Amazon (NASDAQ:AMZN) has increased its focus on profitability, and that means getting rid of items on which it "can't realize a profit" -- or CRaP, as the company unofficially calls them. Host Shannon Jones and Fool contributor Daniel Kline also discuss whether CVS (NYSE:CVS) selling CBD products fits its image as a company focused on health.
A full transcript follows the video.
This video was recorded on March 26, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Tuesday, March 26th, and we're talking Consumer Goods. I'm your host, Shannon Jones. I'm joined via Skype by Foolish contributor fresh off of his weekend cruise ship, Dan Kline. Dan, how is life treating you? Poorly, it sounds like.
Dan Kline: I promise to not make you laugh -- Shannon has a bit of a cold, so, laughing, she's going to cough. My world is still a little bit wobbly. A lot of people get sick on a boat. I have trouble after I get off the cruise. For the next couple of days, my world is a little bit sloshing around.
Jones: I have to say, I fall in the same category. After I get off a cruise ship, I'm usually a little wobbly. I figured it out, it was my caffeine intake. We'll have to do a follow-up show on how to avoid that for all of our listeners on a cruise ship. I deal with the same thing. Glad to have you back on land.
Kline: [...] cruise ships, maybe next month. So if you have any cruise ship questions, send them to us, tweet us, whatever it is.
Jones: Yes, we'd love to have that, and yes, we will definitely do that. I'm excited, Dan, that you are back on land because today's show is covering some of the bigger headlines and some of the bigger names out there that a lot of our listeners have been asking about.
Let's kick things off with the first story. Of course, that comes from none other than Amazon, AMZN. Reports have come out over the past week primarily of Amazon's newest profitability push, which has really been ramping up on its, for lack of a better term, CRaP on its website. Dan, what exactly is this CRaP on Amazon's website? What is it that they're actually attempting to do here?
Kline: I am someone who has bought a ton of crap from Amazon. We've talked about it on other shows -- sometimes I get package notices from my building, and it's a mystery. What did I order? Is it something I actually need? But they're not talking about that. Amazon unofficially uses the term crap for "can't realize a profit." That's an item that, no matter how they ship it, it's not going to work. Picture something heavy, like a bottle of water; or something that's like both fragile and not very expensive. A bag of Doritos that's really awkward to ship. If I decide at two a.m. that I need Doritos two days from now, Amazon is trying to either very much downplay those items by not allowing ads for them or just not taking them anymore because there's simply no way to make money on them.
Jones: Exactly. In 2018, you saw Amazon starting to push back on a lot of these vendors, saying, "You need to rethink your pricing." Now, we've got word that not only are they saying, "Rethink your pricing," but also, "You're no longer going to be able to have ads. You're not going to be able to pay for ad space on our site if your products are not profitable for us." What's so interesting is, when you look at their ad business, Dan, it's not like the ad business is struggling by any means. Ad sales actually doubled in 2018, totaling over $10 billion for 2019. You've got some analysts saying that could jump 50% to 60%, and their ad business could even surpass the more lucrative AWS, Amazon Web Services, by 2021. It's not necessarily like the ad business is struggling. What's really behind this, Dan?
Kline: I think the ad business gives them some leeway. If there's a product that would be breakeven or lose a tiny bit of money, but it's being advertised and that pushes it overall into profitability, Amazon might be ignoring that. They haven't explained exactly what hits this list.
The other thing they've done is, they've pushed back to vendors and taken certain items and said, "We're not going to fulfill these anymore. These aren't going to be Amazon Prime items. You're going to fulfill them." What that does is, it forces the vendor to look at the pricing and say, "OK, now I have to bear the cost of shipping. I have to deal with all this." It's going to force some prices higher.
This is really just Amazon doing what any store does. If you walk into a grocery store, are they going to devote an endcap to something that they only make a couple of cents on? Or are they going to devote an endcap to a high-margin product or a product that's a gateway to others? If you buy chicken broth, you might need noodles and carrots and who knows what else. Amazon has a harder time doing that. If I buy a bag of Doritos, I'm not necessarily going to buy 16 other things with it. I might take advantage of being a Prime member and just buy a $2.99 bag of chips, and they're going to lose money. So that's the motive of all this. It's just to rightsize some of their business.
Jones: But yet, still, you're hearing the headlines about this just because Amazon has been touted, and they've really been all about creating this frictionless shopping experience, whether that's from a vendor's perspective or from a customer's experience. So now that you see them starting to get much more targeted in terms of what they're actually advertising on their site, you're starting to hear the people lament.
