Is Amazon an unstoppable behemoth that will eventually devour the entire retail sector as we know it? Or is there a hidden Achilles heel that could potentially thwart the Seattle-based company’s seemingly unstoppable momentum?
These questions have been on the minds of our analysts and investment strategists in the aftermath of the online retailer’s $13.7 billion acquisition of Whole Foods last month. Following Amazon’s entrée into the brick-and-mortar grocery business, market participants of all stripes want to know – which sector will this juggernaut disrupt next?
Manufacturers who sell products to consumers through retailers are being disrupted by Amazon across a range of sectors, including food, clothing, and home furnishing, just to name a few. To learn more about what Amazon’s rise means for the future of retail, as well as how competitors are responding, we recently hosted John Delano, Co-Portfolio Manager of the Oppenheimer Global Equity Team, and several analysts from the U.S. Equity team, on the OppenheimerFunds World Financial Podcast.
We explored what Wal-Mart and Target are doing to fight back, why Amazon hasn’t succeeded in China and potential vulnerabilities in its business model. Here are some highlights from the episode.
Brian Levitt, Senior Investment Strategist: In the past, from what I understand, Wal-Mart tried to buy Amazon. Target even once had an agreement in place with Amazon. How did that work out for these two companies, and what’s happening with them now?
Kristin Ketner Pak, Director of Equity Research, Co-Portfolio Manager of the Oppenheimer Main Street Team: Given Wal-Mart’s scale, they can and are spending tremendously to fight Amazon. They made an acquisition last year, Jet.com, and have given the CEO of that company, Marc Lore, free reign to run their ecommerce business separately and spend as much as necessary. Market share and top line growth is all that matters. Their losses in dotcom are estimated to be over $1 billion.
Target is at the other end of the spectrum, which is surprising given its scale and its size. It was very, very late to embrace dotcom, and it was only just three or four years ago that they had their online platform on Amazon. That was like letting the fox in the hen house. This wasn’t sustainable, so they embarked on developing their own site, but definitely got a late start.
Wal-Mart has been the most assertive, aggressive and responsive out of the two in my view.
Levitt: Based on how this is playing out, are there companies or sectors that are now un-investable in your opinion?
Mary Dugan Sheridan, Director of Equity Research: It’s very broad. If you look at Amazon’s share, they currently have an online share of 70 percent in books, consumer electronics and music. They have 50 percent share in consumer products and 28 percent in apparel and fitness. These are the categories where Amazon is making inroads, and we’ve seen store closures as a result.
To digress a little bit, I think we’re at a tipping point with store closures. Last year there were about the same number of retailer openings and closings. This year, however, through July, the closures have outpaced openings by about 65% for bricks-and-mortar. So we’re at a tipping point there, which tells you that a lot of areas may have become un-investable. Apparel is very difficult, and Amazon has spoken about areas of focus such as grocery, apparel and home.
The areas that we thought were safe seem to be under duress just because of rumor and fear. More recently, that includes auto parts retail, and possibly even beauty and event ticketing. These are areas that Amazon doesn’t seem to have a big presence yet, but is open to entering.
Levitt: Many of us are Amazon Prime addicts. We stream the shows. We’ve got the boxes coming. We’re paying the fee. But is this monopolistic? Could this get busted up at some point?
Dugan: It’s an interesting question, because Amazon is helping customers with lower prices and convenience, in my view. It’s so much more than just online shopping. They’ve added video and music – automated ordering. Alexa and Echo are now in our homes to help us navigate such things as song and music and even “Jeopardy!” It’s a great thing for consumers, but is very disruptive to the retail establishment. And as Amazon gets larger and larger, and goes into underpenetrated areas – I wouldn’t be shocked if the government steps in at some point.
Gregory Brown, Income Strategist: Where do you see the pain points for Amazon?
Dan Hozian, Senior Research Analyst: For the last 15, 20 years, Amazon has been able to fly above the battle field to a certain extent in the retail landscape where they’ve come at it as this ecommerce or structure player. But what we’ve seen in the last 12 months is Amazon increasingly moving into the brick-and-mortar world. Obviously their purchase of Whole Foods Market – getting the 450 store locations – is a big key and sign for that.
But additionally, they’re expanding their fulfillment center operations within 20 miles of their end consumers. They want to invest heavily in market logistics to try to get goods to consumers as quickly as possible. Prime same-day delivery is in a lot of major market cities. In Denver, just within the last year, they’ve gone from mandatory two-day to mandatory one-day shipping. To do that, they’ve had to make massive investments in both an air network and also in market logistics like small fulfillment centers inside New York City.
These are very costly operations relative to the distribution and warehouse centers that were 20, 30 miles away from cities previously. Now they have to bring that inside the market and find people to do these deliveries on a daily basis.
Levitt: Why was Amazon such a failure in China?
John Delano, Co-Portfolio Manager of the Oppenheimer Global Equity Team: Amazon, like many western companies, really has had a hard time embracing the local tastes and needs of the consumer in China. We also saw this with eBay and Google. Alibaba blew eBay’s mind when they told consumers, “list your items here for free. We’ll make money somewhere else.” eBay could never figure that out.
Amazon also had a very Spartan-looking web page and app. Contrast that with JD.com, whose site has all sorts of colors and attractions. It’s something that resonates with the Chinese consumer.
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