Hard to believe that just two decades ago, when current college students were in diapers, there was no Amazon. Now it’s an integral part of the economy. Amazon ushered in massive changes in how we shop. But the company’s story contains a more important lesson about the New American Economy.
Let’s consider first how Amazon has overhauled the way American consumers spend their money. When Amazon went public back in 1997, the online retailer’s offering consisted largely of books. Today, Amazon is a teeming marketplace that has all of our shopping needs covered — from groceries to apparel to electronics. Over the past four quarters, the e-commerce behemoth’s sales numbers dominated other online U.S. retailers with a hefty $94.7 billion in online sales. That figure put it ahead of Apple Inc., Wal-Mart and Macy’s Inc. What’s the significance here? Unlike those other retailers, Amazon has very few brick-and-mortar stores. For now, it operates almost solely online.
With all the news about the “Retail Apocalypse,” store closures, and company bankruptcies, it’s understandable that folks could feel a sense of panic about the current state of the U.S. economy. But take a look at the numbers, and it’s clear that Americans are still spending — they’re just spending differently. For illustration, during the period between the years 2000 and 2016, there was an $80 billion fall in department store sales and a $320 billion rise in e-commerce. A recent study found that 50 percent of all American households have an Amazon Prime membership. The takeaway is that, more than ever before, we are online consumers. And business is booming. We have entered the New American Economy.
How has this spending shift played out in the market? Let’s chart a few numbers, from the date Amazon went public back in 1997 to today. If you put $10,000 in the S&P 500 on that day, your investment would be worth $30,000 today. Had you put the same amount into Macy’s stock, your stock would be worth $10,000. But, say you invested in Apple, then your $10,000 would now be valued at a whopping $2.5 million. And if you’d gone all in on Amazon, your stock value today would be an incredible $4.9 million.
These figures certainly show that online retailing is here to stay. But they also highlight the rise and sustained success of technology-driven companies — the real drivers of the New American Economy.
This is a huge turnabout in the business world. It used to be that every company’s slogan was some iteration of “our people are our biggest asset.” But in today’s economy, the biggest winners’ slogan would read more like “our brains are our biggest asset.” As Amazon has shown, innovation and intellectual capital make up the new big business model.
And Amazon isn’t alone, at all. There’s been a discernible difference in stock performance over the past five years when comparing S&P 500 companies by their “market cap per employee.” This measure of human efficiency essentially divides a company’s total market size by its number of employees. As a group, the top 20 companies ranked by market value per employee have grown over 260 percent over the past five years. Companies with the lowest market cap per employee have a collective performance of only 74 percent over the past five years.
For example, Visa (in the top 20 group) has a market value of about $210 billion and has 11,300 employees. That gives them a market value per employee of about $19 million. On the other end of the spectrum, Target has a market value of $31 billion, and has over 320,000 employees. This gives Target a market cap per employee of about $95,000.
Take first-ranked company Cabot Oil & Gas, a petroleum, natural gas, and natural gas liquids exploration and production company. Cabot has a market capitalization of over $11 billion, and employs only 421 people. That’s right, 421. Cabot isn’t alone.
Household names Facebook and Netflix also topped the list. Other, perhaps lesser-known, companies like Gilead Science (biotech), Verisign (Internet security), Altria Group (tobacco) and EOG Resources (oil and gas) have massive market capitalizations with a relatively small number of employees.
Some of the names you’ll recognize from the bottom market cap per employee list include Macy’s, Whole Foods, Nordstrom, Kroger and Goodyear Tires. It boils down to a basic truth in our New American Economy – companies that are still operating under the same model they had in, say, 2005, aren’t doing as well. While we all still value customer service and brick-and-mortar stores, many of these businesses haven’t kept pace with their more technology-driven counterparts. They haven’t evolved. The market has.
How are these top producers generating huge revenues with fewer people? They’re capitalizing intellect and innovation, not sheer manpower. They’re employing programmers, scientists and researchers to get things accomplished more efficiently. They’re using great minds to develop new products and new modes of product delivery. For these all-stars, it’s all about maximizing intellectual capital.
Regardless of your love for Amazon or Macy’s, the numbers tell a compelling story.
Companies with an eye focused on innovation and technology are faring much better. They make the most of every single employee, and demonstrate that in the New American Economy, a high value is analogous to high intellectual capital and low human capital.
For investors, this doesn’t mean you need to avoid more traditional companies. It just means we should consider your options carefully, with the understanding that in an Amazon era, companies that have been able to do more with less have ended up market leaders. This has always been the case with capitalism, but in a world where the fastest horse is big data and cloud computing … the pace is faster than ever.
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