I have to wonder, though, and I think this is what it comes down to at the end of the day, and you started to hint at it: What does this mean for consumers?
Kline: It's bad. Amazon has over 100 million items available for Prime. Let's pretend this gets rid of 2% of the items. It's not going to be a disaster. It's not like you're going to go on to Amazon and be like, "I want shampoo," and all of a sudden, they don't sell shampoo anymore. But you might find that they don't sell shampoo in the exact size bottle you want, or, in the brand of your choice, they only have certain sizes or certain availability. That can happen in grocery stores. If you go to a grocery store, they're only going to have that double-big-size box of cereal for certain brands.
So, again, it's going to impact consumers, because some things that were very, very cheap are probably either going to go away or get more expensive. But I don't think your average person is really going to notice. It's a lot like grocery store pricing. It's something you don't think about that often.
Jones: I agree. I think you will have some immediate pain for some shoppers, but ultimately, the shoppers that are coming to Amazon are coming from a convenience standpoint, and they're willing to pay a little bit more to have that box show up at their doorstep within a day or two. I don't see this being a huge problem for them. It'll definitely be something to watch moving forward.
Next up for us, the largest retail drugstore, CVS, ticker CVS, is diving into the latest new health and wellness craze that is none other than CBD. That's right, CVS has started selling hemp-derived CBD in several of its stores with plans to expand with its partner, the cannabis producer Curaleaf Holdings, ticker CURLF. Dan, what can you tell us about this budding new relationship? See what I did there?
Kline: [laughs] I do. So, this is a toe in the water. This is eight CVS stores, and they're only selling topicals, meaning that they're not entering the other major category for CBD, which is edibles. It's also important to recognize that while there's a lot of, let's call them purported, maybe in some cases proven, medical benefits for CBD, this is not a drug. This is not marijuana. Shannon, you've covered this more. Maybe you can explain the exact differences.
Jones: Exactly. CBD comes from hemp, not the marijuana plant, a cousin of the marijuana plant. Hemp more specifically was made legal thanks to the 2018 Farm Bill that was signed in to law back in December of last year. So now, all of a sudden -- and actually a little bit sooner than I thought that it would -- you're seeing this flood of these hemp-based CBD products. It does not contain THC. THC is what is known as the psychoactive agent behind the high of marijuana. This is completely separate. It's just CBD. As you mentioned, Dan, this is really just topicals: lotions, creams. Certainly it's interesting, because you can see how it could open the door for edibles. Canada is planning to open the door to edibles for marijuana. Of course, they've already legalized adult-use recreational marijuana. Edibles is the next component. Of course, the U.S. is much further behind. But, at least for CVS, they're getting out early on the CBD craze, specifically partnering with Curaleaf with a lot of these topical creams and ointments.
Kline: Clearly, there's a demand. I live in West Palm Beach, Florida. Florida has loose standards on this. There is a CBD store, maybe not on every corner, but there's at least four or five of them within a couple-of-mile radius of downtown, where I'm sitting right now. This is CVS saying, "If people want this, we're not going to give it up." It's many ways like the supplements and additives and other things people take that are not necessarily proven science. Taking ginkgo biloba might help your memory. It might not. There's a lot of that with CBD. This is CVS saying, "Our customers are going to get this product. We should have them get it from us. At least they'll know that it is what it's supposed to be. They'll have more of an idea of how it interacts with other things." It's a very smart play, as long as they take it very slowly and very carefully. You're going to see CBD at the mall. You're going to see CBD in a lot of places. Why not CVS?
Jones: Exactly. With Curaleaf, Curaleaf is the first announced partner. It would not surprise me if CVS decides to add a lot more brands that are out there, some with much higher brand appeal, even. Curaleaf was at least first out of the gate with partnering to get this into CVS stores. The question that I have, Dan, is do you think this makes sense? You and I have talked before on the show about CVS being a company in transition. Do you think this plays in well with this whole concept that they're trying to build?
Kline: I think the challenge is, CVS is trying to build its brand around health. You have CBD -- which, again, I understand, please don't send me the tweets. There's some research that says it works for certain things. There's people who absolutely swear by it. But I think it's fair to say the science is still out. We're not entirely sure what the impact of this is. So, in many ways, it's like CVS selling caffeinated products. Are there benefits to caffeine? Absolutely. Can too much of it hurt you? Sure. It doesn't fit the wellness message entirely.
On the other hand, there's people who think this is a curative product. As long as CVS sort of doesn't make those claims -- if they put out CBD and say it's going to cure whatever, that's not great. But if they leave it the way they market, say, vitamin C or any other vitamin, and people have their beliefs in what it does, then I think it can still fit that motif.
