At a conference last week, Amazon.com CEO Jeff Bezos climbed into the control cockpit of a giant, 14-foot-tall robot and moved its arms menacingly, waving them back and forth. According to a 3/20 CNN article, he quipped: “Why do I feel so much like Sigourney Weaver?,” referring to the epic scene in “Alien” when she wore an exoskeleton to battle and beat the alien.
In the business world, Bezos has no need for such armor, but his competitors must identify with the alien and feel the creature’s pain. Started in 1994 as a book retailer, Amazon now sells just about everything you can imagine at prices that make it a fierce competitor. It offers furniture for the living room, cookware for the kitchen, and tools for the garage. It hawks arts and crafts, food, electronics, toys, sporting equipment, and towels. Amazon created the Kindle, has us talking to Alexa, and became a web-hosting powerhouse. Bezos even attended the Academy Awards because Amazon Studios distributed “Manchester by the Sea,” which won two Oscars.
Amazon is killing lots of businesses. In the process, it may also be killing inflation. In the early 1980s, Paul Volcker seriously wounded inflation with killer interest rates (Fig. 1 and Fig. 2). This monster has struggled to raise its ugly head only to be subsequently whacked back down by deregulation that started under President Jimmy Carter and continued under President Ronald Reagan. Then came the end of the Cold War in 1989, unleashing globalization, which increased global competition. Walmart’s “everyday low prices” reflected the disinflationary impact of the retailer—which became a publicly traded company in 1970—distributing cheap imported goods in the US. Then the “China price” continued to put downward pressure on inflation after the country joined the World Trade Organization in 2001. Now Amazon has turned into the price killer in retailing and increasingly in other businesses.
As the world’s largest retailer and the sixth-largest publicly traded company, Amazon has single-handedly disrupted the retailing industry, the tech industry, and the entertainment industry.
It employs 341,400 people, but it has caused competitors to close their stores and lay off countless employees.
The company arguably has done as much as the Chinese to kill jobs and keep a lid on inflation by enabling fast and easy price discovery for anyone with a cell phone.
I’ve asked Jackie to look at the impact Bezos and Amazon have had on us mere mortals so far.
Here is what she found:
(1) Retail’s category killer. Last year, Amazon sold $94.7 billion worth of products around the world, and it continues to expand its offerings. One area of growth is private-label brands for men’s, women’s and children’s clothing, according to a 3/27 Business Insider article. It cites a Cowen & Co. research report that estimates Amazon will become the biggest apparel seller this year. “The company’s clothing and accessory sales are expected to grow nearly 30%, to $28 billion. Macy’s apparel sales, by comparison, are expected to drop 4%, to $22 billion, in the period,” the article states.
Amazon is also experimenting with a small-format, bricks-and-mortar grocery store, Amazon Go. Consumers would use their phones to pay, eliminating cashiers and checkout lines. The rollout of Amazon Go has been pushed back due to technological hitches the company is addressing, but it envisions opening roughly 2,000 stores if the format is ultimately successful. The company also announced earlier this week that it’s launching a grocery store that offers curb-side pickup, dubbed “AmazonFresh Pickup,” according to a 3/28 WSJ article. Watch out, Walmart!
The online retailer’s impact on the bricks-and-mortar set is hard to overstate. A 3/15 MarketWatch article looked at retailers that fell into the GAFO category, General Merchandise Apparel and Accessories, Furniture, and other stores. Sales at GAFO retailers have “stalled, falling $1.8 billion (or 0.6%) in the past year. … Meanwhile, online sales jumped by $13.7 billion through the third quarter of 2016, with Amazon accounting for most of that,” the article reported.
The US Census Bureau reports that online shopping rose to a record $521 billion (saar) during January (Fig. 3). Debbie calculates that it now accounts for a record 29.1% of total online and in-store GAFO sales (Fig. 4). Sales at general merchandise stores were relatively flat as a percentage of GAFO from 1992 through 2008 at around 43%, while the percentage at warehouse clubs and super stores (which are included in general merchandise stores) rose from about 7% to 27% over that same period (Fig. 5). Since 2009, the percentages of the former and the latter are down to 37.8% and 25.2%, respectively.
Some retailers have been laying off workers, but overall headcount has grown. “While sales fell 0.6% in 2016, employment at GAFO stores increased by 1.6%, or about 95,000,” according to the MarketWatch article cited above. That implies more layoffs are needed, the article states.
Amazon may absorb some of those laid-off employees. Earlier this year, it announced plans to hire more than 100,000 people in the US over the next 18 months. But the MarketWatch article contends that Amazon needs about half as many workers to sell $100 worth of merchandise as Macy’s does. Amazon has automated much of the work done in its warehouses, it hopes to eliminate grocery store cashiers at Amazon Go, and it’s working on using drones to deliver packages, endangering the local delivery guy.
The monthly employment report shows that 15.9 million workers are employed in retail trade (Fig. 6). There are 6.2 million people working in GAFO stores, 3.4 million workers in grocery stores, and another 700,000 or so working at pharmacies and drug stores. That might still be less than the 12 million folks employed by manufacturers, but the numbers are large enough that President Trump might want to start paying attention. If nothing else, he should think long and hard about introducing a border adjustment tax at a time when the industry is already under intense financial pressure due to the competition from Amazon.
