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All Contents © 2018The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| September 4, 2018
You would think e-commerce and cloud computing giant Amazon.com (AMZN), after 20 years of unfettered growth, would have run out of room to pump up its top line. But the company continues to choose new opportunities. Amazon is willing to try its hand at almost any sort of business, does well at the bulk of them – and threatens to destroy dozens of other companies with its success.
The latest foray into unfamiliar territory? The June acquisition of PillPack turns Amazon into a mail-order pharmacy, with a twist. PillPack packs all pills it dispenses into individual bags, each with a unique time and date to be consumed by the customer.
That’s not Amazon’s first venture outside its space. Amazon’s also a grocer, a fashion venue, a peddler of handmade crafts and even a video game developer, just to name a few.
As a result, Amazon has become at best a headache, at worst a survival threat, for any rival organization in its past. Indeed, in November, we tallied up 32 companies that looked like potential victims of Amazon’s never-ending expansion. Today, we’re looking at 49 companies Amazon could kill – a few updates of the original list, but also an alarming number of new outfits that have fallen into Amazon’s crosshairs – as well as one confirmed kill.
Companies listed in alphabetical order.
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The unchecked growth of Amazon didn’t faze auto parts suppliers like O’Reilly Automotive (ORLY), AutoZone (AZO) and Advance Auto Parts (AAP) for a long time. Car parts are too heavy, bulky and specialized to be handled like a consumer-centric commodity. And besides, when mechanics (DIYers or the real thing) need a part to use in a repair, they usually want it quickly. The big three names in the auto parts retailing game haven’t needed to worry.
But times have changed, helped along by inventory-management technology and delivery networks that are willing and able to handle goods they simply couldn’t before. That’s why Amazon was willing to enter the fray in January 2017.
It didn’t take long for brick-and-mortar operators to notice. AutoZone shares fell 27% during the first half of 2017, reflecting a first-quarter revenue and earnings miss. O’Reilly hit a similar headwind in Q2 2017 as well, as did Advance Auto Parts.
All three stocks have since recovered, as the market realizes Amazon hasn’t yet unleashed the same havoc realizing Amazon hasn’t unleashed the same kind of havoc on the auto parts retailing industry that it has on other consumer-facing markets. Give it time though. The fact that a little more than half of this trio’s business, on average, comes from consumers rather than mechanics, it’s a perfect opportunity for Amazon to become a disruptor.
Amazon’s purchase of Whole Foods Market sent shockwaves through the organic-grocery business, but just as vulnerable (albeit in a different way) are more conventional grocers such as Kroger (KR), privately owned Albertsons and the grocery arm of Walmart (WMT).
Yes, Whole Foods and Kroger somewhat overlap, particularly since Kroger has stepped up its organic and whole foods offering. But it’s not the brick-and-mortar alternative that should worry Kroger shareholders the most. More concerning is that consumers are increasingly comfortable with the idea of ordering their potato chips, laundry detergent and ground coffee from Amazon.com, just like they order office supplies or books.
Recent numbers from industry research outfit One Click Retail tell the story. Since the end of last year, Amazon has sold 18% of all groceries purchased online in the United States, making it the biggest online grocer despite more recognizable names in the business also offering online ordering. The firm estimates the company sold $650 million worth of groceries in the second quarter of this year, up 40% on a year-over-year basis. Beverages, of all things, are likely to be Amazon.com’s best-selling grocery category.
As time rolls on, more people raised in the internet era are becoming comfortable with the idea of not shopping in an actual grocery store. This shift plays right into Amazon’s hand.
Music isn’t the only audio Amazon.com can digitally deliver. It’s also the owner of Audible, which boasts the largest audiobook library in the world. It’s a direct threat to (among others) Audiobooks.com and Playster.
Don’t dismiss this market’s importance. Although audio books only generated $2.5 billion worth of revenue in the United States last year, the size of the market is not only growing, it’s accelerating. In the first quarter, the industry’s revenue was up 32% year-over-year, extending a longstanding hot streak.
What was largely missing from the audiobook landscape for a long time was a central name, playing the role Netflix (NFLX) played within the streaming video arena in mainstreaming the audio books.
Amazon largely has become that player.
