Thomas paulson amazon and retail

Why Amazon is bigger more impactful than believed
and where is it going
All rights reserv ed, Inflection Capital Management, LLC 1
Topic

1) Amazon’s Gross Merchandize Volume (GMV) vs. Revenue
❑ Amazon’s North America GMV will be ~ $236B in 2018, 64% larger than Walmart US’ $144B non-grocery business.
❑ The GMV from Walmart.com & Jet.com will be ~$19B in 2018; Amazon is 12.5X larger. Target’s will be ~$5B.
❑ Amazon’s total GMV momentum is building. It is still on the front-side of its S-curve.
2) E-Commerce Share and Growth.
❑ The press, analysts, and industry generally have a poor understanding of what the e-Commerce and Amazon
share are of retail.
❑ That misunderstanding has led to inadequate anticipation and adaptation to Amazon’s impact on retail. We
have seen a lot of reaction and very little of proactive strategy.
❑ Amazon’s market share gains and its impact on retail are accelerating.
3) Understanding Amazon’s Business and Profits.
❑ Amazon’s North American retail business has experienced substantial growth in margin rate and profits.
❑ Amazon makes plenty of margin, profits, and cashflow. These are invested back into international expansion
and new flywheel enhancing initiatives such as Alexa.
Bigger and more impactful than believed

Retail Business
1
All rights reserv ed, Inflection Capital Management, LLC
2014 Mix
$89B Revenue
2017 Mix
$172B Revenue
1P Product Sales
1P Product Sales
Whole Foods
Amazon
Web Services
(AWS)
Prime
RevenueAd
Revenue
3rd Party
Seller Services
3
Level Set: Amazon’s Revenue Mix & Growth

North America ($ million) 2015 2016 2017
Revenue
Subscription Fees $2,814 $4,125 $6,325
Advertising $1,553 $2,706 $4,201
Whole Foods $5,798
1P Sales $48,465 $57,048 $67,696
3P Fees $10,877 $15,905 $22,091
Est. Take Rate 20% 20% 20%
Est. GMV $54,387 $79,523 $110,456
Est. Total GMV $102,852 $136,571 $178,152
% Growth 28% 33% 30%
Total Revenue $63,709 $79,784 $100,313
Impact on the retail industry is felt through GMV
o Subscription fees are akin to a Costco membership
o Advertising revenue is really a slotting-fee
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Level Set: Deconstructing Amazon’s NA GMV from Revenue

North America ($ million) 2012 2013 2014 2015 2016 2017 2018e 2019e
Est. Total GMV $46,847 $59,964 $76,753 $102,082 $136,182 $179,031 $236,321 $297,764
% Growth 34% 28% 28% 33% 33% 31% 32% 26%
$ Growth $11,886 $13,117 $16,790 $25,329 $34,100 $42,849 $57,290 $61,443
Growth Factor 1.1 X 1.3 X 1.5 X 1.3 X 1.3 X 1.3 X 1.1 X
Source: Inflection Capital Managementestimates
2017 Comparisons
Walmart-US +$10B
Costco-US +$7B
Home Depot-US +$6B
Momentum = mass x velocity
✓ Amazon’sMomentum in 2017 = $43B
✓ Walmart’s Momentum early-2000s:+$17B
✓ Home Depot: early-2000s:+$8B
Amazon’s GMV momentum has held steady for multiple years
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Level Set: Amazon’s GMV Momentum
Unprecedented

Billions
2017 Revenue
1
2
Amazon’s Projected North American GMV

Billions
2017 Revenue
1
Amazon’s Projected North American GMV

Why Does Amazon Have Such Momentum?

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2 3
4
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Brand & Service Affinity Rankings by Consumers

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1
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Amazon dominates Consumer Consideration, Ruling the Top of the Funnel

Allrightsreserved,InflectionCapitalManagement,LLC
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Lower Friction
Low Prices
One-Click
Low(er) Shipping Costs
Prime
Expand Selection
New Categories
New Vendors & House Brands
New Services
3rd Party Sellers
DTC Relationship Allows for
AlgorithmicallyOptimizing
Each Level of Sales Funnel
Funds More
Prime Benefits
Content
Speed of Delivery
Whole Foods Discount
More Traffic
More Volume
Faster then the Norm Delivery
Alexa Ordering
Channel Shift
& Growth
More Prime
Members
More
Margin
Dollars
Increased Route Density
=
Cost Advantage
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9
#
Amazon’s Flywheel
Purchase

