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. Amazon, directly and indirectly, impacts inflation, jobs, and investment.
- Amazon's overhead costs are much lower than other retailers because there are no storefronts.
- Although company costs are low, Amazon has been accused of not paying workers a living wage.
- Amazon does pay tax, but not as much as one might think.
- Amazon has been a fantastic investment, but those returns are extremely unlikely to be duplicated in the future.
The Retail Giant
Amazon started with books and then added everything from engagement rings to jail cells for mobile phones until it became "the everything store." Add the convenience of having it delivered promptly to your doorstep, and customers have rewarded Amazon with open wallets.
According to Digital Commerce 360, Amazon's revenue from U.S. consumers' web purchases amounted to 30.7% of U.S. online retail sales in the first quarter of 2021. In 2020, ecommerce spiked to account for approximately 21.3% of U.S. retail sales, meaning Amazon accounted for about 6.5% of all retail spending. This huge increase can be attributed to the surge in online shopping as a result of the global pandemic due to the novel COVID-19 virus.
If you consider the macro picture, consumers spending more is a good sign because it contributes to the GDP. That being said, consumer spending on Amazon is not significant enough to tip the GDP scale. However, 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. That gives Amazon the edge to undercut rivals on prices and operate on a thinner profit margin.
Some economy watchers are nervous about Amazon’s deflationary impact. Ideally, low unemployment is accompanied by wage growth, which in turn fuels inflation as companies pass on the costs to consumers. That is the logic of the Phillips curve, but Amazon has disrupted it as well.
Greater competition and lower prices can limit the ability of companies to pass on any wage increases to consumers. Those worries were echoed in the wake of the Whole Foods acquisition in 2017. Chicago Federal Reserve President Charles Evans noted that mega-mergers can put downward pressure on inflation.
Jobs at Amazon
By the end of 2020, Amazon employed approximately 1.3 million employees worldwide. In 2020 alone, the company added 400,000 jobs. That includes both full-time and part-time employees. Although over one million seems like a large number, it is actually low by retail industry standards because Amazon does not have a significant storefront presence. A traditional store requires far more employees. For example, Walmart (WMT) employs approximately 2.3 million people worldwide.
Amazon also engages several third-party contractors and companies for tasks like deliveries. Those people go door-to-door, dropping off Amazon packages. However, they are not employees of the company. Does that matter—yes and no.
In a way, these are jobs for people. 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. Some have criticized the company for harsh working conditions.
Another angle of the jobs conversation is how many jobs Amazon is eliminating. Consider how much the company is hurting other retailers, forcing them to shutter stores and cut back on costs. Job gains at Amazon may not mean anything for overall employment.
The company came under fire from Sen. Bernie Sanders. He introduced a bill, Stop Bad Employers by Zeroing Out Subsidies, or the Stop BEZOS Act, in Sept. 2018. He proposed levying taxes on large companies to the extent that their employees relied on public benefits. Sanders had attacked Amazon and founder Jeff Bezos on account of worker pay and worker safety conditions. In response, Amazon raised its minimum wage to $15 per hour, on November 1, 2018, much higher than the federal minimum wage of $7.25 per hour.
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 has introduced cashier-less Amazon Go stores in several 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 1.9 million small and medium-sized businesses sell in our store, and they make up close to 60% of our retail sales," the company said in its 2020 letter to shareholders.
As small businesses thrive, further job creation and spending are bound to happen. According to Amazon, 1.1 million jobs have been created outside of the company as a result of the Amazon Marketplace.
Amazon as a Taxpayer
Amazon does pay taxes, but it pays far less than some people believe that it should. For 2020, Amazon's effective income tax rate was 9.4%—versus the 21% statutory corporate tax rate. The company paid $1.8 billion in federal income tax on $20 billion in profits—versus the $4.1 billion that Amazon would have paid with the 21% tax rate.
Amazon saves billions on taxes using tax credits and stock option tax breaks. Over the three-year period, 2018 to 2020, Amazon paid an effective federal tax rate of 4.3% on income in the U.S. Longer-term, Amazon has been just as good at avoiding taxes, with an average effective federal tax rate of 4.7% over the last 10 years.
Amazon is structured to minimize corporate income taxes. The company reinvests profits into expanding its business instead. While some joke that this policy makes Amazon the largest nonprofit organization in America, reinvestment leads to increased market share and capital gains. Amazon's lower tax bill helps the company to expand, and expansion helps Amazon to reduce its taxes.
Not having a physical presence or employees in many 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 straightforward explanation in this context is that tax laws in many states need the physical presence of an online retailer in the state to collect sales tax. Therefore, Amazon saved on tax by not having its own warehouses or employees in certain states.
The problem was not specific to Amazon, however, as it applied to any online retailer shipping goods across state lines. As time passed, Amazon started collecting sales tax on all products that were sold in or delivered to states that have such a tax. The following do not have sales tax:
- New Hampshire
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. As of July 2021, it holds third place behind Apple and Microsoft, boasting a $1.875 trillion market cap. Another milestone, in July 2020, the company crossed the $3,000 mark for its share price, which has been steadily increasing since. Amazon's founder and executive chair, Jeff Bezos, is frequently the wealthiest person in the world, depending on current market prices.
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. Amazon has significantly outperformed the S&P 500 over the last several decades, but it has been a rocky road at times. In particular, Amazon lost more than 90% of its value when the dotcom bubble crashed.
Here, past returns are clearly not indicative of future results. Amazon's strong performance during the 2020 bear market is a sign that the company is maturing. The thousandfold return available to early investors in Amazon simply cannot be repeated. Without hyperinflation, a trillion-dollar company will never be worth a quadrillion dollars because that is more than the combined value of every stock market in the world.