Audible controls about 41% of the audio book market, as of the most recent look. And, like Netflix, being the first to become the dominant, defining force in a particular market leaves little room for a second or third player … which is all Playster and Audiobooks.com are in a position to enjoy from here. But playing second fiddle to Amazon in any business is a problem, especially when Audible can be sold as part of an Amazon Prime package.
Bookstore chain Barnes & Noble (BKS) and Joseph-Beth Booksellers were the first major victims of the rise of Amazon. Remember: Initially, Amazon.com was an online bookstore, and the advent of e-readers – then tablets – made e-books commonplace, further displacing physical bookstores.
One end result for B&N is 11 consecutive years of declining sales, and the 12th appears to be underway. Another end result: nine straight years of net store closures.
The matter may get worse, too. CEO Demos Parneros was terminated after only 14 months on the job during which he presumably couldn’t drive any measurable change. A statement from the company only said Demos had violated corporate policies, and further made a point of saying it wasn’t a matter of fraud or misreporting of results.
Such a disruption here only exacerbates the underlying problem.
Global Data Retail analyst Neil Saunders explains the challenge bluntly and succinctly, saying, “People may drop in for a browse but they won’t make a dedicated trip to a bookstore. They don’t have the need and they don’t have the time. The way people shop changed, and that’s been detrimental for Barnes & Noble.” Ditto for tiny Joseph-Beth, which has four stores left in the U.S.
There are a number of specific gaming companies that, with the exception of YouTube Gaming, won’t ring any bells with investors. But within video gaming circles, Hitbox, Mixer, Dailymotion, Beam and a whole slew of other non-descript names are plenty familiar. All of these organizations have developed platform that let gaming fans pay to watch other people play video games.
Yes, it’s a real thing. Last year nearly 700 million people watched someone else play a game, though some suggest the figure is actually closer to 1 billion, depending on how it’s measured.
What does that have to do with Amazon?
Amazon.com is the owner and operator of Twitch, which is the world’s most popular destination to watch other individuals play video games. Not unlike YouTube, the maker of the video and Amazon split any subscription revenue created by a particular gamer’s channel, so that player has an incentive to do well and grow his or her audience.
It’s possible there’s room for more than one player in the game-streaming space. It’s unlikely there’s room for more than one dominant player. For the same reason Facebook (FB) became the place where the world can gather online, the biggest crowd attracts the best game players, and the best game players attract an increasingly bigger crowd.
There’s no denying that electronics retailer Best Buy (BBY) pulled off a miracle.
The deeper Amazon.com waded into the consumer electronics market, the more trouble Best Buy found itself in. By 2012, chatter about Best Buy’s impending doom was common. Many presumed the company would follow in Circuit City’s footsteps to bankruptcy, as Amazon was simply too competitive.
A funny thing happened on the road to oblivion. Turnaround artist Hubert Joly took the helm that year and began working on a turnaround plan to save Best Buy. It worked, at least according to Joly. He flatly said earlier this year, “We have turned around the business, it’s about where we go from here. We have not only survived but thrived and I don’t believe this is a winner-takes-all market.”
Last quarter’s numbers suggest there’s some truth to the matter. Company-wide revenue was up 6.8%, and same-store sales grew 7.1%.
Hold off on the victory lap. Best Buy wasn’t facing the most difficult of comps last quarter, and it remains to be seen whether there’s a growth trajectory in place or if Best Buy is simply lifting the revenue plateau to a slightly higher level. It will take a few more quarters to know for sure. In the meantime, Amazon is undoubtedly going to push back, reminding Best Buy that it’s tough to fight a sustained war against a bigger army.
Major video game publishing outfits such as Activision-Blizzard (ATVI) and Electronic Arts (EA) will be forced to face off with Amazon at some point in the future. Both those companies are big enough and well-grounded enough to hold their own, however.
The same can’t be said for all the smaller, “indie” game developers and game-engine providers such as HeroEngine, Unity, Blender, Godot and more, which eventually could feel the pressure from Amazon.
Confused? You’re not alone. Though most investors – and even most gamers – don’t know it, Amazon has a hand in the video game development arena. It owns a game engine called Lumberyard, allowing developers and designers free access to this solid technology licensed from a company called Crytek. Games such as Crucible and Star Citizen are some of the early AAA games the Amazon platform has produced.
