in the state in order to collect sales tax. Therefore by not having its own warehouses or employees in certain states, Amazon saved on tax.
This wasn’t a problem specific to Amazon, however, as it applied to any online retailer shipping goods across state lines. Over a period of time, Amazon started collecting sales tax on all goods that were sold in or delivered to states that have such a tax. Five states: Alaska, Delaware, Oregon, New Hampshire, and Montana do not impose a sales tax.
The sales tax issue gets even more complicated when it pertains to third-party sellers.
Investing in Amazon
Amazon became the second trillion-dollar company by market cap on September 4, 2018. It also hit many milestones, including crossing the $2,000 mark for its share price. A jump in shares earlier this year crowned CEO Jeff Bezos, who owns 16% in the company, as the richest man in the world.
The multi-year run for Amazon shares has been phenomenal. The company made its stock market debut in 1997 and $100 invested then would have turned into six figures.
In the past ten years, the stock has returned a whopping 2,661%, as of October 1, 2018, while the 5-year return was nearly 529%. The S&P 500 meanwhile returned only 151% over the same 10-year period. Imagine the wealth that was created by Amazon’s stock return and the potential economic activities it could finance in the future.
Amazon’s Spectacular Stock Run
10 year data as of October 2, 2018
Amazon’s Big Investment Portfolio
Amazon isn’t just a bumper investment for those who go in at the right time: It is a big investor itself. As of 2017 year-end, the company held a portfolio of $22.28 billion in cash equivalents and marketable debt securities. It also had $737 million worth of equity investments or equity warrants in public and private companies.