(2) Dearly departed and walking dead. All manner of retailers have gone bust during Amazon’s expansion over the last two decades. Granted, some retailers accelerated their demise by taking on too much debt, and others were felled by the drop in demand during the Great Recession. But the competition from Amazon shouldn’t be underestimated. The list of deceased over the past 13 years includes Tower Records, CompUSA, Circuit City, KB Toys, Linens ‘n Things, Blockbuster, Borders, and RadioShack.
What’s notable today is that retailers are going bust or shuttering stores at a pace that would normally indicate an economic recession. Current moderate economic growth and strong consumer confidence haven’t helped some retailers improve their fortunes. Bebe Stores, a women’s apparel chain, recently announced plans to shutter its physical stores and sell exclusively online, while shoe retailer Payless is expected to file for bankruptcy protection and close 500 stores. Many department stores have been shuttering stores as they face competition from Amazon as well as discount and fast-fashion retailers like T.J. Maxx, H&M, and Zara.
Sears, which has been closing stores for years, warned investors in its annual report that “‘substantial doubt exists related to the company’s ability to continue as a going concern,’” reported a 3/22 WSJ article. “Sears quickly added that it is ‘probable’ that cost cuts, asset sales and other actions would mitigate its problems.” Sears is shutting 108 Kmart stores and 42 Sears early this year, in addition to closures in previous years. “[T]he retailer will have fewer than 1,500 stores left by early 2017. That’s down nearly 60% from 2011, when Sears had more than 3,500 stores,” calculated a 1/4 Business Insider article.
Sears may face the most dire situation, but it’s not the only department store shutting stores. Earlier this year, J.C. Penney announced plans to close 130 to 140 stores and two distribution centers. And after Macy’s reported that same-store sales fell 2.1% over the November-December holiday period, it warned that it could lay off as many as 10,000 workers, noted a 1/4 FT article. The retailer is in the midst of closing 100 stores.
(3) Hole in the mall. Investors in real estate also have begun to fear the Amazon threat. Shares of the FTSE NAREIT Equity Regional Malls Index are down 15.8% over the past year as of Tuesday’s close, compared to the 17.6% gain in the S&P 500.
Store closures affected 97.8 million square feet of retail space in 2016, more than double the 41.4 million affected in 2015. So far, strong malls have managed to replace closing stores with other tenants. The net absorption rate in 2016 was 105.7 million square feet, more than the 97.8 million square feet of closed stores, according to a JLL research report. Strong malls have replaced closing stores with new, expanding retailers or with new types of tenants, like grocery stores or bowling alleys. Weak malls, however, have had a tougher time.
“For malls in strong locations, these vacancies may actually be a boon, allowing them to trade up to a more productive anchor (like Nordstrom or Saks) or shift to a strong non-traditional anchor, like Bass Pro Shops. However weak malls will likely struggle to replace these tenants, resulting in a domino effect of decreasing performance and increasing vacancy.” The market may be anticipating tougher times ahead, even for strong malls: Shares of Simon Property Group, known for its high-end properties, are down 17.25% over the past year.
(4) Hollywood’s horror show. Were its domination of the retailing industry not enough, Amazon has expanded into and is disrupting new areas, including the entertainment and technology industries. It’s producing award-winning TV shows and movies, and throwing around big bucks to attract talent and distribution rights. Amazon purchased the distribution rights to “Manchester by the Sea” at last year’s Sundance Film Festival for $10 million, the second-largest sum paid to acquire a film at the festival in 2016. “The e-tailer has also made the biggest acquisition so far of this year’s Sundance: $12 million for comedy ‘The Big Sick,’ according to a person close to the deal,” the 1/24 WSJ reported.
As is industry custom, Amazon has released its movies in traditional theaters and waited before allowing access to the videos online. To watch a streamed movie over the Internet, Amazon customers must have a Prime membership, at the cost of $99 a year, which also gives them free two-day shipping. Netflix, another recent comer to the Hollywood game, streams its films the same day they are available in the theater.
The competition is pushing Hollywood studios to change the way they release films. Today, movies are available for at-home on-demand viewing 90 days after opening in theaters. Releasing the films with a lag time insulates theater ticket sales from competition. By yearend, however, studios may make films available on demand just a few weeks after they’ve appeared in theaters for between $30 and $50, the 3/26 WSJ reported. The Journal article explained: “To compensate theaters for lost box office, studios may share 10% to 20% of premium VOD revenue with them if the window is less than 30 days after the cinema debut, people with knowledge of the talks said. A key sticking point is for how many years theaters would be guaranteed to receive their share and that prices for early home release won’t fall too low.” Of course, empty movie theaters would be yet another blow to malls.
(5) Shoot-out in Westworld. It became clear that Amazon could do tech devices well when its Kindle e-reader outsold Barnes & Noble’s Nook. And now we’re all talking to Alexa, not to Siri, at home. But Amazon’s most impressive tech offering is certainly Amazon Web Services (AWS), its cloud-computing business that’s growing 50% annually and is expected to generate $13 billion in revenue this year, according to a 1/19 Information Week article. The business goes toe-to-toe with Microsoft and has a lead on both Google and IBM. And perhaps most importantly, AWS’s 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 ensures that Amazon will be a lethal competitor in the retailing industry for many years to come.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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