You’ve heard little about this because the whole effort still is in its infancy. It’s possible not even Amazon really knows where it’s going. So it’s not entirely clear who should be worried about Amazon’s potential push.
Given Amazon’s sheer size and strength, though, any of the smaller players in the highly fragmented game development industry should fear what Amazon may try to do once it feels Lumberyard is ready to promote in a big way.
No one disputes Amazon.com has mastered the art of delivering anything and everything that isn’t perishable, but what about pre-packaged meals? Yep, the e-commerce company can do that too. It got into the business in the middle of last year, and it has since stepped up its game. Its entry into the race is a direct threat to the likes of rival meal kit outfits Blue Apron (APRN), Hello Fresh and Plated.
The marketability and viability of the so-called “pure plays” in the business were never all that strong. They’re all subject to the changing – usually rising – price of food, and it takes massive scale to make meal kits cost-effective enough to turn into a sustainable business. Blue Apron, for instance, is one of the biggest names in the business yet still is nowhere near profitability.
Another unsavory reality of the meal kit biz: Roughly three-fourths of Blue Apron’s and HelloFresh’s customers stop buying them (on a regular basis anyway) within about six months. The idea is creative, but not necessarily one with longevity.
To the extent there is a viable meal kit market, though, Amazon.com has an edge. Two edges, actually. One of them is the fact that Amazon regularly serves more than 300 million customers, enough of whom will test drive a meal kit. The other edge is that Amazon doesn’t have to turn a profit selling pre-packaged meals. It can extract a profit from those customers by selling them other products and services.
Energizer Holdings (ENR), which of course is the name behind Energizer batteries, clearly is one of the most recognizable names in the business, as is Duracell, which is held by Warren Buffett’s Berkshire Hathaway (BRK.B).
Batteries currently sold under Amazon’s “Basics” label don’t exactly inspire deep brand loyalty.
Don’t dismiss the potential of Amazon’s entry into the seemingly boring business. In the United States alone, the battery business (including the automotive component of the market) is worth roughly $17 billion per year, and Amazon already outsells all other battery brands in the U.S. As of last year, Amazon.com sold a little more than 30% of all consumer-electronics-sized batteries for use in the United States, versus Energizer’s market share of around 12%. Duracell is holding up a little better, sporting roughly 21% of last year’s non-rechargeable battery business in the U.S.
It’s unlikely either brand will ever be wiped out completely. But Amazon doesn’t even really promote its Basics battery other than as an add-on purchase at its website, and yet it already has proven disruptive to the two biggest brands in the business.
Teachers Pay Teachers is an unconventional, though brilliant, business idea. Rather than proverbially re-create the wheel, teachers can create structured classroom handouts and materials, then sell them to other (often overworked) teachers who may not have the time to do so for themselves.
It’s not exactly clear how big the market is. Owler provides an estimate of $5.8 million in annual revenues for Teachers pay Teachers, but the ecosystem of the money its 80,000 contributors earn is much larger. Last year, they collectively banked more than $100 million. For perspective, the textbook market in the United States alone is worth roughly $11 billion per year.
Amazon’s increasingly disruptive role in the middle of that melee is its relatively new Amazon Inspire site, which is “an open collaboration service that helps teachers to easily discover, gather, and share quality educational content with their community.”
The problem for Teachers Pay Teachers, Educents and all their peers? Amazon Inspire is free to use.
That may or may not always be the case, but as long as it’s free, it’s a threat to for-profit sites in the same arena. Conversely, should Amazon eventually opt to make it a profit center, it’s apt to turn up the heat on promoting Amazon Inspire. That could prove highly disruptive to the other venues that have commercialized DIY classroom materials.
Etsy (ETSY) was, and is, a brilliant idea.
Some things are just not meant to be made or sold in bulk. Handmade one-of-a-kinds still have a place in consumers’ hearts, but makers of these goods are facing an increasingly tough time in just being able to show their wares to an increasingly distracted market. By bringing a huge number of artisans under one roof and then promoting the entire collection, Etsy has successfully melded an old-school idea with the new.
