An interesting white paper was released recently, analyzing how Amazon (click ticker for report: ) is altering the retail landscape.
The paper itself had some interesting insights, but our favorite takeaway of Placed’s work was the top ten companies at risk.
1. Bed Bath and Beyond (click ticker for report: )
2. PetSmart (click ticker for report: )
3. Toys ‘R Us
4. Best Buy (click ticker for report: )
5. Sears (click ticker for report: )
6. Barnes & Noble (BKS)
7. Kohl’s (click ticker for report: )
8. Target (click ticker for report: )
9. Costco (click ticker for report: )
10. JC Penney (click ticker for report: )
For the most part, we agree with the list, particularly Toys ‘R Us, PetSmart, Best Buy, and Barnes & Noble, though we don’t think any are necessarily at risk of going bankrupt. Best Buy and Barnes & Noble are at the most risk, in our view, as both sell commodity products and continue to be displaced by digital distribution. Toys ‘R Us and PetSmart have a similar issue, but instead of competing with digital distribution, both are seeing greater industry price competition and lost profits from Amazon’s growing distribution network.
One of the factors that Amazon bulls often cite is that the firm’s distribution network will make same-day and next-day delivery a cinch. We’re not so sure about this though. Even if the supply chain is efficient, transportation costs may not be low enough to drive meaningful earnings expansion. But if Amazon is able to achieve a low-cost transportation system, Costco, Target, and even Wal-Mart (click ticker for report: ) could be at risk. Still, we believe all three operators are skilled to fend off such competition. There will always be a place for brick-and-mortar necessities, and we point to the fact that online grocery never took off as much as some thought it would. In this case, the consumer was unwilling to depart from the physical grocery shopping experience.
Although online retail continues to grow at Kohl’s, we can see how its business and JC Penney’s business can be hurt considerably by Amazon’s presence. Kohl’s in particular lacks a powerful brand portfolio, leaving it more prone to commoditization. JC Penney has a few more exclusives, but as with Kohl’s, its business is also very prone to commoditization. Sears had a strong electronics presence, and we could see Amazon (and Best Buy) take additional share in the appliance space (especially since online reviews have largely displaced the value of retail experts in the minds of many). eBay (click ticker for report: ) may be best-suited to steal share in the apparel space since its marketplace already places a large emphasis on fashion. We don’t think Amazon would have an easy time stealing eBay’s already-strong network of fashion buyers and sellers.
On the other hand, we believe now is a wonderful time to boast a solid brand, reinforcing the competitive advantage that some can develop. Nike’s (click ticker for report: ) higher-end products, lululemon (click ticker for report: ) and Tiffany (click ticker for report: ) won’t feel the “Amazon” pinch, in our view, and consumers will likely continue to seek out these brands’ products. Higher-end brands–think PPR’s Gucci and Louis Vuitton—are even more insulated from the threat as the highest-end brands are marketed with an air of exclusivity (making increasing distribution channels less of a priority). Firms also predicated on a shopping experience such as TJX’s (click ticker for report: ), Marshall’s and TJ Maxx, as well as Ross Stores (click ticker for report: ), could remain shielded (though Amazon and retail upstarts will likely develop algorithms to mimic the experience).
All things considered, Amazon and online retail will continue to be disruptive, and Toys ‘R Us, Best Buy, and Barnes & Noble look most vulnerable (but we doubt everyone will go down without a fight). People argue that Amazon is doing to retail in the 21st century what Wal-Mart did in the 20th century, but it may take years for the company to develop the supply-chain sophistication necessary to completely alter the landscape. All of the ten “at-risk” firms are certainly facing threats, and we think the best place to avoid battling with Amazon is with firms that boast impenetrable brand names, though such companies do not become cheap very often.
Interested parties can download the Placed’s original report here.