Amazon got its start in 1995, selling books to online pioneers and, at blistering speed, adding everything from engagement rings to lock boxes for kids' mobile phones until it became "the everything store."
Add the convenience of speedy delivery to your doorstep, and customers have rewarded Amazon with open wallets.
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. Directly and indirectly, the company has an impact on inflation, wages, and the profits of businesses large and small.
Key Takeaways
- Amazon's overhead costs are much lower than other retailers because the vast bulk of its business is done online.
- Amazon has succumbed to pressure to increase its wages, causing a ripple effect through retail.
- Amazon pays some tax, but not as much as one might think given the size of its business.
- Amazon has been a fantastic investment in the past, but those returns may be tough to duplicate in the future.
The Retail Giant
Today's Amazon is responsible for 37.8% of all online retail sales in the U.S. The company made $12.9 billion in the U.S. in just two days on its Prime Day 2023.
If you consider the macro picture, consumer spending anywhere is a good thing for the economy because it contributes to the gross domestic product (GDP). That said, spending on Amazon is not significant enough to tip the GDP scale. Yet.
How Amazon Tames Inflation
Amazon disrupted traditional retail and accelerated the demise of struggling players. Its focus on online sales means its overhead costs are significantly lower than those of big-box retailers. That gives Amazon the edge to undercut its 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 that norm as well.
Competition forces prices lower and limits the ability of companies to pass on any wage increases to consumers. Those worries were heard 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 mid-2023, Amazon employed approximately 1.5 million people worldwide, and that represented a decline of more than 4% from the previous year.
It's a lot of people, but it's significantly less than rival retailers with a big real-world imprint. Walmart (WMT) employs about 2.1 million people worldwide.
Amazon also engages many 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. It creates jobs. On the other hand, hiring contractors helps the company skip the costs of employee benefits.
Another angle of the jobs conversation is how many jobs Amazon is eliminating as big chains like Sears, Toys 'R Us, and Pier 1 Imports bite the dust. 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 contribute to overall employment.
Criticism of Amazon
Amazon has been criticized for its low pay for employees, particularly in its vast network of warehouses, and to give it credit, it is addressing the issue.
The company came under fire in 2018 from U.S. Sen. Bernie Sanders of Vermont, who introduced a bill called Stop Bad Employers by Zeroing Out Subsidies, or the Stop BEZOS Act. The bill would have levied taxes on large corporations whose salaries were so low that their employees had to rely on public benefits to make ends meet.
The bill didn't pass but Amazon raised its minimum wage in the U.S. to $15 per hour that same year. nearly twice the federal minimum wage of $7.25 per hour.
Meanwhile, Amazon's quest for innovation and technology to achieve operational efficiency has many worried about the elimination of jobs.
Those worries are not far-fetched. The company has introduced cashier-less Amazon Go stores in several large U.S. cities, is experimenting with drone delivery, and is expanding the use of robots in its warehouses.
A Facilitator of Small Businesses
Amazon's infrastructure has benefits for other businesses, especially small businesses that could not otherwise dream of access to such logistics. Listing their products on Amazon helps them increase their customer reach, and delivery essentially becomes Amazon's headache.
Today, nearly two million retail "partners," most of them small or medium-sized businesses, list their products on Amazon.
As small businesses thrive, further job creation and spending are bound to happen. Those partners employ about 1.5 million people in the U.S. alone.
Amazon as a Taxpayer
Income Tax
Amazon is structured to minimize corporate income taxes. The company reinvests its 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.
Nevertheless, the numbers could be galling to some taxpayers. In 2021, the company's effective federal income tax rate was 6.1% on U.S. income of $35.1 billion.
It's hardly the only big company in the low-tax bracket. That same year, JP Morgan Chase had an effective federal income tax rate of 5.9%, and General Motors paid 0.2%.
Amazon pays 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.
The statutory corporate tax rate in the U.S. has been set at 21% since 2017.
Sales Tax
Sales taxes are a complicated subject with the rates and rules set by each state. But in most cases, the states that have a sales tax require it to be collected when the seller has a physical presence in the state.
Amazon, like most web retailers, avoided burdening its customers with state sales taxes in most jurisdictions until that practice ran up against its goal of placing a warehouse within reach of every consumer everywhere.
Beginning in 2018, Amazon started collecting sales tax on all products that were sold in or delivered to states that have such a tax. The following states do not have sales tax:
- Alaska
- Delaware
- Oregon
- New Hampshire
- Montana
Investing in Amazon
Amazon became the second trillion-dollar company by market capitalization on Sept. 4, 2018. As of late August 2023, it was the fourth-largest U.S. company by market cap, behind Apple, Microsoft, and Alphabet.
Amazon's founder, executive chair, and the company's biggest shareholder, Jeff Bezos, is frequently the wealthiest person in the world, depending on current market prices. As of late August 2023, he's lagging in third place behind Tesla founder Elon Musk and French luxury goods king Bernard Arnault.
But Amazon made its stock market debut in 1997 and tanked when the dotcom bubble burst in 2000. It was only in about 2013 that Amazon stock started moving.
Its progress since has been rocky at times but impressive overall, climbing from under $20 a share in 2014 to about $133 a share in August 2023. At its recent peak, in June 2021, it hit about $185 per share.
As always, past returns are not indicative of future results. Amazon's strong performance during the 2020 bear market reflected its catbird seat for the pandemic, but may also be a sign that the company is reaching its mature stage. The spectacular returns available to some early investors in Amazon are unlikely to be repeated.
What Businesses Does Amazon Operate Besides Retail?
Amazon is best known to consumers as a seller of a vast variety of goods, from Apple watches to Ziploc plastic bags. But it owns and operates many other businesses, most of them spinoffs from its retail empire:
- Amazon Web Services is its cloud computing subsidiary for individuals, companies, and governments.
- Amazon Studios produces entertainment content for Amazon Prime Video.
- Amazon Music is its platform for music streaming and music sales.
- Amazon Prime Video is a subscription streaming service, available as a standalone or with Amazon Prime membership.
- PillPack, the online pharmacy, is an Amazon subsidiary.
- Amazon Robotics is a manufacturer of robotic fulfillment systems.
- Ring, the home security device manufacturer, is an Amazon subsidiary.
- Amazon sells other devices, notably the Kindle e-reader and the Alexa virtual assistant.
Amazon is also the owner or majority owner of Zoox, a manufacturer of autonomous vehicles, Kuiper systems, a satellite internet service, and Whole Foods Market.
How Many Warehouses Does Amazon Operate?
At last count, Amazon had more than 185 warehouses, which it calls fulfilllment centers, in North America and Europe.
There seems to be some room for growth here: There are none listed in Latin America, Africa, or Asia.
What Has Amazon Failed At?
Amazon seemingly will try anything, so it's not surprising that it has done a few faceplants over the years:
- Amazon pop-up stores, where customers could test-drive gadgets like Amazon Echo and Fire TV, were deemed an expensive failure, and all 87 stores shut down.
- Amazon Instant Pickup failed to catch on, although its related network of lockers for pickup lives on.
- Amazon Destinations was a brief foray into competition with travel booking sites.
- The Amazon Fire Phone was a thing, but not for long.
The Bottom Line
Amazon has to be near the top of any list of internet disruptors. It continues to change our world, with ripple effects through the U.S. and world economies.
It may not be able to grow its retail businesses at the blistering pace of its early years. Its future successes may rely on other areas of growth such as cloud computing, streaming media, and logistics.
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