Amazon’s latest earnings report underscores its ever-expanding dominance in the retail space. The company reported a 55% increase in operating income for the third quarter, and an 84% increase in operating cash flow. With the conclusion of a successful Prime Day and in anticipation of the holiday shopping season, Amazon maintains its position as the leader in e-commerce and continues strategic investments in its business. As of the end of 2023, Amazon holds nearly 40% of the U.S. retail e-commerce market—a staggering lead compared to competitors like Walmart (6.4%), Target (1.9%), and The Home Depot (1.9%).

Amazon’s retail strength reflects its ability to adapt and invest in ways that other retailers struggle to match. As CEO Andy Jassy pointed out in the latest earnings call, “…We have some elements of our customer experience that are really unusual and unlike others. I think we have [a meaningfully] broader selection than almost all the players that you probably have seen and heard of. We have low prices with very significant deals that we go work with our third-party selling partners around key holiday shopping occasions.”

The company has consistently outpaced its retail competitors in year-over-year growth. From 2018 to 2023, Amazon achieved a cumulative annual growth rate (CAGR) of 20%, while Walmart’s growth rate lagged at 5%, and overall U.S. retail sales grew at just 7%. This trend stretches over the past decade, with Amazon’s CAGR at 24%, far exceeding Walmart’s 3% and the broader retail industry’s 5%.

Amazon’s ability to invest heavily in customer experience and its relationship with its third-party vendors has been a key driver of its growth, one that other retailers can replicate with similar success.

Amazon’s Cash-Maximizing Inventory Model

One of Amazon’s key strategies driving its growth is its reliance on a consignment-sales model. This approach has transformed the company’s retail operations by reducing its need to invest heavily in inventory, freeing up capital for strategic investments that propel its dominance. Over 60% of Amazon’s retail business is powered by third-party sellers which reduces Amazon’s reliance on purchasing inventory.

In this model, suppliers retain ownership of products until they are sold through Amazon, significantly reducing Amazon’s financial risk while allowing suppliers to benefit from real-time sales insights. This reduces Amazon’s capital tied up in inventory and helps drive its competitive edge with a diversified product range.

By contrast, other e-commerce platforms and traditional retailers have been slow to adopt this model. On the whole, brick and mortar retailers utilize this consignment model, commonly referred to as scan-based trading (SBT), to facilitate only a small fraction of their sales, thereby significantly limiting their ability to scale with the same agility.

Investing in Growth: Customer Experience

The freed-up capital from Amazon’s inventory strategy has allowed the company to invest heavily in enhancing the customer experience, a critical driver of its success. Data consistently demonstrates the impact of this investment on business growth: brands with greater customer experience bring in nearly 6x more revenue than competitors, and nearly 75% of companies with above-average customer experience outperform their competitors financially.

Amazon continuously optimizes its platform, conducting A/B tests on features like button placements, colors, and other design elements to improve the shopping experience. Notably, Amazon has integrated AI innovations like “Rufus,” its virtual shopping assistant, and AI Shopping Guides, making the shopping experience more personalized and seamless. In addition, they’ve invested in the experience for their sellers, including Project Amelia, an AI assistant that offers tailored business insights to boost productivity and drive growth. This focus on customer experience is a significant factor in consumer loyalty—86% of shoppers report they are willing to pay more for a superior shopping experience. While investing in similar tools, competitors have struggled to match Amazon’s pace and scale.

Fueling Marketing Power

This inventory model has also enabled Amazon to scale its marketing efforts far beyond its competitors. In 2023, Amazon allocated more than $40 billion to marketing, a more than 40-fold increase since 2010. This marketing spend supports all of Amazon’s products and services but is largely fueled by the operating capital freed up by its consignment-based sales model.

In comparison, Target invested just $1.5 billion in marketing in 2022, trailing Amazon, Walmart, and LVMH. This stark difference illustrates how Amazon’s ability to maximize operating cash directly translates into more aggressive and widespread marketing campaigns, driving even further growth and customer acquisition.

Competitors’ Slower Adoption of Consignment Selling

Amazon’s inventory model isn’t unique to the company—other e-commerce platforms, like Wayfair, also rely on consignment selling. However, most traditional retailers have been slow to adopt this approach. Walmart and Target, for example, have only adopted this model in a limited fashion, reducing their ability to free up capital and invest as rapidly as Amazon.

By leveraging consignment early and at scale, Amazon has created a competitive moat that its rivals have struggled to cross. This financial flexibility allows the company to continuously invest in innovation, customer experience, and marketing at levels that outmatch the broader retail industry.

Amazon’s ability to free up operating capital through its consignment-sales model has been a game-changer in the retail industry. This approach not only reduces inventory risk but also provides the company with the financial flexibility to out-invest its competitors in key drivers of growth. As other retailers slowly embrace this model, Amazon continues to set the pace, further entrenching its dominance in the retail market.

Tad Phelps is CEO of Fintech, which supports over 250,000 retail and hospitality businesses. Fintech’s platform automates invoice payment, streamlines payment collection, and facilitates comprehensive data capture for over 1 million B2B business relationships.