560m items for sale (1)
$110B in NA 3P sales(2)
80m US Prime member (2)
$6B in Prime Video Content
Deep route density → < $2 delivery cost
13
Amazon’s Flywheel
Walmart.com’s Flywheel
75m items for sale
$4B in NA 3P sales
No membership program
Is there even room for another one?
Store associate home deliver
Sources: (1) ScrapeHero; (2) ICM
The Amazon Flywheel vs. Walmart.com’s

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1
2
I’ve seen other survey’s saying the number is above $3500
Membership Models are about Capturing Mindshare & Wallet-Share

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MS’ Survey states 43% of people have purchased apparel on Amazon in past year

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1
2
Source: ScrapeHero
Apparel was a Big Win in Category Expansion

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Amazon is now #2 in Apparel

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Amazon is now #1 in apparel for millennials

1
2
1) It’s important to all consumers
2) Apparel is a big consumer category with larger than average gross margins; it can
move the needle for Amazon
3) Its smaller cube and weight are benign to fulfillment and shipping costs
Why Amazon Focused on Apparel

Book CD Electronics Jeans Sneakers Housewear Furniture
$10.00 $12.50 $40.00 $40.00 $90.00 $150.00 $300.00
B&M Retailer Barnes Tower BestBuy Gap Foot L Bed Bath Pier-1
Gross Margin Rate 28% 30% 24% 36% 27% 43% 42%
Amazon Price Discount 10% 10% 10% 10% 10% 10% 10%
Margin Dollars $1.80 $2.44 $5.60 $10.40 $15.30 $49.50 $96.00
Earned the right to play and won consumer trust & consideration
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Amazon climbing up the margin continuum

Amazon Toys-R-Us
Retail Price $36.00 $40.00
Merchandise Cost $26.24 $25.60
FC Costs $3.24 $0.00
Net Shipping Costs $1.80 $0.00
Rent $0.00 $2.00
Labor Costs $0.00 $6.20
Contribution $4.72 $6.20
Marketing $1.44 $2.00
Other Costs $1.62 $3.80
Contribution $1.66 $0.40
Interest Costs $0.00 $2.00
Contribution $1.66 -$1.60
Margin Rate 4.6%
2006 Margins
Walmart US 7.5%
Target 7.5%
Bed Bath 15.2%
Pottery Barn 10.1%
Kohl's 10.5%
Amazon could offer a 10% lower price because:
✓ It had a substantially lower cost structure
✓ It had no debt
✓ It hasn’t beholden to a high margin structure
expected by Wall Street or its owners
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Margin Rate/Business Model

What is e-Commerce’s share of retail?
1) Under 10%
2) 10 - 15%
3) 15-20%
4) Over 20%
E-Commerce Share & Growth

$ Billions Unless Noted 2012 2013 2014 2015 2016 2017
(D) US Online Sales (US Census, non-SA) # $230 $261 $299 $343 $391 $453
YoY Growth 13% 14% 15% 15% 16%
Minus
Amazon 3P Fees $4 $6 $8 $11 $16 $22
Plus
(J) Est. Amazon NA 3P GMV $19 $29 $40 $54 $80 $110
Minus
Est. eBay US Mkt Place Fees $2 $3 $3 $3 $3 $3
Plus
eBay.com GMV ex. Auto $25 $29 $31 $32 $33 $34
(E) Total GMV Adjustment $38 $49 $60 $72 $94 $120
(F) D + E GMV Adjusted US eCommerce Sales $268 $310 $359 $415 $485 $574
YoY Growth 16% 16% 16% 17% 18%
US e-Commerce GMV is $120B more than conventionally believed
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The Right Numerator

What retail?
E-Commerce Share & Growth

(A) Adjusted US Retail Sales non-SA # $1,872 $1,923 $1,986 $2,052 $2,098 $2,152
ex. vehicles, grocery, non-store retail 2.7% 3.3% 3.3% 2.2% 2.6%
gas stations, fuel dealers and eat & drink
YoY Growth 16% 16% 16% 17% 18%
(I) A + F GMV Adjusted Retail -ex Food, etc. $2,140 $2,233 $2,344 $2,468 $2,583 $2,726
YoY Growth 4.4% 5.0% 5.3% 4.7% 5.5%
For the right understanding we need to look at the right market.
We are not considering auto, gas, restaurant, and grocery sales.
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The Right Denominator

