President Trump has been bashing Amazon of late. And Amazon is down about 12.5% since peaking on March 12, 2018. Simultaneously the DJIA fell 10% from 1/26/18 thru 4/3/18, so it is hard to discern if Amazon’s pullback has more to do with market conditions and trade war fears or Presidential bashing. Amazon’s performance has been only slightly worse than the Dow. Anyway, one would think that if the President is right and Amazon plays unfairly, the future would bode well for Walmart.
That is very unlikely. Since peaking on January 29, just after the Dow, Walmart crashed 32% by April 3. Over the last month the stock has stabilized, but unfortunately the signs are not good for Walmart investors.
Walmart leadership has never shown a keen understanding of e-commerce, nor a commitment to making Walmart a leading market competitor. You might counter that Walmart’s acquisition of Jet.com showed a strong commitment. But we now know that amidst the minimalistic hype, Walmart actually cheated when providing its e-commerce results. And when Walmart hired a former Tesco executive to lead Jet.com’s grocery sales effort, the news was not splashed front page. Rather it was hidden in an internal email discovered by Reuters and given almost no coverage. Like Walmart was afraid to let people know it was incompetent and hiring an outsider.
Investors, and customers, need to admit that it is a LOT easier for Amazon to learn about traditional store operations by purchasing Whole Foods than it is for Walmart to learn how to succeed in e-commerce. Traditional grocery “excellence” is easy to come by, after all there are thousands of experienced grocery store executives. So Amazon can buy Whole Foods and gain what knowledge it needs overnight, while adapting Whole Foods to the tremendous e-commerce insight embedded in Amazon. But Walmart is struggling to add compete with Amazon in e-commerce, where knowledge is a lot, lot tougher to come by.
Telltale’s are strips of cloth used by sailors to provide early tips about wind direction and speed. Good sailors “read” the telltale strips to plot their sail use for maximum performance. We can read the “telltales” in business as well. The “telltales” at Walmart have long been bad signals for investors. After 3 years of recovery from a 2014 collision created by an overworked Walmart driver, comedian Tracy Morgan recently returned to television with a new show. The overworked driver was a worrisome telltale of how Walmart pressured its employees to attempt competing against much lower cost e-commerce. By February, 2016 there were 10 very obvious telltales of Walmart’s inability to cope with Amazon and the market shift to e-commerce.
Understanding e-commerce is worth a whole lot more than being good at running a tight retail operation. As I pointed out in May, 2016, knowing that trend is what makes Amazon worth so much more than the much bigger, and asset rich, Walmart. And the Walton family knows this, that’s why it became clear by October, 2017 that they were cashing out of the traditional Walmart business. As I’ve said before, if the Walton’s aren’t putting their money in Walmart (or shopping in the stores) why should you?
(Photo: JOHN MACDOUGALL/AFP/Getty Images)
Amazon.com has become an important part of the American economy, and the lives of people globally. But, far too few people still understand the repercussions of Amazon’s success on retailers, consumer goods manufacturers, real estate – and ultimately everyone’s lives. The implications are enormous. Smart leaders, and investors, will plan for these implications and take advantage of the market shift.
Invest in ecommerce, divest traditional retailers.
The first implication is just thinking about investing in Amazon and/or its competitors in retail. In May, 2016 I compared the market value of Wal-Mart, the world’s largest retailer, with Amazon. At the time Wal-Mart was worth $216 billion, and Amazon was worth $332 billion. The difference could be explained by realizing that Wal-Mart was the leader at brick-and-mortar sales, which were shrinking, while Amazon was the leader in e-commerce, which is growing. Since then Wal-Mart’s value has increased to $222 billion – up $6 billion, 2.8%. Meanwhile Amazon’s value has increased to $403 billion- up $71 billion, 21.4%. Over three years (starting 3/3/14) Wal-Mart’s per share value has declined from $74 to $71 (down 4%,) while Amazon’s has risen from $370 to $845 (up 128%.)
To put it mildly, investing in Amazon, which is the leader in e-commerce, has created a great return. Contrastingly that value increase has been fueled by declines in traditional retailers. The Amazon Effect has caused shares in companies like Sears Holdings, JCPenney, Kohl’s, Macy’s and many other stalwarts of the bygone era to be crushed. Over the last year investors in XRT (the retail industry spider) have increased 1.6%, while the S&P 500 spider has jumped 22%. The number of retailers with debt rated at Moody’s most distressed level has tripled since 2009 – and Moody’s predicts this list will worsen over the next five years.
