How Big of a Threat is Amazon and E-Commerce to Retail

How Big of a Threat is Amazon and E-Commerce to Retail?

Amazon. What can we say? The company made it possible to buy virtually anything without leaving your home.

Amazon keeps making it easier to use its services. It introduced buying with only “1-click,” the push of a “Dash Button” to reorder your favorite items, and a call from the other side of the room – “Hey Alexa…order me…”

Now it has its clutches on food with the acquisition of Whole Foods recently closing in addition to its already established grocery delivery service. Consumers can even hire local cleaning or landscaping services through Amazon.

A recent survey by PricewaterhouseCoopers (PwC) polled respondents from across the globe on how Amazon has influenced their shopping behavior and 28% of participants said they shop less frequently at retail stores, 18% shop less often at other companies’ websites and 10% reported that they now shop exclusively at Amazon.

Welcome to Amazon, formerly known as Earth.

What Has Driven the Rise of Amazon?

Aside from Amazon’s innovative approaches, consumer demands and the way people shop are changing, in part due to Amazon’s influence (the “Amazon effect”), and in part due to the fact that technology is transforming the way we do almost everything. Even the way people are buying online is shifting from the PC or tablet to a mobile phone and from an app to a mobile website.

With virtually the whole world at hand in a digital marketplace, Amazon is capitalizing on some of these trends:

Convenience

We’re all looking for ways to make our lives simpler, and nothing is easier than ordering all of your necessities from your mobile device and having those items delivered to your doorstep. Or hiring someone to mow your lawn with the click of a button, knowing your service is backed by a guarantee, which is not always the case when hiring a local contractor. 

So Amazon or any retailer who can offer a variety of coveted goods and services to consumers via a user-friendly (key characteristic) app or mobile website is going to be appealing to people. Although one-stop-shopping giants like Walmart and Costco (numbers 1 and 2, respectively, in the National Retail Federation’s 2017 Top 250 Global Powers of Retailing report) are still holding their own. 

Value

Value plays a large part in this picture too. This is another reason Amazon Prime is alluring, but other retailers are remaining competitive by selling quality products at attractive prices and offering the customer a unique shopping experience. Examples are Best Buy with its buy online, pick up in store service and knowledgeable in-house resources, and TJX, the owner of predominantly brick-and-mortar TJ Maxx, Marshalls, and HomeGoods stores, with its discount, brand name, “Look what I found!” shopping experiences.

Community

Companies that can incorporate a membership or loyalty program (61% of shoppers in the aforementioned PwC survey expressed an affinity to staying loyal to their favorite brands) or tie exclusive events and products into their business models have a chance at competing in this changing environment. Online communities can be formed on social media platforms, generating connectivity and excitement for a store, brand or product.

So Is the Retail Industry Dying?

The short answer is no, it’s evolving.

Here in the U.S., growth in the retail sector is fueled by e-commerce, but as shown in the graph below it has been for some time, so this is not a new trend. At 8.9%, e-commerce is actually still quite a small percentage of total retail sales given digital technology is at our fingertips 24 hours a day.

Estimated Quarterly US Retail Sales

*Preliminary data
Source: U.S. Census Bureau 

So why do some people think the industry is becoming extinct? It could be that e-commerce is affecting some retail segments negatively, particularly apparel and electronics, hurting department stores and other major retailers. We are hearing about store closures (such as Macy’s and Gap) and bankruptcies (like Payless Shoesource and Gymboree), which are creating subsequent headlines about the death of the shopping mall. However, retail sales continue to grow overall with no immediate signs of stopping.

Total US Retail Sales

*Preliminary data
Source: U.S. Census Bureau 

Also, despite the many doom and gloom retail headlines, there have been more store openings than closures in 2017. A recent study by IHL group, a global retail research firm, revealed that for every company closing a store, there are 2.7 companies opening stores.

And with more stores opening, there will be a need for more workers. In fact, the Bureau of Labor Statistics predicts that employment in retail trade will increase by 5% through 2024 and add approximately 765,000 new jobs, the fifth largest positive change in new job growth amongst major industry sectors.

The takeaway here is that retail, “e” or otherwise, is alive and well and expected to survive for the foreseeable future. While there are some negative headlines about store closures, and e-commerce (which is commerce, after all) growing relative to total retail sales, these are indications of a changing, not dying, industry.

How Can Investors Avoid or Embrace the Trends in Retail?

The differences in performance among retail stocks so far in 2017 demonstrate one of the potential advantages of an active manager. The dynamics in the retail market are changing fast, and a good active manager can sift through the data to form sound conclusions on which stocks to choose or avoid.

A good active manager can also choose how to weight the best bets in the retail space—for instance, Amazon may well be a good long-term growth play, but one could question its current valuation. The active manager has the ability to add or trim a stock such as Amazon based on those dynamics as well.

In order to navigate the trends in consumer spending and retail, Segal Marco Advisors believes investors should consider hiring best in class managers whose investment strategies and models are intuitively designed to capitalize on the best opportunities in the market. Managers assess companies for their portfolios based on many factors and, depending on the type of investment strategy they’re employing, select stocks based on companies’ growth potential, perceived value, fundamentals, or other core characteristics.

Not all active managers will succeed in this assessment so the thorough evaluation of their qualifications and processes is critical to producing the most optimal results for investors. We also note that active management is not without risk, including the possibility of paying higher fees for less than market returns, and investors must recognize the impact of potential underperformance and higher costs on their particular circumstances.

The retail story is far from over. It will be interesting to see how far Amazon can go, and which companies emerge as its great competitors. In one blogger’s opinion, Amazon may appear to be poised to take over the world, but nothing will replace a physical store any time soon for that sometimes much-needed retail therapy.

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Tim Barron, CAIA

Tim Barron, CAIA
Senior Vice President, Chief Investment Officer

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Catherine Hickey

Catherine Hickey
Vice President

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