But Amazon noticed, and responded. In 2015, the e-commerce giant launched Amazon Handmade, taking a stab at Etsy.
Amazon’s disruption of Etsy has been hit and miss. Etsy’s revenue grew 30% year-over-year last quarter, and the company upped its full-year revenue guidance, too. Clearly Etsy is doing something right under the relatively new leadership of former eBay (EBAY) executive Josh Silverman.
Still, Amazon may slowly but surely taking a toll – or at least forcing Etsy to take a toll on itself. In July, Etsy upped the transaction fee it charges merchants from 3.5% to 5.0%, inciting enough grumbling among some of its sellers that it’s a legitimate fear many of them will look elsewhere … such as Amazon. Amazon Handmade charges considerably more, but also boasts considerably more marketing firepower.
Amazon appears to be playing the proverbial long game, planning to win the war by attrition.
Ride-hailing services Uber and Lyft were long thought to be potential victims of Amazon. Whispers that Lyft was aiming at parcel delivery were circulating, and Uber was waist-deep into the package-shipping business. Amazon was using contractors to deliver packages as well, though, and the foray into people transportation would have been an easy one.
Amazon’s focus is elsewhere, however. Rather than expands its network of delivery drivers, earlier this year it doubled down on building its own delivery chain using contractors. Called Amazon Delivery Service Partners, the company is encouraging individuals with an entrepreneurial spirit to build their own business by delivering Amazon-ordered parcels. Such a venture takes aim at the likes of United Parcel Service (UPS) and FedEx (FDX).
The Amazon Delivery Service Partners venture isn’t a direct, immediate threat to the existence of FedEx and UPS. Indeed, some of these deliveries may well be ones that those bigger logistics outfits don’t want to do.
Amazon isn’t a company that thinks small, however. With a fleet of 32 delivery jets in operation and a growing fleet of trucks on the road, the next natural step is bridging the two and completely cutting out middlemen like FedEx and United Parcel Service from many of its delivery chains.
GameStop (GME) historically has made its money by serving as the middleman, but the game publishing industry’s move toward downloads and away from discs and cartridges is increasingly making the venue less of a destination for gamers.
Jefferies analyst Stephanie Wissink explained the problem in July, noting “We’ve observed meaningful valuation expansion across retailers where margin rates base, pricing power returns (inventory & markdown clean-up), and sector participation/consumption is healthy.” Wissink added, however, that “GME has not participated in this reversal … due in part to leadership turnover, lack of an articulated vision & direction, and overriding fears around software profit dependence.”
Don’t misunderstand. GameStop also sells game downloads via its own website. Amazon does too. Neither venue is completely out of the loop when it comes to this paradigm shift underway within the gaming business.
But Amazon.com induced 2.8 billion unique visits just over the course of the first half of the year. It simply draws a bigger crowd, and the gamers among them know they can buy downloads via the site. GameStop’s website simply doesn’t attract nearly as many people.
The premise is evident in the numbers. Revenue has been drifting lower since 2011, and more often than not since 2012, the organization has reported slight declines in per-share profits. Its first quarter revenue was off to the tune of 5.5%, cutting profits roughly in half year-over-year.
Initially, the rise of Amazon.com was not only not a threat to book publishers; it was a benefit, making it easy for consumers to purchase a book rather than require a visit to an actual bookstore.
Technology never stops marching forward, though. The development of e-books and e-readers has quelled the need for printing and shipping while simultaneously positioning Amazon.com as an e-book hub. For the crowd that still prefers the feel of paper and the look of a volume on a bookshelf, Amazon’s Create Space can arrange for a book to be printed on-demand – even just one at a time.
With that option on the table, traditional book publishers like Penguin Random House and Hachette Books are struggling to justify their new role as a middleman that doesn’t bring any real value to the table. Amazon can do the marketing job too, or at least offer a platform that will allow an author to promote a book as effectively as a publishing house often does.
The paradigm shift toward self-publishing continues to get traction too, democratizing the space in a way that accelerates that shift. Jeff Bezos noted in his most recent letter to shareholders that that more than 1,000 independent authors earned more than $100,000 using Kindle Direct Publishing last year. For 2017, Amazon paid out more than $200 million to its authors.
