Amazon, Costco, and TJX: 3 Companies to Thrive in a Promotional Retail Environment

These companies are in a position of strength to benefit from the rise of the price-conscious consumer.

Jan 8, 2014 at 5:18PM

When investing in retailers, especially those competing in the low end of the pricing spectrum, investors need to go with the companies that can truly succeed in a merciless competitive environment. (NASDAQ:AMZN), Costco (NASDAQ:COST), and TJX (NYSE:TJX) have what it takes to continue benefiting their customers with aggressively low prices and rewarding their shareholders with growing sales over time.

The disruptive power of Amazon
Amazon is clearly the most disruptive force in the retail industry over the past decade. The company has gone from an online bookstore to a major retailer selling all kinds of products for competitively low prices while gaining market share versus traditional bricks-and-mortar retailers in different categories.

The company has increased revenues at an amazing rate of 32.7% annually over the past five years, and there's no slowdown at sight, considering the recent news that Amazon has recently announced a record-breaking holiday season for its Amazon Prime membership program.

More than 1 million customers around the world became new Prime members in the third week of December, according to the company, and it now has tens of millions of members on a global basis. The company sold more than 36.8 million items worldwide on Cyber Monday -- a mind-blowing figure of 426 items per second.

This is important not only in terms of financial performance during the key holiday quarter: Amazon Prime members tend to buy more often and make bigger purchases from the company. A growing membership base could have profound strategic implications when it comes customer loyalty and competitive position in the long term.

Low prices and high customer loyalty at Costco
Costco benefits from a remarkably loyal customer base: Renewal rates are consistently above the 85% level in recent years, and the last quarter was as strong as ever, with global renewal rates near 87% and important markets like the U.S. and Canada seeing renewal rates above 90%.

The company has a smart and fairly unique business model; Costco makes most of its profits from membership fees, not product sales. This allows the company to sell its products at razor-thin profits, or even at a loss. Price competitiveness is a key strategic factor in the discount retail industry, and Costco's business model provides an advantage versus the competition.

This is not only a source of competitive strengths, but also a valuable trait for shareholders from a financial point of view. Since profits depend mostly on fees the company collects in advance, this means higher stability when it comes to sustaining cash flows through the ups and downs of the economic cycle.

Fashionable bargains from TJX
TJX is an off-price retailer of apparel and home fashions operating approximately 2,400 stores in the U.S. under its T.J.Maxx, Marshalls, HomeGoods, and Sierra Trading Post brands and more than 700 stores in Canada and Europe under the Winners, HomeSense, Marshalls, and T.K. Maxx brands.

The company provides department stores the opportunity to clear excess inventory at very favorable terms; TJX is willing to purchase less-than-full assortments of items, styles, and sizes, as well as quantities ranging from small to very large. The company pays promptly and usually doesn't ask for typical retail concessions like advertising, promotional, or return allowance.

This gives TJX significant bargaining power with suppliers, which the company translates into pricing discounts of between 20% and 60% versus traditional retail prices. Rock-bottom prices resonate remarkably well among consumers through good and bad economic times: TJX has reported growing annual comparable-store sales in each of the past 17 consecutive years.

The company seems to be firing on all cylinders. TJX reported better-than-expected financial performance for the third quarter of 2013, and management raised the low end of its earnings guidance for the full year. CEO Carol Meyrowitz sounded quite optimistic regarding prospects for the holiday quarter: "The fourth quarter is off to a good start, and we see exciting opportunities for this holiday selling season."

Bottom line
Price competitiveness is becoming a crucial success factor in the retail industry. Smart and efficient companies like Amazon, Costco, and TJX are well positioned to continue benefiting from the rise of the price-conscious consumer for years to come. Investors looking for sound names among retailers may want to give some some consideration to these rock-solid industry players.

The future of retail
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they’re planning to ride the waves of retail's changing tide. You can access it by clicking here.

Fool contributor Andrés Cardenal owns shares of The Motley Fool recommends and owns shares of and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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