Cape Town 22 July 2019

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Book your seat at the Allan Gray Investment Summit taking place on 22 July at the Cape Town International Convention Centre and 23 July at the Sandton Convention Centre.

The next big things
by Tom Slater, Head of US Equities at Baillie Gifford, and Long Term Global Growth

Baillie Gifford first invested in Amazon around 15 years ago. At that time, the company was regarded largely as an online disruptor of traditional bookshops.

We have subsequently followed with interest as Amazon has moved into other businesses. We've also benefited from the accompanying sustained rise in the share price. During a recent discussion with its founder and chief executive Jeff Bezos, we gained our latest insights. This emphasised how the company has evolved and reaffirmed many of our views on its prospects from here.

Bezos focused on four areas: Amazon's virtual assistant Alexa and its media, grocery and cloud computing businesses.

The first of these is not new. The Amazon Echo speaker and Alexa, its integrated voice assistant, are already ubiquitous. Cursory analysis might suggest that the smart speaker market is maturing, and the fastest revenue growth phase is behind us. It will be another contributor to a slowing top line at Amazon over the coming years.

It is precisely this narrow type of thinking which has led Wall Street to underestimate Amazon for the past two decades. It's true that the smart speaker market is no longer of much interest. But Amazon has laid the foundations of a new era of computing. It has created an expectation that we ought to be able to speak to our devices. Alexa, is coming to your microwave, your television, your car, and even your bicycle. Ambient computing is becoming a reality.

Importantly, Amazon now has over 100 million Alexa-enabled devices in circulation which means it is collecting data faster than rivals. Its competitive edge is increasing. On the subject of media, in the past we have focused on the distinction between offline and online. The issues have moved on and so has our portfolio. Today, Amazon and Netflix, along with Tencent and Alibaba, dominate the Long Term Global Growth portfolio's media exposure.

We are seeing the accelerating decline of the traditional media industry. Since 2011, Netflix has grown from around 25 million subscribers to almost 140 million today. Amazon's outlays were just under US$5 billion on content last year, close to double the levels of many of the bigger traditional media companies. As the company is data-driven, this spending is motivated by the information derived from customer spending patterns. When a Prime member watches their first piece of content on Prime Video they become a much more committed Prime member. Renewal rates improve.

Bezos' third topic was grocery. As recently as five years ago it might have seemed that the food industry would be one of the last to be affected by digitalisation. Instead it has become one of the most interesting parts of the online market. As Amazon seeks to offer a broadening array of services to its customer base, grocery is clearly a priority. It is a huge market which has seen very little radical thinking.

The UK has one of the most e-commerce-penetrated grocery markets in the world, yet online sales still account for only 7% of the total. Elsewhere in the world, penetration is lower still. The frequency of purchase and the scale of the market make the sector very attractive for technology-led entrants. Today's customers are looking for a combination of physical stores, click-and-collect and home delivery. This is a battle that is likely to consume capital and take time to develop.

Technology is enabling some amazing experiences. At one of the five Amazon Go stores in Seattle and San Francisco, you can scan your mobile on the way into the store, pick items from the shelves and walk out. No item-scanning, no tills, no queues: just cameras and machine intelligence. This is a meaningful improvement on the customer experience in a traditional store. The key to achieving success is rich data on the customers, an area in which a traditional food retailer has no experience.

The final area Bezos mentioned was cloud computing. At a superficial level this can be described as the move from on-premise systems to third party infrastructure. We think the change is more profound and should really be thought of as the digital transformation of enterprise. It is being driven by information technology becoming a central and strategic activity for many businesses. This isn't a technology cycle, it is a fundamental change that will play out over decades.

As ever, we were impressed by Bezos and particularly his foresight. We also remain convinced of the benefits of having access to him and his thinking, as it allows us to better understand the potential for future returns.

Baillie Gifford will be presenting at the Allan Gray Investment Summit in Johannesburg and Cape Town in July 2019.

Book your seat at the Allan Gray Investment Summit taking place on 22 July at the Cape Town International Convention Centre and 23 July at the Sandton Convention Centre.

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