The numbers prompt one key question: Who needs an old-school publisher?
Most consumers have heard of online business directory and review repository Yelp (YELP). Ditto for Angie’s List, which was owned by InterActiveCorp (IAC) but later spun off into ANGI Homeservices (ANGI). What most consumers don’t yet realize, however, is that Amazon is quietly encroaching into that market.
It’s called Amazon Home Services, and it looks a lot like Angie’s List. Homeowners looking for anything ranging from tech support to housecleaning services to yardwork can browse Amazon’s curated list of service providers and read reviews regarding their previous work. Angie’s List and Yelp offer similar information. And while Yelp also serves up information about a variety of other consumer-facing businesses such as restaurants or retail stores, there’s no denying that Amazon Home Services is a viable alternative source of information on many fronts.
Given that Amazon already connects consumers with restaurants near them, adding reviews to the mix wouldn’t be a major technical hurdle.
Nothing is wrong with Yelp yet, at least not given its most recent quarterly earnings report. Sales were up 12% year-over-year, and per-share profits grew from 9 cents to 12 cents. But the company hasn’t yet faced Amazon in a full-on fight.
Even something as mundane and common, yet garment-specific, as fabric could be upended by Amazon.
At first glance, it doesn’t appear Amazon has given its fabric and material business any particular special attention. Many of the sewing and craft supplies the website offers are featured on the same basic page used to sell all sorts of other goods, and the featured seller, Fabric.com, appears to be the beneficiary of the usual handoff Amazon makes when a customer needs something that can’t be sold en masse.
But take a closer look at the website that Amazon.com redirects you to when you click on the sizeable at the top of the “Fabrics” page. You’re buying fabric by the yard from Fabric.com, but Fabric.com is wholly owned by Amazon.
It’s a very un-Amazon-like business, though the company knows something most consumers and investors don’t: The fabric and sewing supply retailing market is worth about $4 billion per year, and globally, the textile market is expected to be worth more than $1 trillion by 2025.
That’s more Amazon-like! Amazon’s edge in the arena is that it has the much-needed scale that most textile outlets and retailers don’t. That’s a problem for Jo-Ann Fabrics.
If you own any activewear sporting the Goodsport, Rebel Canyon or Peak Velocity labels, you’re actually wearing one of Amazon’s homegrown house brands. The company got into the business for itself late last year.
The foray was a modest one – more of an experiment than something meant to make a splash. It largely was meant to fill gaps left unfilled by the athletic apparel names that weren’t offering the entire breadth of their lineup at Amazon.com. Most everything Amazon does, though, starts small and eventually gets big enough to become disruptive.
It’s a shot at names such as Lululemon Athletica (LULU) and Under Armour (UAA), which are well-recognized brands but fiscally struggling companies. Under Armour has been saddled by debt, while Lululemon is finding that an increasingly competitive environment isn’t driving profits any higher despite rising revenue.
Nike (NKE) is vulnerable too, but being the biggest and most respected name in the business, it could just as easily benefit from the fact that Amazon has put other activewear manufacturers on the defensive.
It certainly wouldn’t be a significant stretch to wreak some significant havoc in the semi-specialized apparel arena. Morgan Stanley noted earlier this year that Amazon.com already generates more U.S. apparel revenue than any other retailer, garnering 8.6% of the market for itself in 2017. And last year, online apparel sales grew 7% to make up more than 20% of the market, while in-store purchases fell 3%. Amazon is well-positioned to leverage its own athletic apparel into the equation.
Reminder: Office Depot (ODP) and OfficeMax are now one and the same company, having merged back in 2013 as a means of defending itself from the slow disintegration of the office supply business.
Amazon.com – and Amazon Business in particular – put that disintegration into motion.
It still wasn’t enough. That’s why Office Depot and privately held Staples sought a merger of their own a couple of years later, explaining that unless the two retailers worked as one, neither would survive. The Department of Justice didn’t buy into the argument, however; it feared that whittling down the number of large brick-and-mortar office supply outfits would harm consumers.
