We live in an age of paradox.
We have instant communication, but no filter. There’s no way to sort out what’s important from what isn’t when it comes streaming in like a never-ending assembly line. As a result, we’re possibly worse-informed. We don’t have a few hours, or even days, for news events to percolate. Nor do we have time to analyze what every little piece of news means when the next piece of data already awaits our attention.
Likewise, we now live in an era where nearly half our shopping is done via the internet. From the comfort of your home, couch and pajamas, it’s possible to order just about anything, with home delivery to boot.
Nevertheless, physical retail has persisted. Despite the store bankruptcies and closures, consumers still put on pants and leave the house in droves to go shopping. Retail spending is now mixed between the physical and the digital, but that spending is still on the rise.
This growing schism between going to the store and opening up a web browser has led to one of the biggest paradoxes of all. Can retail become a sector where one company dominates all?
That’s what many in the stock market are betting.
Enter Amazon (AMZN). 20 years ago, the humble little online peddler of used books was one of many hot new websites in the original tech bubble. It didn’t disappear like pets.com or webvan.com. Instead, Amazon grew to incorporate more non-book items. Now you can buy anything from dvds to exercise equipment to clothing to yes, even food.
That’s led many to believe that traditional retailing is on its way out. Yet even Amazon recognizes that that’s not the case. Today, Amazon is getting into the big box space in a big way. No, not with its Amazon stores, an idea it’s still tinkering with in a few small markets. Instead, the company made an offer to buy a grocery chain—Whole Foods Market (WFM).
It’s a bizarre fit at first glance, as befits the paradox of retail. The upscale grocery chain, where customers are lucky to part with as little as $50 on up to three artisanal cheeses, is a far cry from the warehouse-dominated Amazon, which relies on big scale to keep prices down for folks buying everything but groceries online.
And yet, that’s the rub. Because grocery purchases are still the smallest amount of the online retail space, getting into that gig is a vast, untapped market for Amazon. And Whole Foods aren’t on every corner. They’re strategically placed in higher-income areas to attract the best clientele.
What’s more, that’s a strategy that hasn’t played out too well for the grocer. Consumers are price-conscious, and if it’s cheaper elsewhere, folks will go elsewhere. Despite loyal and higher-income consumers, chains like Whole Foods have seen flat sales and disappointing growth in the past few years.
Grocery stores are low-margin affairs to begin with. But then again, so is Amazon. While the company’s currently profitable, they’ve managed to grow both their size and share price without posting a profit. That’s often from doing things like starting up a TV division (Amazon Studios), or spending what could have been profits toying around with things like drone delivery (available in a few markets, but very few). Perhaps that’s what they need.
But this supports a broader thesis. We’re seeing the end of a multi-decade trend in retail consolidation. I call it the “Amazon Plus One” model. In short, for every space of retail Amazon does business with, it’ll have one competitor that’s primarily in the physical space.
In the book space, Barnes and Noble (BKS) won out the physical realm following the collapse of Borders during the Great Recession. And Best Buy (BBY) survived when competitor Circuit City blew a financial fuse.
Amazon’s foray into the grocery business via the Whole Foods buy means it’ll be competing with whatever grocery chain already dominates a market. In Florida where I live, that means I’ll have a choice between Amazon groceries or Publix. Where I went to college near St. Louis, Amazon will be competing with Schnucks. You get the idea.
The bigger question is where that leaves the big-box retailers. The big three, Target (TGT), Wal-Mart (WMT) and Costco (COST) will likely survive. Yes, that breaks the plus one model, but each of these companies appeals to a different crowd. Wal-Mart leads on price. Target leads on the “cheap chic” model. Costco relies on memberships and bulk buys to profit.
Each has a slightly different outlook and model that can compete with Amazon. What’s more, each has embraced add-ons to their stores like barbershops, clinics, and optometrists. That’s not something readily available online… yet.
If anything, Amazon’s expansion into groceries allows them to increase their share of a market they don’t have much of yet. But it’s also a space where people need to shop and consume what they buy on the same day. That shows the limits of online buying. I still expect the retail space to contract—with smaller specialty stores going the way of the dinosaur. There will be a few exceptions, but Amazon won’t rule the world.
In fact, that’s impossible. No company can dominate a sector on a free market. If Amazon ends up dominating the market, it’s because of price and convenience that competitors can’t offer. But if they get greedy and start to ratchet up prices, new competitors will emerge. Retail will be a smaller market going forward, and likely a more efficient one. But it won’t be an Amazon monopoly. Investors can buy pricy shares of Amazon, but the big money has likely been made on the retail consolidation trade over the past 20 years.
Instead, look to the beaten-down big-box names like Target and Wal-Mart. They’ll survive. And their shares were unfairly knocked down last week on Amazon’s merger news. It’ll take time for Amazon to change the way business is done at Whole Foods. But it won’t be the end of retail as we know it. Embrace the paradox and go where the value is—in the surviving big box chains.
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.