Many investors consider Amazon.com, (NASDAQ:AMZN) to be one of the most, if not the most, disruptive retail tech stocks in the market today. Amazon also trades at such lofty valuations that it takes a leap of faith for investors with no prior positions in the stock to buy its shares. Over the years Amazon has built a reputation of being brutally competitive, to such an extent that it has forever changed the online retail landscape. In fact, it's gotten to the point that investors shopping for retail stocks are best advised to do due diligence by first gauging how susceptible the stocks are to the online retail giant.
Retailers that can give Amazon a run for its money
Despite being utterly disruptive, Amazon is not 100% immune to getting a taste of its own medicine. Most people think of technology stocks as the most likely source of disruption. Investors should, however, not rule out the retail space as another possible source of disruption for Amazon. A little-known upstart today might very well be eating the dominant player's lunch tomorrow. When you consider the mammoth amount of money that is poured into U.S. retail sales--a staggering $380 billion per month--the prospects of a hungry, innovative retailer taking the market by storm does not look too far-fetched. Below are two long-shots that might give Amazon food for thought in the not-too-distant future.
Groupon (NASDAQ:GRPN) has been struggling with its ''daily deals'' business model amid a backlash from merchants and stiff competition from Google and RetailMeNot. The firm's Groupon Goods Service, however, seems to be bringing home the bacon for the company. In a nutshell, Groupon is now selling directly to its customers, instead of simply offering discounts on services. It wouldn't come as a surprise if the company starts building Amazon-like warehouses to support its new retail model. Groupon's current model is a 21st century twist on infomercials and direct mail marketing. Definitely an interesting segment to watch.
E-commerce was rather slow coming off the blocks due to widespread privacy and security concerns. These concerns have now largely evaporated, and nearly every online shopper takes it for granted that transacting online is safe. Early on, online merchandise was limited to small stuff worth a few dollars. The vastly-improved online shopping security now has some online sellers taking online sales to the next level; why not sell ultra-high-end and luxury goods via the web? That's precisely what Blue Nile (NASDAQ:NILE) is doing. The online retailer is building its business on this model, while its top line continues expanding. The luxury goods segment remains one of the very few online markets that have not been over-cannibalized, thanks mainly to more robust customer service that ensures customers are not being scammed with lower-end or fake merchandise. Although Blue Nile is still a small company ($466 million market cap), its innovative business model might become the norm 10 years from now. The company would then evolve from an online retailing outlier to a well-known and respected online luxury goods seller.
Amazon has been increasing its sales at the expense of other brick-and-mortar retailers (see graph below). Some traditional retailers, however, seem to have credible defenses against Amazon.
Mark Miller is a William and Blair analyst in Chicago. Together with his colleagues, for the past two years Mark has been gathering massive swathes of monthly data from 40 large retail websites, to check, among other things, how much product overlap exists between other retailers and Amazon. This is not the kind of analysis you would normally find among typical securities analysts. Mark and his colleagues calculate the vulnerability of a retailer to Amazon by using several functions and assigning them different weights, as shown below:
- 20% based on product overlap
- 40% based on price comparison
- 40% based on favorable shopping environment
By using these considerations, Walgreen (NASDAQ:WBA) and T.J. Maxx (NYSE:TJX) have emerged as being the least vulnerable to losing market share to Amazon. Cabela's is also considered to be at low risk of losing market share to Amazon. The specialty retailer has a 35% product overlap with Amazon, and its goods are 12.2% more expensive.
Walgreen has a 49% product overlap with Amazon, and its merchandise is 17.2% more expensive. T.J. Maxx has the lowest product overlap among the 40 retailer studied at just 17%, while its products are 24.3% pricier than Amazon's.
Since the May study, Amazon, T.J. Maxx and Walgreen have all gained relatively more than the S&P 500. Amazon has risen 17.7%; T.J Maxx has climbed 10.21%, while Walgreen has gained 10.07%. Cabela's shares have, surprisingly, tanked a good 10.2%. In comparison, the S&P 500 has gained just 1.25% in a similar period of time.
Amazon has successfully built a thriving business based on offering its customers a wide variety of products at low prices and fabulous services. The company's dominance as an online retailer might continue for many years to come. Its investors don't seem to be overly concerned with the fact that the company's profit margins have thinned dramatically during its huge growth spurt.
Amazon is, however, not completely immune to facing growing competition from the likes of Groupon and Blue Nile, or from larger companies such as T.J. Maxx and Walgreen that have withstood the Amazon onslaught amazingly well.
Fool contributor Anthony Maina has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Blue Nile. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.