Little has changed since then. Office Depot managed to top its second-quarter earnings estimates, catapulting ODP shares higher, but a closer look at the Q2 report reveals that not all of the tepid growth was even organic. It was driven by acquisitions and new initiatives. Perhaps worse, the lackluster year-over-year results appear to be the new normal.
Staples doesn’t have to disclose its quarterly results, but it’s difficult to see how it could be faring much better than ODP. Neither can compete with Amazon’s prices, and low prices are everything to business customers.
When consumers mull their digital music options, Amazon Prime generally isn’t a name that comes to mind. The race for online-radio mindshare has largely been won by the likes of Spotify or Pandora (P) … or increasingly, Apple (AAPL), which was recently cultivated its own subscription-based service to complement the a la carte nature of its iTunes store.
However, a wide swath of consumers are grooving to Amazon’s beat. As of Q1, Amazon Music boasted 12.7 million regular/monthly users. That pales in comparison to the “Big Three” of Apple, Pandora and Spotify. But considering how little effort Amazon.com puts into music, that user base could ramp up quickly if Amazon turns up the heat.
Amazon’s exposure to the digital music market may actually be much bigger than it seems on the surface, too. That’s because you also could include the number of Amazon Prime subscribers that take advantage of the Prime Music offer available to Prime members. There’s no firm figure on how many people listen to some sort of online audio via Amazon, but the company said the number is in the “tens of millions.”
One small tweak in its music platform, then, could make Amazon alarmingly disruptive.
Rite Aid (RAD) actually earned a spot on Amazon’s list of likely victims a few months ago – back when rumors were merely swirling that the e-commerce outfit was toying with the idea becoming a drug dispenser. Little had come of the possibility at the time, but obviously much has changed.
Aside from the threat that Amazon’s acquisition of PillPack poses to the Rite Aid, the remaining piece of Rite Aid that wasn't sold to Walgreens (WBA) still needs help in reinvigorating sales and profitability. A partner/buyer appears to be a means to that end, but finding a suitable, willing suitor is proving tough to do. The latest would-be partner was grocery chain Albertson’s, though such a pairing may not exactly have been of any benefit to investors. Proxy advisor Institutional Shareholder Services penned a report on the matter just a few weeks ago. It wrote, “The merger combines two low-margin, over leveraged companies, both of which are facing heightened competitive environments.”
Shareholders agreed, prompting management to kill the deal and leaving Rite Aid in need of a lifeline that doesn’t appear to be on the horizon.
Amazon is largely responsible for the “heightened competitive environments” both parties are facing. Amazon not only owns PillPack and Whole Foods Market, but it’s also selling all sorts of consumable dry goods via its online platform.
In all fairness, Amazon has been making things tough for all brick and mortar retailers. Sears (SHLD) is the wounded and sickest member of the herd, though, and therefore the prey most vulnerable to Amazon.com.
Revenue has been shrinking since 2006, and the company hasn’t turned a full-year profit since 2011. In retrospect, hedge-fund-manager-turned-CEO Eddie Lampert should have fixed as many of its poorly performing stores as he could rather than simply shed them in an effort to raise much-needed cash. Or, maybe Sears (and Kmart) were and still are simply unfixable.
The irony? Sears has actually partnered with Amazon on multiple occasions in an effort to drive sales. In October of last year, Kenmore – a Sears-owned brand of home appliances – unveiled a new line of smart refrigerators that work with Amazon’s artificial intelligence assistant Alexa. In July of last year, Sears listed a slew of Kenmore branded goods at the Amazon.com website. In May of this year, Amazon began selling tires to consumers that ultimately would be installed at a Sears Tire Center.
The struggling retailer may only be feeding the beast that will eventually eat it, however. Amazon also is selling tires that Monro will install, and Amazon.com sells Maytag and Frigidaire home appliances too, even if those other brands aren’t featured as prominently.
Sears, and Kmart, are just too deep into the Amazon quicksand now to fight their way out.
It’s not exactly a secret that people across the U.S., and around the world for that matter, are increasingly concerned about what they’re eating. Chemicals and pesticides are completely out of fashion, as is genetically modified produce. En vogue are organic goods, and where at all possible, locally sourced foods.
