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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Amazon: Loved and Hated (but Loved More)

Updated: Jul 19, 2020

On Friday the BBC and several other news sources reported on Black Friday protests at several of Amazon’s facilities in France, related to concerns about “over-consumerism” and environmental apathy.  This story reminded me of the disruptive history of Amazon, and also, of the pre-Amazon (pre on-line) retailers that came before Amazon that caused the same sort of stir in the U.S. retail market years before Amazon burst on the scene. The likes of Walmart, Target. Costco, Best Buy and Home Depot were referred to a “box retailers”, mainly because they were huge stores (by square footage) generally located outside of city centres where real estate was substantially less expensive, allowing these retailers to carry many more products at a lower fixed (real estate) cost. These box retailers were largely blamed for destroying the “Main Street” in many mid-size US cities in the late 1980’s into the 1990’s because more and more consumers preferred to shop at these huge stores. (And lest you think this was a US-only phenomenon, think about one of the earliest examples in Europe, IKEA.) But just as the box retailers were changing the landscape of the traditional retail market, Amazon burst on the scene, first disrupting the physical book business and then, in 1998, expanding outside of books to include DVD’s and CD’s before adding more and more general retail products. In essence, Amazon became a “disrupter of the disrupters” as far as the box stores. Like them or loathe them, Amazon has been a success when measured by customer growth and stock price appreciation. I am not a retail expert (aside from being a customer), but these are what I view as the keys to Amazon’s success:

1. Breadth of product line / number of SKU’s, but very little inventory held on site because much of it is “just in time” (so effectively “held” and financed by suppliers),

2. Ease for consumers to access the broad product base via website or app, and the app is ubiquitous as it can be used nearly anywhere around the world,

3. Delivery of products straight to your front door quickly, often the very next day,

4. Low (or generally competitive prices), which are achievable because of a low cost base, which remains a major focus of Amazon’s,

5. A reliable brand that has “earned its stripes” over time with consumers.

Although it took many years in some cases, the savvy management teams at box retailers and certain specialty traditional retailers developed strategies, including e-offerings and cost controls, that enabled them to respond to the threat of Amazon. These forward-thinking managements teams developed their own on-line distribution platforms, and also developed the concept of “order on-line and collect at the store”, which seemed to catch on.  From an expense perspective, Amazon put pressure on these traditional retailers to examine their own cost base and improve efficiency, perhaps by managing their own inventories and suppliers better, closing unprofitable stores, and otherwise reining in costs where possible.  And guess what? Amazon did not destroy these progressive traditional retailers but instead helped eventually make them stronger, boosting their earnings and stock prices in the last several quarters (and outperforming Amazon in many cases), as this graph of stock performance over the last two years illustrates.

In fact, while the likes of Macy’s and L-Brands have been on a slow but steady march downhill, this year has been particularly good for many retailers vis-à-vis Amazon, which has returned a meagre 7.6% in the last year, even less than the S&P500 index (circa 16%). In fact, returns of some major retailers in the last one year (since last week of November 2017, inclusive of dividends) have been: Walmart, 23.6%; Target, 80.4%; Home Depot, 26.2%; Costco, 31.0%; Best Buy, 27.9%, and Dick’s Sporting Goods, 30.4%.

So where do these two phases of disruption over the last 20-30 years leave us today? They certainly did transform Main Street, just like they transformed the High Street in the U.K. and retail centres in other cities and towns in many countries around the world. Consumers of course “vote with their feet”, and as history has illustrated, retailers have either had to adapt or close down (e.g. K-Mart and Sears). At the same time though, many Main Streets and High Streets around the world have been transformed by attracting new types of specialty retailers with different and / or more unique offerings, or by developing “destination centres” that consumers enjoy visiting. These cities and town centres have had to work hard to identify things which appeal to consumers that e-retailers and box stores simply cannot provide. Whether or not net employment has increased or decreased across the retail category is hard to say, but retail has certainly transformed in a way that seems more appealing to consumers. You can protest against disruptive change in the world, but unfortunately there is no stopping it when consumers are largely in favour of it.

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