What is one of Amazon’s biggest blind spots? Small retail businesses.
By the end of 2018, despite having a nearly $1T market cap, Amazon represented about 50% of all e-commerce sales, but only 5% of total retail (Source: https://techcrunch.com/2018/07/13/amazons-share-of-the-us-e-commerce-market-is-now-49-or-5-of-all-retail-spend/). That means that while Amazon is a juggernaut already, 90% of all retail is still happening offline, and 95% of it is hidden from Amazon. From the perspective of a total addressable market, that’s still a huge portion of the pie to win, while still growing the pie as a whole. This graphic shows how much of a lead Amazon has on it’s next best competitors in e-commerce alone.
Amazon’s strategy against the bigger retailers such as Walmart, Costco, Kroger, Walgreens and Home Depot is simply to beat them on consumer convenience, speed of delivery and price, and erode the power of brands. The big retailers have the resources to build systems to learn more about their customers, but most retailers, especially small businesses, have had little to no intelligence on who their customers are and what they’re buying unless they’re using loyalty cards or buying online with an account through that retailer, but even then, solutions are fragmented from punchcards for “Buy 9, Get The 10th Free” coffee cards up to proprietary siloed IT systems with consumer data. They’re operating blind, whereas Amazon knows everything about every purchase I’ve ever made through them.
However, Amazon currently has little to no visibility at scale into the purchasing behaviors of small businesses such as coffee shops, boutique shops, vendors at farmer’s markets, band merch booths, day spas, etc. If you sell your products on Amazon’s marketplace platform, they have all the data about sales and fulfillment through their marketplace, but if you sell things elsewhere (which they are making it increasingly harder to do because Amazon has become the default search engine to search for anything you might buy) they don’t have any direct data and are blind. As a small business owner, the customers aren’t yours, they’re Amazon’s, and you’re just the fulfillment arm. To grow their business, Amazon either need the intelligence of to either continue to grow their 5% market share on their own, or accelerate it with intelligence about what’s happening in the other 95%.
Just in 2018 to 2019, Amazon is projected to increase the percentage of Marketplace sales to over 70% of total transactions which represents third parties selling and fulfilling things on Amazon, not Amazon selling things directly. That set of direct sales decreasingly represents less than 30% of Amazon’s total sales which means Amazon is encroaching on small businesses by being “the place to be” to get products sold and delivered by 3rd parties, moreso than selling directly themselves. This is one strategy, but it needs to be flanked with another strategy coming at the problem from another direction to drive small buisnesses right into Amazon from all directions.
Therefore, I predict that to get access to that data to funnel back into the Amazon platform behemoth, Amazon will make a play to buy Square in the near future. The reason is to gain access both to the small business merchants who increasingly use Square readers and iPad, iPhone and Android terminals and adapters to accept credit cards, Apple Pay, Google Pay, etc. as well as the innovative In-App Payments SDK which allows websites and app builders to take payments via Square’s platform, and to keep track of their customer habits, something they were previously blind on unless it could be done by memory for certain regular customers, but not at scale and not able to quantify trends over time or spotting habits which might indicate a potential customer churn. This is intelligence that previous point-of-sale (POS) terminals, such as NCR, have not provided, or if they do now, are too late to the game to be helpful to their churning customers.
Buying Square would put them “squarely”, as it were, in the middle of small business commerce and allow them to start offering other services to piggyback on that to push out other payment gateway rivals such as Clover, Revel and Stripe, further squeezing them out of the game. Square offers the Point-of-Sale (POS) terminal which not only processes the payments, but offers the customizeable menu to allow merchants to easily add/modify/remove products/services, prices, discounts, bundles, etc. This means access to information about what’s selling, when, where, and how and inversely, information about what’s not selling. At a macro level, now you have information about why Coffeeshop A in one town is doing so much better than Coffeeshop B for selling relatively similar products. Is the price of a flat white the major difference? How many flat whites are made with almond milk instead of regular milk? Does that offering of almond milk influence higher sales from one merchant versus the other? What if Square sent the merchant of the lesser performing store a notification that said, “Coffeeshops that offer almond milk tend to see an 18% increase in daily sales.”? What if Square provided a notification that said, “The weather is going to turn cold tomorrow, stock up on more coffee beans and add another soup option to the food menu.” It’s that kind of data and predictive intelligence which small business owners have not been able to quantify at scale, and have spent a lot of time and money informally A/B testing (e.g. “It’s going to be cold today, let’s also add a chili to the menu and see how it does.”) without the benefit of piggybacking on unfragmented macro-level real-time data from their industry, their regional market, what their competitors are doing, how they rank, etc. This already makes Square a powerhouse of data for small business merchants, and a perfect target for acquisition.
