Amazon.com (NASDAQ:AMZN) is one of the biggest investments in my Stocks and Shares ISA. And the reason is simple – I think its long-term strength is incredible.
The key to this is its business model. But there’s a UK firm with a £6.24 share price that I can see doing something similar – and investors haven’t noticed yet.
Amazon
While AWS is often the focus for investors, Amazon’s marketplace is its largest revenue stream. It’s the biggest and the best in the industry by miles.
The trouble is, margins in this part of the business aren’t intrinsically huge. But that misses an important point.
Amazon uses its marketplace strength to generate other high-margin revenue. Specifically, this comes from its Prime membership.
The company uses this to put its marketplace even further ahead of its rivals, which leads to more subscriptions. And so on.
This is an extremely powerful business model. And I can see a FTSE 250 company that’s looking to make a similar move.
JD Wetherspoon
I’ve been a bit lonely in having a positive view of JD Wetherspoon (LSE:JDW) shares recently. And that’s fair enough.
Investors have been concerned about the impact of cost inflation. That’s been true across the industry, but especially with the FTSE 250 firm.
A focus on customer value seems to limit its ability to offset rising costs with price increases. And management reinforced this view.
In its last update, the company stated that this year’s profits might be lower than expected. And the stock has been faltering as a result.
There’s no way around the fact that higher costs are a risk. But I see the company making a move to replicate Amazon’s business model.
Franchises
Until recently, JD Wetherspoon hasn’t had a source of revenue like Amazon’s high-margin subscriptions. But that’s changing.
The firm has started opening franchised venues run by local operators. And Wetherspoon’s provides the central admin and IT systems.
Importantly, partners also benefit from the company’s buying power. This gives them huge cost savings.
That’s been the key to JD Wetherspoon’s lower prices. So it’s a huge advantage for these partner venues.
Early signs are that this has been transformative for the venues, which is great. But it’s the FTSE 250 firm I’m interested in.
A game-changer?
What does JD Wetherspoon get from letting other operators use its supply chain? Three very big, very important advantages.
The first is a franchise fee (as well as a possible percentage of revenues). And this comes at virtually no cost to the company.
The second is that the firm benefits from expansion with none of those rising costs. These are left to local operators.
The third is that it gets additional scale. And this reinforces the firm’s key strength, which is its ability to buy in bulk.
I think those are some key advantages. Especially with rising costs making things tough for hospitality companies.
A bargain buy?
JD Wetherspoon’s scale has always given it a cost advantage. But it’s starting to turn this into a source of high-margin revenues.
This could be extremely powerful. It both reinforces the firm’s key competitive strength and widens its margins in a time of higher costs.
It’s the model that’s worked for Amazon. And it’s another reason I think investors should take a closer look at £6.24.
