Trump's anti-Amazon crusade could actually help the company - even if it leads to sales tax changes and higher shipping rates
- Donald Trump has been railing against Amazon lately in a series of tweets, charging that the company pays too little in state and local taxes and has a deal with the US Postal Service that's costing the latter money.
- The president's tweets may lead to new taxes and higher shipping rates for Amazon, but such moves may end up benefitting the company in the long run, analysts at Morgan Stanley said in a new report.
- Unlike other online sellers, Amazon already collects state sales taxes in most states, and any increase in shipping costs will likely be "manageable," the analysts said.
Amazon investors shouldn't get too worked up about the potshots President Trump has been taking at the company lately, a new research report advises.
Trump's been making a lot of noise about Amazon not paying its fair share of taxes and having a deal with the US Postal Service that's supposedly costing the latter "massive amounts" of money. The president has railed about the company needing to pay more in taxes and higher rates to the USPS. Amazon's stock has been trading down in recent days amid the president's attacks on the company.
It's unclear whether Trump's outbursts will lead to any policy changes. But even if they do, the effect on Amazon will likely be minimal and, ironically, may actually help the company, analysts at Morgan Stanley said in a note issued late Wednesday.
The impact of both new taxes and higher postal rates are both "manageable," the analysts said.
Despite Trump's assertions, Amazon already collects sales taxes
On the tax front, Trump has charged that Amazon pays "little or no tax to state & local governments." The president appears to be referring to sales taxes, which has been a long-festering issue between the e-commerce industry and state authorities.
Many ecommerce outlets and small online vendors still use the loophole to avoid collecting sales taxes. Indeed, many stores and individual sellers who offer goods through Amazon's website don't collect taxes on their sales.
But Amazon itself collects sales taxes on the goods it sells directly to customers in nearly all the states, the Morgan Stanley analysts noted. Indeed, it's been collecting sales taxes in half of all US states for the last two years now.
Because of that, Amazon arguably has a cost disadvantage compared with other online outlets. Its goods ended up costing consumers more because it collects sales taxes, or it has to cut into its profits to offer them for less.
Making all online stores collect sales taxes would help Amazon
As a result any move by the government to put in place a law that would require all online vendors to collect sales taxes could end up being a boon to Amazon, because it would be able to better compete on price, the analysts said.
"Retailers essentially now will be on the same tax-playing field," the analysts said. They continued: "It is not clear where else consumers would go for purchases."
With prices more even across the board, customers would most likely make their purchase decisions on other factors, such as loyalty to particular stores. That's an area where Amazon has an advantage, thanks to its Prime membership service, they said.
There is a risk that more uniform sales tax enforcement might lead to a price war, where online retailers across the board cut their prices to mitigate the new taxes they're forced to collect, the analysts warned. And Amazon may feel compelled to match those reductions, which could cut into its bottom line. But the company has some flexibility to reduce prices, thanks to the large scale of its operations, they said.
"As a base case, we would expect [Amazon] to invest rationally (and with a long-term cash-flow focus)," they said.
Amazon should expect higher - but "manageable" -postage costs
On the Postal Service front, Amazon may well see higher rates as a result of Trump's agitation. While the USPS is likely making money on its deal with Amazon, it's probably giving the company a 50% to 60% discount off its average rates. Amazon's contract with the Postal Service is reportedly subject to renegotiation this year, and the USPS is likely to push for higher rates, the analysts said.
"The USPS needs Amazon," they said.
Of course, Amazon depends on the Postal Service, too. The USPS delivers about 45% of all of the company's packages in the US, according to the analysts. But because of its relatively low rates and Amazon's dependence on other carriers, the money it pays the USPS each year is a smaller fraction of its shipping costs than that volume would indicate.
As a result, even if the Postal Service hiked its rates dramatically, Amazon's overall costs wouldn't go up that much. A 10% jump in rates would increase Amazon's overall operating costs by about $713 million a year, or about 0.3 percent, according to the report. A 50% jump in rates would increase Amazon's costs by about $3.6 billion, or about 1.4%.
"Even this bump up in shipping costs feels manageable," the analysts said.
Such a move would obviously affect the company's profitability, but it would also likely encourage the company to further build out its own delivery network, the analysts said. That's what Amazon did in Japan in response to a price hike from the local postage service.
Such an investment "would weigh on near-term profits but likely lead to higher long-term profitability," they said.