If Amazon could then also merge that Square customer data with its own Amazon customer data to gain a full historical picture of buying habits of its consumers “offline” as well. Imagine Amazon seeing that it’s been a few months of regularly going to that new yoga studio, and it now suggests a new yoga mat and clothing, or inversely, have it delivered to the studio for immediate use. Or that it knows you’ve started a new exercise program from one vendor, and it knows you often get mocha and a bagel on the way to work, so it instead recommends that you get something healthier and you recieve a coupon for getting an açai bowl at another place along your route? Such recommendations would benefit you the consumer becuase the platform is trying to help you achieve your goals, and using macro-level information about your daily habits to route you to try new vendors, new products, etc. and bringing those vendors customers they didn’t previously have before. The coffeeshop that previously sold you the mocha and bagel would see decreased revenue, but they would also get data back indicating that high sugary drinks and carb-loaded breakfast options may be on the decline, and advise them to make changes to their menus or promote other options.
Amazon has already built their own solution to give to merchants called Amazon Pay, but it hasn’t been a major success. It’s been better to let Square continue to grow and expand their footprint, to move upmarket into being the dominant payment platform for larger retailers including payroll and small business loans, and move downmarket into doing interpersonal cashless transactions such as Square’s Cash App to compete with Venmo, PayPal, Apple Pay, etc., and then buy them at a premium at a later date down the road after they are further embedded into other merchants and their moat around the castle is wider and deeper with better analytics. This would be the ultimate retail commerce trojan horse move becuase no matter what the premium is on Square’s valuation, it would forever be a discount to Amazon. It would be to Amazon what buying Instagram for $1B was to Facebook: the greatest deal in their history which at the time looked too expensive to neutralize a competitor and reinforce their dominance and relevance.
Why Square And Not Their Competitors
Simplicity. Reach. Analytics. PayPal is bigger as a whole, but its more peer-to-peer payments on eBay and similar as their merchant solutions are not as widely deployed. Clover, Revel, etc. don’t have the market share or innovation, and are simply competing on lower-cost, high frequency transaction fees. Affirm is probably the next-best competitor on the horizon starting with offering alternative loans to consumers, and then working backwards into doing more transaction based processing. However, Square has the most growth attention right now, the right product design, the right analytics, the right leadership, the right strategy. (Source: https://www.fool.com/investing/2019/02/28/squares-ecosystem-driving-earnings-growth.aspx)
Who else could afford to buy Square though to prevent Amazon from doing that? Well, generally you’d need a set of companies who can a) afford to buy them and b) be motivated either offensively to compete head to head, or defensively to block Amazon from achieving this goal.
Who are those likely competitors?
- Walmart — This is the most obvious competitor to Amazon, but buying Square wouldn’t really fill a void in their strategy. By already having a major retail footprint, Walmart is trying to work backwards from Amazon to be dominant in e-commerce while maintaining the overhead of it’s retail empire.