(A) Adjusted US Retail Sales non-SA # $1,872 $1,923 $1,986 $2,052 $2,098 $2,152
YoY Growth 16% 16% 16% 17% 18%
(I) A + F GMV Adjusted Retail -ex Food, etc. $2,140 $2,233 $2,344 $2,468 $2,583 $2,726
YoY Growth 4.4% 5.0% 5.3% 4.7% 5.5%
F / I % eCom of Adjusted Retail 12.53% 13.90% 15.29% 16.83% 18.78% 21.05%
YoY Sh Ch 137 bps 140 bps 154 bps 195 bps 227 bps
21%! is the right answer
The Right Answer
1

Adjusted US Retail Sales non-SA # $1,872 $1,923 $1,986 $2,052 $2,098 $2,152
Total GMV Adjustment $38 $49 $60 $72 $94 $120
GMV Adjusted US eCommerce Sales $268 $310 $359 $415 $485 $574
YoY Growth 16% 16% 16% 17% 18%
GMV Adjusted Retail -ex Food, etc. $2,140 $2,233 $2,344 $2,468 $2,583 $2,726
YoY Growth 4.4% 5.0% 5.3% 4.7% 5.5%
% eCom of Adjusted Retail 12.53% 13.90% 15.29% 16.83% 18.78% 21.05%
Total Amazon NA GMV $47 $63 $80 $103 $137 $178
YoY Growth 30% 34% 28% 28% 33% 30%
Amazon GMV / Adj Retail 2.2% 2.8% 3.4% 4.2% 5.3% 6.5%
Amazon GMV / Adj US eCommerce 17.6% 20.3% 22.4% 24.8% 28.2% 31.1%
27
Amazon is 6.5% of total adjusted retail and 31% of e-Commerce.
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The Right Perspective

Billions
28
Total US Retail Sales +4.5% growth
+0.7% growth
33% of
retail
1
2
3
The Right Outlook

3)Understanding Amazon’s Business and Profits.

Amazon is looking for categories that drive traffic, membership and margin, that add momentum to the flywheel
North America ($ million) 2010 2011 2012 2013 2014 2015 2016 2017
1P Sales $15,237 $21,396 $28,607 $34,081 $40,727 $48,465 $57,048 $67,696
Advertising $116 $167 $224 $255 $334 $732 $1,130 $1,596
Net Sub Fees $179 $202 $271 $310 $398 $756 $762 $1,187
Net Revenue $15,532 $21,765 $29,102 $34,646 $41,459 $49,953 $58,941 $70,480
Merchandise Cost $13,180 $18,299 $22,958 $26,588 $31,071 $36,744 $43,015 $50,786
%1P Sales 87% 86% 80% 78% 76% 76% 75% 75%
Shipping Costs $723 $1,051 $1,424 $1,798 $2,507 $3,595 $5,590 $8,014
COGS $13,903 $19,350 $24,382 $28,386 $33,578 $40,339 $48,606 $58,799
Gross Profits $1,629 $2,415 $4,720 $6,260 $7,881 $9,613 $10,335 $11,681
% of Net Revenue 10.5% 11.1% 16.2% 18.1% 19.0% 19.2% 17.5% 16.6%
Fullfillment Costs $1,020 $783 $1,496 $1,506 $1,815 $2,156 $1,954 $2,484
Contribution Profits $609 $1,632 $3,224 $4,754 $6,065 $7,457 $8,381 $9,196
% of Net Revenue 3.9% 7.5% 11.1% 13.7% 14.6% 14.9% 14.2% 13.0%
Comments:
1) Deconstruction based uponICM estimates.
2) Subscriber fees, adv ertisingrevenue, andfulfillment costs allocated as a % of GMV.
Profits pre- Marketing, R&D, & HQ costs
2
1
3
North America Retail Rearranged: 1P

31
For every 10X increase in a sellers size, there are 10X fewer sellers. Most sellers contribute to the long-tail, while a
relatively small number drive the majority of the volume. 25% of the GMV is driven by the top-1000 sellers.
Source: Marketplace Pulse
3P Also a Scale Business

