Along its route to becoming the world's dominant e-commerce company, Amazon.com Inc. (AMZN) has laid waste to the competition in one industry after another, building a market capitalization that now exceeds $900 billion in the process. Nonetheless, the escalating trade war between the U.S. and China threatens to put a dent in its rapid growth rate.
The U.S. imposed 15% tariffs on $112 billion of goods imported from China on Sept. 1, 2019, with additional tariffs scheduled to take effect in December. According to a recent report from Bank of America, "e-commerce has the most tariff risk due to the impact on product pricing." The report estimates that prices for goods sold in the U.S. through Amazon must rise by an average of 2.1% to 2.6% to offset the cost of the new tariffs.
Amazon's share price is down by 9.6% from its 52-week high set on July 11, as of the close on Sept. 5.
Significance for Investors
Based on their analysis of cost of goods sold (COGS), BofA estimates that 20% of Amazon's first-party sales and 25% of their third-party sales represent goods imported from China. The former are sales made directly by Amazon. The latter are sales made by independent merchants who sell through Amazon's website, thereby generating commissions for Amazon.
To neutralize the effect of the new 15% tariffs on profit margins, BofA calculates that Amazon's first-party prices must increase by 2.1% on average, while the prices in its third-party marketplace must rise by an average of 2.6%. Higher prices inevitably will reduce demand, but two factors may dampen the negative impact on Amazon, BofA adds.
First, other retailers may impose similar price increases. Where this occurs, Amazon should maintain its competitive position.
Second, consumers may switch to alternative products sold through Amazon whose prices have not risen as the result of tariffs. "We expect substitution in the marketplace to reduce the impact, both from consumers buying from non-China sourced sellers, and sellers sourcing from other markets," BofA notes. "Over time, we expect...share gains for goods sourced outside of China," the report observes.
On the other hand, brick-and-mortar retailers, who already are losing business to online merchants, may be reluctant to pass the cost of tariffs along to consumers through higher prices. The CEO of embattled department store chain Macy’s Inc. (M) said last month that shoppers are resisting price increases, The Wall Street Journal reports. Meanwhile, in August the Michigan Consumer Sentiment Index (MCSI) registered its biggest monthly decline since Dec. 2012, with about a third of respondents citing tariffs as a reason for their growing pessimism, per the Journal.
"Given potential substitution on AMZN's marketplace between goods & similar price increases expected at other retailers, we expect Amazon to maintain (or grow) its [market] share," BofA concludes. If a trade deal is signed, the report expects Amazon's stock to rally.
However, BofA cautions, "analysts seem less optimistic on a trade deal this year." Indeed, if the tariff war escalates yet more, and that 15% rate gets hiked to 25%, they estimate that offsetting it would cause Amazon's first-party prices to rise by 3.5% on average, and its third-party prices to jump by an average of 4.4%. Whether shoppers would accept price increases of this magnitude remains to be seen.