There is vastly too much retail space, and nobody knows what to do with it.
And this has an impact on real estate. As online sales come to over 11% of all holiday sales in 2016, and Amazon accounts for 40% of all those sales, it is clear people just don’t go to stores any more anywhere near the way they once did. Historically prime retail real estate was considered valuable – and in 2007 many people thought Sears real estate was worth more than Sears as a retailer. But no longer. According to Morningstar, Sears store closings alone could cause 200 malls to close.
It is apparent the Amazon Effect has left America with far more storefronts than needed. Stand-alone stores are being shuttered, with no alternative use for most buildings. Malls and shopping centers go begging as traffic drops, tenants leave, lease rates collapse and the facilities end up wholly or nearly empty. This means you don’t want to invest in retail real estate REITs. But it also means that neighborhoods, and sometimes entire towns, will be impacted as these empty buildings reduce interest in housing and push down residential prices.
Tax receipts will fall, and nobody knows how to replace them.
For a long time governments gave handouts to retailers in the form of tax breaks to build stores or locate their headquarters. But as stores close the property tax receipts decline, putting a greater burden on homeowners to pay for schools and infrastructure. Same with sales taxes which disappear from the local government coffers. And tax breaks once given to hold onto jobs – like the ones the village of Hoffman Estates and state of Illinois, gave Sears in 2011 to not move its headquarters, look far less justified. In short, the Amazon Effect has an enormous impact on the local tax base – and those missing dollars will inevitably have to come from residents – or a significant curtailing of services.
The impact on job eliminations will be staggering.
The Amazon Effect also has an impact on jobs. Amazon’s growth keeps escalating, from 19% in 2014 to 20% in 2015 to 28% in 2016, which takes the jobs away from traditional retailers. Macy’s plans to shed 10,000 workers as it shrinks and streamlines. JCPenney will eliminate 6,000 employees via early retirement completely separate from its store closings, and HHGregg is shedding 1,500 jobs as stores close. And thousands more are being lost across traditional retail in stores, supply chain positions and headquarters facilities.
Traditional retail employs about 16.5 million Americans – nearly 10% of the entire workforce. 6.2 million are in the prime product lines targeted by e-commerce (GAFO – General, Apparel, Furniture and Other.) The Amazon Effect will continue to eliminate these positions. Over the next five years it is not unlikely that the decline of brick-and-mortar will cause 16% of GAFO jobs to disappear, which is almost 1 million jobs. Simultaneously this could easily cause 10% of the non-GAFO jobs (10.3 million) to disappear – which is another 1 million. This likely scenario would cause the loss of 2 million jobs in just five years, which is the entirety of all lost manufacturing jobs to China. The Trump administration has more employment concerns to face than just the return of manufacturing.
The Amazon Effect is changing grocery shopping, without even being a major competitor in that sector. Because Wal-Mart has lost so much general merchandise sales to e-commerce, the company has amped up grocery sales – which are now 56% of total revenue. To continue growing groceries Wal-Mart is undertaking a massive price war pitting itself against the long-running low cost grocer Aldi. This is creating even more intense profit pressure on Wal-Mart, which last year saw gross margins drop by eight points, as net income fell 18%. Such intense price competition is creating the need for even more cost cutting among all grocers – which means investors beware – and we can expect even more job cutting as the spiral downward continues.
Consumer Goods manufacturers, and their suppliers, will be stressed.
Of course this pushes the Amazon Effect onto consumer goods companies that supply grocery retailers. Wal-Mart has held meetings with P&G, Unilever, Conagra, Coca-Cola and other big name companies demanding across-the-board 15% price reductions at wholesale. And Wal-Mart expects these suppliers to help Wal-Mart beat its head-to-head competitors on price 8o% of the time. This will cause consumer goods manufacturers to cut their own costs, including jobs, as well as pressure their raw material suppliers to further reduce their costs – leading to an ongoing spiral of cost cutting, job eliminations and additional pressures for change.