Jones: Yeah. For CVS, personally, I think this does fit well into this rebranding that they're attempting to build right now. They want to be the one-stop health and wellness shop for anyone. I think adding in CBD, you know your consumers want it. Yes, the verdict is still out in terms of all of the benefits, but there are some benefits to CBD that we do know about. And really, the research is just beginning thanks to the 2018 Farm Bill. I think there'll be a lot more that comes out. But I do like to see that they are being aggressive in trying to build out this whole health and wellness concept in terms of store branding.
What's interesting to me, though, is of course on the marijuana side with Curaleaf. Curaleaf, of course, being the first right now to supply this major supply deal with a retailer of this magnitude is significant. You mentioned Florida being a huge market. Curaleaf has a lot of dispensaries in Florida. This certainly expands their retail footprint a lot further. Like I mentioned, it certainly opens the door for edibles, should that ever come to market. All in all, the CBD market opportunity is huge. Some analysts are actually pegging the market as much as $22 billion by 2022. For a company like Curaleaf that only made maybe a few million in 2018, you can see the long growth runway here.
I like the strategy here. In terms of Curaleaf actually having long-term competitive advantage, that's a question mark for me. But I do like, ultimately, this play that CVS is trying to brand itself as a health and wellness shop, and a one-stop shop for many, too.
Kline: Well, for Curaleaf, this is a no-brainer. This gives it ultimate brand credibility. One of the reasons I've never used a CBD product is, I don't want to say every CBD store is kind of sketchy, but most of them sell pipes and bongs and other...things that have valid uses but are also drug paraphernalia. So, I'm not necessarily walking into that shop to find out if taking CBD would calm my nerves or be good for my stomach or, I don't know, help my cat sleep better, some of the many things it's used for. So, for Curaleaf, this puts their product in front of people who would never walk into the places where CBD is being sold now.
That's where CVS has to be careful. They're lending their name to something. It's, in many ways, like back in the 80s or early 90s when I went to college. You could walk into a CVS and buy those pills that helped you stay up later so you could study more. It later turned out that those were very bad. We shouldn't be taking those. And CVS takes a little bit of a hit. That's why they're going slow here. They're not going to introduce a soda with CBD in it, because kids would drink it, until they know exactly what it does and who it's for. So, baby steps, really good for Curaleaf, very progressive for CVS, but they have to be very careful to not harm their brand.
Jones: Even more interesting is that CVS is not the only retailer going after the CBD. We've also got some other, I guess you can call them high-end luxury retailers as well, Dan, jumping in on the craze.
Kline: Yeah. Coming to Barneys, there's going to be CBD shops. That's putting it in front of an entirely new audience. Going into a hundred, let's call them upscale, Simon-owned malls. That's a very different presentation. It's a concierge-level presentation. "What's ailing you? Here's what might work." It's not exactly doctors, but it's kind of like the way a good wine steward or barista can take you through the coffee or the wine process.
Again, it's going to take CBD and bring it in from the fringes. If CVS is stocking it at reasonable prices, and other people are doing some of the matching and "here's what you need" work, that's going to be good for CVS.
Jones: Who knew CBD and a lifestyle luxury brand like Barneys could be a thing? I think it's interesting. They plan on calling this concept that they're rolling out at Barneys "the high end." I have to give it to them, at least a few points for creativity there. I think you'll see much more of this. Even more so, these are signs that we're hitting peak CBD craze. What do you think, Dan?
Kline: I don't think we're anywhere near the peak. I think as this gets exposed to more people...look, I'm 45 years old. There's aches and pains. There's all sorts of things that don't happen to you when you're 35. If these products prove safe and valuable, there's a market for them. I live in Florida. There's people a billion years older than me. If a cream makes your arthritis hurt less, and your friend got exposed to it at Barneys or CVS or wherever, I think there could be a huge mainstream explosion of CBD, and really a destigmatization of it.
Jones: Yeah. I think the growth opportunity is very long. When I say CBD craze, it's really just the madness. When my mom is asking me about CBD showing up in CVS and all of these department stores, that's where I know we've hit peak madness and craze. But all in all, a lot to watch here.
For Dan and me, that'll do it for this week's Industry Focus: Consumer Goods show. Dan, always a pleasure to have you on the show!
Kline: Thanks for having me! Next time, perhaps, I'll be sitting next to you.
Jones: I hope so! And thank you to our listeners for tuning in this week! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is being mixed by Austin Morgan. For Dan Kline, I'm Shannon Jones. Thanks for listening, and Fool on!