- PayPal — PayPal would be the next most obvious competitor with the ability to buy Square. PayPal is currently valued at about $113B, which is $32B, which is 3.5X larger than Square. PayPal obviously has hundreds of millions of individual accounts, many of which created during their time as part of eBay, from which they can piggyback additional services onto which makes it popular amongst consumers. However, PayPal isn’t as widely used in retail POS outside of eBay and person-to-person transfers despite having similar solutions for businesses to do both online and in-person purchases. At best, it’s an “also there” on your website as a payment option, but isn’t the primary solution. Buying Square would buy PayPal more relevance from a retail business perspective, as they had also made an acquisition of Venmo to maintain further relevance in the personal payment space. PayPal isn’t innovating the way it use to, so now it must acquire. (Source: https://www.fool.com/investing/2018/08/19/better-buy-square-inc-vs-paypal.aspx)
- Google — If Google wants visibility into purchases made on Apple devices or otherwise outside of Google Pay, this might make sense. Could also be done as a blocking tactic against Amazon given that Google has been losing search market share when it comes to people using their platform to find products to buy, which devalues the Adwords CPMs that they charge.
- Apple — Apple has a fraction of the problem that Google does which is if something isn’t happening on the Apple platform or using Apple Pay, then it’s blind. But do they really care to learn everything that everyone else is buying the way Amazon or Walmart might? It’s not really their main concern, and certainly not one they want to touch being perceived as the “privacy experts” when it comes to not sharing user data and breaking that trust.
- Facebook — Facebook wants to be WeChat and have every communication and transaction occur on their platform. They offer payments via Facebook Messenger, but it hasn’t really taken off the same way that Venmo has for person-to-person payments. Buying Square could take it off the market for Amazon as a defensive play and give Facebook the visibility into offline transactions to further enhance it’s own Facebook Ads platform, but could suffer backlash from consumers concerned that Facebook’s knowlege of their daily buying habits may be done nefariously.
- Microsoft — Microsoft could be a suitor as well to provide a payment gateway solution and analytics into the Microsoft enterprise applications space. You could easily see them offering Square as a service to the same people they are selling Office 365 and Microsoft Dynamics to to have an all in one business and analytics solution.
- JP Morgan Chase, Wells Fargo, Bank of America, Citigroup, American Express, Visa, Mastercard — Technically any of these could buy Square, but it wouldn't necessarily be the best fit. Or more to the point, if Square was approached by any of them for an acquisition, why would they choose to sell to an individual bank when they could hold out for a much bigger offer from Amazon or one of the others above to increase the strategic revenue multiple, all the while watching their stock price continually rise.
Amazon’s Next Move: Personal Finance
The next move that many tech companies are moving into is to become your bank. Fintech services such as Robinhood, M1 Finance, etc are already moving from brokerages to becoming banks. In fact, Square is already providing small business loans to their customers (Source: https://squareup.com/us/en/capital). Next up will be Amazon to move into this space regardless.
You already spend a ton of your disposable income there, why not just have your money go there first? Then Amazon can see all your other transactions as well that aren’t Amazon or Square. Aggregate that data across millions of users, and its the ultimate “start at the end and work backwards” move to identify what else they should pursue for new business. From your checking account transactions, they can see how important cash is to you, how often you’re paid and on average what that is, look for other opportunities to offer you a cheaper mortgage or auto loan payment by refinancing, search for trends like how many times a week you eat out, model and trend future income and spending habits, and become a financing engine for other ventures. Without the overhead of brick and mortar retail locations or the need to make the same interest rates and fees, they could offer fee free banking and investment services by instead selling you other products and services on the Amazon platform.
Square is one of the fastest growing payment system ecosystems due to its innovations, simplicity, straightforward pricing for merchants, wide range of payment types and models it can process, and the analytics it provides to its customers in a previously ignored and underserved market. It’s clean interface means its easy to use by merchants to train up new employees in industries with rapid employee churn. It’s strategy to both go upmarket and downmarket to expand it’s footprint is a stronger one than that of any of their competitors. Amazon should buy Square to gain access to this market after it has expanded further and becomes an even more valuable brand with greater reach, and then merge that into the Amazon platform for greater market dominance and adding value to Amazon customers by having greater visibility over all aspects of consumer behavior online and offline.
Full Disclosure: I own and am long both Amazon (AMZN) and Square (SQ) stocks. I am not a financial adviser. All articles are my opinion and are meant for educational and intellectual purposes only. Perform your own due diligence and consult a financial professional before trading.