An anchor store is one of the larger stores in a shopping mall, usually a department store or a major retail chain. Shopping malls were first developed in the 1950s.
Their developers signed up large department stores to draw retail traffic that would result in visits to the smaller stores in the mall as well. The anchors usually paid heavily discounted rents.
Amazon is a river in South America. It is the largest one in the world by discharge of water and the longest in length. A piranha is a freshwater fish with sharp teeth and a powerful jaw that inhabits South American rivers, including the Amazon. If you happen to fall off a riverboat steaming down the Amazon, the piranhas will pick your bones clean.
Amazon is also a piranha-like corporation that eats up retailers, particularly the anchor stores, and doesn’t even leave the bones.
Jackie and I have been picking apart this story for a while. For example, see our 3/30 Morning Briefing titled “Jeff Bezos, The Terminator.” We were quoted in a 5/12 IBD article on the subject as follows:
“‘Amazon is killing lots of businesses. In the process, it may also be killing inflation,’ Ed Yardeni, noted economist and president of Yardeni Research, said in a recent report. Using Chief Executive Jeff Bezos’ playbook, Amazon has pummeled rivals with price cuts enabled by its smart logistics and relentless drive toward efficiency. Labor-displacing warehouse robotics give Amazon a cost advantage, and it aims to one day deploy delivery drones to extend its edge all the way to the customer’s doorstep. Amazon’s casualty list already is formidable. Over the years, Amazon has left consumer-facing retailers such as Borders, Circuit City and Sports Authority in the dust. Department chains have been closing stores, unable to answer the e-commerce challenge.”
Amazon II: Everything Must Go. The IBD article reported that Amazon’s piranhas are about to chew up other businesses. Consider the following:
(1) Big-box retailers & grocers. Amazon is going after big-box retailers like Wal-Mart and Costco by leaning on their consumer staples vendors to sell their products, which are packaged in big boxes, to consumers directly through Amazon’s distribution system. The $1.3 trillion US grocery market could be Amazon’s biggest potential source of revenue upside. IBD noted, “Amazon hopes to eliminate store cashiers at Amazon Go convenience stores now being tested. Amazon Go stores use sensors to track items as shoppers put them into baskets. The shopper’s Amazon account gets automatically charged.”
(2) B2B. Yardeni Research already has received mailings inviting us to set up an Amazon Business account for our office needs. IBD observed: “The online sales channel for business customers is sending prices down for industrial products, pressuring companies like W.W. Grainger.”
(3) Entertainment. Amazon is also going head-to-head with Netflix and all of Hollywood, by producing and distributing movies. The CEO of the entertainment provider Liberty Media, Greg Maffei, called Amazon a “ridiculously scary” rival at a financial conference on May 9. He presciently explained that Amazon’s competitive advantage is that it “has an ability, because of its scale, to invest at incredibly low or negative rates of return—because they can cross-subsidize, and the market is willing to suspend disbelief in future profitability.”
(4) On-demand & logistics. IBD reported: “Amazon recently was granted a patent for automated, ‘on-demand apparel manufacturing.’ The patent highlights plans to go beyond clothing into other fabric-based products, such as footwear, bedding and home goods. … Amazon is also bringing more of its logistics and delivery operations in-house.” This means that it is aiming to compete with, and eventually chew up, the airfreight, trucking, and home delivery industries.
(5) Cloud. In March 2006, Amazon officially launched Amazon Web Services (AWS). We signed up in 2008 for this fantastic cloud service, which has been remarkably reliable and very cost effective for us. IBD reported:
“As corporate America outsources more computing work to AWS and other highly automated cloud services, companies buy less hardware and software for internal data centers and cut back on IT staffing. In the March quarter, IBM’s (IBM) hardware business fell nearly 17% to $2.5 billion year-over-year, reflecting the impact of cloud adoption. How do the likes of IBM, Cisco Systems (CSCO) and Hewlett Packard Enterprises (HPE) fight back? By cutting prices. ‘Cloud is deflationary and collapses markets,’ said a Citigroup report in April. ‘Labor, with 85% deflation in the cloud, has the most significant disruption from cloud economics,’ says the Citi report. It says 15 IT staffers in a public, shared cloud service can replace 100 in a private data center.”
According to Citigroup, AWS will rake in some $37.5 billion in revenue by 2020, up from $17 billion this year. IBD quoted me as follows: “Perhaps most importantly, AWS’ juicy operating profit margin of more than 25% gives Amazon a way to fund its new ventures and a retail business that has notoriously skinny margins. The cash and financial flexibility AWS provides ensure that Amazon will be a lethal competitor in the retailing industry for many years to come.”
Amazon III: Body Count. In other words, “Death by Amazon” is a plague that will continue to afflict more and more businesses and industries. We can keep track of the mounting body count with a few economic indicators and by reading the business obituary page:
(1) Retailing. In March, online shopping rose to a record 29.7% of all online and in-store sales of GAFO, i.e., general merchandise, apparel and accessories, furniture, and other sales (Fig. 1). That’s up from just above 5.0% in 1994, when Jeff Bezos founded Amazon on July 5 that year. Over this same period, department stores’ share of GAFO plummeted from 34.3% to 12.5% currently. The box retailers saw their share rise from about 7.0% in 1992 to peak at 27.2% during January 2014, and ease back down to 25.3% currently.
The 5/8 issue of Bloomberg Businessweek features a picture of Bezos on the front cover with a story titled “They’re Coming for You, Bezos!” Both Wal-Mart and Costco are moving forward with plans to counter Amazon’s onslaught.
The department stores are like deer in the headlights. Their stock prices certainly suggest that investors are worrying that more of them will be roadkill. The S&P 500 Department Stores stock price index (JWN, KSS, and M) dropped 14.7% last week to its lowest level since July 20, 2009, and is down 57.5% from its recent peak on April 8, 2015 (Fig. 2). Industry analysts have cut their forward earnings for the industry by 27.4% since August 6, 2015 (Fig. 3). Investors have knocked down the industry’s forward P/E from a recent high of 16.1 in April 2015 to 10.9 currently (Fig. 4).
(2) Technology. In a 5/4 CNBC interview, Warren Buffett said he sold off about a third of his company’s 81 million shares of IBM since the start of the year. “I would say what they’ve run into is some pretty tough competitors,” Buffett said. “IBM is a big strong company, but they’ve got big strong competitors too.” In a 5/8 CNBC interview, Buffett was asked why he didn’t own any Amazon shares. He had a simple one-word answer: “Stupidity.”
Buffett explained, “I was impressed with Jeff [Bezos] early. I never expected he could pull off what he did ... on the scale that it happened.” He added, “At the same time he’s shaking up the whole retail world, he’s also shaking up the IT world simultaneously.”
In the nominal GDP data, Debbie and I see that capital spending on software and on information processing equipment both rose to record highs during Q1-2017 of $346.2 billion (saar) and $334.3 billion (Fig. 5). Computers and peripheral equipment, which is included in the latter category, has been virtually flat in both current and inflation-adjusted dollars since Q4-2010 at around $82 billion (saar) (Fig. 6). This flattening out after rapidly increasing since the early 1980s coincides with Amazon leading the expansion of the cloud business since 2006. Companies don’t need to buy computers when they can sign up for the computing power and storage they need on the cloud, which uses the available hardware much more efficiently.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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