The internet gave us e-commerce, and that birthed Amazon.com. Few predicted the enormous implications this would have on retail, and society. Every single American is affected by the Amazon Effect, which is now inescapable. The only remaining question is whether your business, your government leaders and you are planning for this and preparing for the inevitable changes which will continue coming?
WalMart announced 1st quarter results on Thursday, and the stock jumped almost 10% on news sales were up versus last year. It was only $1.1B on $115B, about 1%, but it was UP! Same store sales were also up 1%, but analysts pointed out that was largely due to lower prices to hold competitors at bay.
While investors cheered the news, at the higher valuation WalMart is still only worth what it was in June, 2012 (just under $70/share.) From then through August, 2015 WalMart traded at a higher valuation – peaking at $90 in January, 2015. Subsequent fears of slower sales had driven the stock down to $56.50 by November, 2015. So this is a recovery for crestfallen investors the last year, but far from new valuation highs.
Unfortunately, this is likely to be just a blip up in a longer-term ongoing valuation decline for WalMart. And that value will be captured by those who understand the most important, undeniable trend in retail.
(c) AdamHartung.com Data Sources: Yahoo Finance and www.trend-stock-analysis-on.net
Although the numbers for WalMart’s valuation are a bit better than when the associated chart was completed last week, as you can see WalMart’s assets are greater than the company’s total valuation. This is because the return on its assets, today and projected, are so low that WalMart must borrow money in order to make them overall worthwhile. And the fact that on the balance sheet, at book value, the assets appear to be some $50B lower due to depreciation, and the difference be cost and market value.
This is because WalMart competes almost entirely in the intensely competitive and asset-dense market of traditional brick-and-mortar retail. This requires a lot of land, buildings, shelves and inventory. And that market is barely growing. Maybe 1-2%/year.
Compare t his with Amazon. Amazon has about $30B of assets. Yet its valuation is over $330B. So Amazon captures an extra value of $300B by competing in the asset sparse market of on-line retailing where it needs little land, few buildings, far less shelving and a lot less inventory. And it is competing in a market the Commerce Department says is growing at 15%/year.
The trend to on-line sales is extremely important, as it has entirely different customer acquisition and retention requirements, and very different ways of competing. Amazon understands those trends, and continues to lead its rivals. Today on-line retail is 10.5% of all non-restaurant, non-bar retail. And that 15% growth rate accounts for 60% of ALL the growth in this retail segment. Amazon keeps advancing, growing as fast (or faster) than the industry average, especially in key categories. Meanwhile, despite its vast resources and best efforts WalMart admitted its on-line sales growth is only 7% – half the segment growth rate – and its growth is decelerating.
By understanding this one trend – a very big, important, powerful trend – Amazon captures more value than the current value of ALL the Walmart stores, distribution centers and their contents. With all those assets WalMart can only convince investors it is worth about $200B. With about 13% of the assets used by WalMart, Amazon convinces investors it is worth 33% more than WalMart – over $330B. That’s $300B of value created just by knowing where the market is headed, and how to deliver for customers in that future market.
Yes, Amazon has other businesses, such as AWS cloud services and tech products in tablets, smartphones and smart speakers. But these too (some not nearly as successful as others, mind you) are very much on trends. WalMart once dominated retail technology with its massive computer systems and enormous databases. But WalMart limited itself to using its technology to defend & extend its core traditional retail business via store forecasts, optimized distribution and extensive pricing schemes. Amazon is monetizing its technology prowess by, again, leveraging trends and making its services and products available to others.
How does this apply to you? When someone asks “If you could have anything you want, what would you ask for?” most of us would start with health, happiness, peace and similar intangibles for us, our families and mankind. But if forced to make a tangible selection, we would ask for an asset. Buildings, equipment, cash. Yet, as WalMart and Amazon show us, those assets are only as valuable as what you do with them. And thus, it is more valuable to understand the trends, and how to use assets wisely for greatest value, than it is to own a pile of assets.
So the really important question is “Do you know what trends are going to be important to your business, and are you implementing a strategy to leverage those key trends?” If you are trying to protect your assets, you will likely be overwhelmed by the trend leader. But if you really understand the trends and are ready to act on them, you could be the one to capture the most value in your marketplace, and likely without adding a lot more costly assets.