It’s a trend that initially sprang life for outfits like Sprouts Farmers Market (SFM) and Trader Joe’s, which historically have been the go-to options for health-conscious consumers. Now that rival grocer Whole Foods Market is an Amazon holding, it can benefit from Amazon’s strong marketing reach.
That’s not the only edge Amazon has on its organic-grocery rivals, however.
Unlike Trader Joe’s and Sprouts, Amazon isn’t all that concerned about turning a profit in the grocery biz. Indeed, the company is almost annoyingly coy about how its grocery business is doing, offering no meaningful details of its performance. Being in the business is simply another means of connecting with consumers, pulling them further into the Amazon ecosystem, where they can be monetized in other ways.
More than that, though, Amazon’s ambition of dominance-at-all-costs has allowed it to become the low-price leader in the whole foods and organic grocery market. Unable to compete with the giant, The Fresh Market announced in July it was closing a total of 15 stores.
Sprouts and Trader Joe’s haven’t been forced become that defensive – yet – but both have been forced to reshape plans. They’re investing more in technology, and less in store growth, where Amazon can really start to pound them.
Amazon.com has proven problematic for the likes of Walmart (WMT) and Costco (COST), and more recently, vice versa. All three companies are big enough and different enough from one another that they’ll be able to at least defend their turf.
Target (TGT) is in a tougher situation, however. It has neither the size of Walmart, the pricing power of Costco nor the sheer online presence of Amazon.com. It’s trapped somewhere in the middle, which within the world of modern retailing is the last place any organization wants to be.
You can see this idea at work in the company’s most recent earnings report. Although fiscal Q1’s same-store sales grew nicely, investments in Target’s online presence and customer-attraction efforts – such as deliveries and price-cutting – crimped margins from 7.1% a year earlier to 6.2% this time around. Morningstar’s analysts foresee more of the same heavy spending ahead, and Target isn’t in a position to outspend its competition.
There is one plausible, albeit low-percentage, ray of hope on the horizon. More than once, Amazon has been rumored to be interested in acquiring Target. Such a maneuver would instantly give the organization a retail footprint that could prove more problematic for Walmart than Target is on its own. But simply hoping for a buyout is never a good enough reason to buy or stick with a stock.
Supply outfit W. W. Grainger (GWW) has held up better than many investors presumed it would when Amazon announced it was tiptoeing onto its turf last year with a platform called Amazon Business. Indeed, GWW shares are up more than 120% from their August 2017 lows, largely driven by slow and steady revenue and earnings growth that analysts didn’t think Grainger would achieve.
How did GWW manage it, and against a bigger foe that cares little about profits? Macquarie analyst Hamzah Mazari explained earlier this year, “Close to $2.5 billion of their revenue, out of their total $10 billion, was uncompetitively priced, so they cut their price to be more in line with the market … in the fourth quarter they showed volumes were up double digits.”
It has worked so far. But Grainger isn’t well-equipped to fight a price war, and CEO D.G. Macpherson has already hinted that gross margins around 38% would be the new norm. That compares unfavorably to gross margins of 44% achieved in 2013. And Grainger will only hit that 38% number if Amazon does something very un-Amazon-like and doesn’t start a price war within this business sliver.
Last but not least, a eulogy for Toys R Us.
After a poor showing for 2017’s busy holiday shopping season, the privately held toy company finally decided to call it quits in March 2018. It didn’t even bother seeking a buyer that might be looking for a cheap way to scoop up a recognized name, or garner some cheap retailing square footage.
Not every observer entirely blames Amazon.com for the demise of Toys R Us. In many regards (and like so many other brick-and-mortar retailers), Toys R Us became sloppy on its own – operationally and fiscally – and never fully realized it until it was too late. Greg Portell, lead partner at retail consultant A.T. Kearney, commented in June, “If you’re going to have that breadth of inventory, you need someone in the store to help you find it, help you experience it. It’s hard to sell toys in a cold, warehouse environment.”
If not Amazon, another player would have continued to chip away at the once-iconic toy store chain.
Still, the fact that Amazon.com is rumored to be preparing the printing of a traditional holiday toy catalog this year sends a clear message. That message: Amazon isn’t stopping now. With the biggest pure-play threat out of the way, it’s going to be even easier for the company to go after other toy sellers such as Target and Walmart.
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