North America ($ million) 2010 2017
Consolidated
1P Contribution Profits $609 $9,196
3P Contribution Profits $1,350 $16,913
Other Expense -$1,156 -$6,520
% of 1P 7.6% 9.6%
% of 1P & 3P 6.7% 7.3%
Segment Profits $803 $19,589
Investment $0 $16,753
Operating Profits $803 $2,837
1P & 3P businesses produce substantial profit growth,
that is invested back into R&D and new opportunities
Comments:
1) Deconstruction based uponICM estimates.
2) “Investments” is deriv edas the remainder ofthe 1P & 3P profit calculations.
Substantial R&D and New Market
Investment such as the Echo
R&D Comparatives:
Microsoft: $13.0B
Google: $16.6B
Apple: $11.6B
Alexa and voice search
are the next drivers for
more flywheel
momentum. But others
are in the works.
North America Retail Rearranged
1
2
3

2016 2017 2018e 2019e 2020e 2021e
NA GMV ($B) $137 $177 $227 $276 $331 $397
YoY $ Ch $34 $41 $50 $50 $55 $66
YoY % Ch 33% 30% 28% 22% 20% 20%
NA Prime Members EOP 70 83 95 106 115 121
YoY Ch 18 13 12 11 9 6
GMV per Member $2,246 $2,321 $2,560 $2,764 $3,010 $3,381
YoY % Ch 3% 10% 8% 9% 12%
33
When Prime matures, growth needs to come increasingly from spend per member.
That is to come from Alexa, new categories (FMCG), & Services
❑ Amazon’s revenue growth is contingent upon: 1) finding new ways to make Prime members’ lives easier, 2)
increasing the brand affinity and love for Prime, 3) sourcing more areas of gross profit dollars to enhance
Prime’s membership value, 4) expanding into new areas of consumption, 5) significantly building wallet
share, and 6) leveraging more network effects to increase the Amazon-flywheel’s momentum.
❑ Adding more selection from a consumption perspective is needed to meet investor expectations for GMV
growth as Prime member growth is slowing due to peaking penetration of households.
❑ To maintain its stock’s trajectory and Amazon’s talent acquisition momentum, Amazon needs to produce
nearly 20% US GMV growth (or more) and $17B in total gross profit $ growth annually.
Amazon Prime’s Contribution to the Flywheel’s Momentum Moderating
Growth from
New Wallets
Growth from
Wallet Share

Flywheel Momentum Accelerators
Alexa
Whole Foods 365
• Brand &
• PL SourcingCapability
Whole Foods Stores
• 10% off for Prime Membership
• Explore Kindle, Alexa, &
Amazon’s brands
In Home Advisor
Home Services
Fire & TV Devices
5G Wireless
Voice Search
Healthcare
• Prescriptions
• Insurance
Travel Market
My
speculation
Based upon
size of GP-$
Entertainment
• Twitch (e-gaming)
• Video subscriptions
• Bundles (channels)
• Mov ie theater attendance
34All rights reserv ed, Inflection Capital Management, LLC

Summary
1) Amazon’s Gross Merchandize Volume (GMV) vs. Revenue
❑ Amazon’s GMV momentum is what impacts the retail industry.
❑ Amazon’s total GMV momentum is building. It is still on the front-side of its S-curve.
❑ Moreover, that size of that momentum is unprecedented and the company will soon eclipses Walmart, Costco, and
Target combined.
❑ Amazon’s momentum is driven by its flywheel that is gaining in size.
❑ A key driver of the flywheel is Amazon’s obsession on the consumer and focus on removing transactional frictions
2) E-Commerce Share and Growth.
❑ E-Commerce is 21% of the retail industry ex-grocery, restaurants, gas, and auto.
❑ Amazon has 31% of e-Commerce share and 6.5% of US retail.
❑ By 2023, e-Commerce will become 1/3rd of US retail and Amazon will be 16%.
3) Understanding Amazon’s Business and Profits.
❑ Amazon’s North American retail business has experienced substantial growth in margin rate and profits.
❑ Amazon re-invests those profits into strategies that will propel its flywheel like Alexa and voice-search.
❑ Amazon will soon be looking for areas to significantly grow wallet-share vs. new Prime members.

Day-2,
1) Why the retail industry has been hit so hard in the 2010s.
2) What the retail industry looks like in five years.

Thomas paulson amazon and retail

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