Amazon.com has effectively dominated multiple industries, making its competition irrelevant.
Has Amazon.com (AMZN 2.48%) ruined retail? With PetSmart (PETM +0.00%) accepting an $8.7 billion buyout offer from private equity firm BC Partners and Dick's Sporting Goods (DKS 0.23%) rumored to be thinking of taking a buyout, too, it's reasonable to ask whether the e-commerce giant has made the specialty retailer a thing of the past?
We've seen a lot of niche businesses disappear over the last few years soon after online shopping giant entered a niche.
- Amazon's original mission was to be the "world's biggest bookstore" spelling the demise of Borders Group and putting Barnes & Noble (BKS +0.00%) on the ropes
- Consumers buying electronic gadgets at Amazon after "showrooming" them at big box stores was the death knell for Circuit City and Sixth Avenue Electronics, while Best Buy (NYSE: BBY) -- itself a possible private equity buyout candidate -- nearly joined them
- Amazon's pricing advantage threw OfficeMax into the arms of Office Depot (ODP +0.00%) to stay solvent, and now there's talk of a possible further consolidation with Staples (SPLS +0.00%)
And the e-commerce leader continues to drill down into its rivals. Its e-book division, for example, is hastening Barnes & Noble's decline as the Kindle e-reader pressures sales. The electronic gadgets found in the private label lines of Amazon Basics boost its own profitability while undermining Best Buy's advantages. And Amazon is branching out in other directions too, including groceries, furniture, bath and bedding, tools, and pet care.
Specialty retailers have been dogs
The performance of specialty retailers has lagged behind the broader industry indexes. Revenues at PetSmart are up an average of 6.7% a year for the past three years, but only rose 2% last year. The pet care leader ignored the online space for too long allowing Amazon's wag.com to gain a commanding foothold. Why carry a 50-pound bag of dog food home from the store when a deliveryman will bring it right to your front door?
Staples, Best Buy, and Barnes & Noble, also saw revenues fall over the past three years with the declines accelerating at a faster rate last year.
Analysts have also pointed to Amazon selling the majority of the sporting goods sold at Dick's as part of the reason for the retailer's underperformance.
And its fast, free shipping policies could undermine competitive advantages otherwise held by retailers like The Container Store (NYSE: TCS) whose strength is said to lay in the depth of its employee's knowledge. But it still lost half its value over the past year as net sales rose an anemic 1.4% in its fiscal third quarter report issued last week, and same store sales were down 3.5%, marking their third straight quarter of decline.
Amazon is pulling on the leash
At the same time Amazon is enjoying 30% annual revenue growth, with the market watchers at ChannelAdvisors reporting the e-commerce leader enjoyed a near-36% increase in sales for the month of November and a 22% increase in December.
Amazon's investments in distribution centers have made it a force in retailer's own backyards.
As Amazon invested more in promotions and shipping to avoid a repeat of the prior year's holiday debacle, it was able to entice 10 million new people to sign up for its Amazon Prime membership program that offers free shipping, online movie and music streaming, and more. Across all of 2014, the e-tailer sold more than 2 billion items worldwide.
That kind of performance is coming at the expense of specialty retailers and explains why when it enters a new business -- such as its recent foray into ethically sourced baby-care products -- investors immediately question whether established players can survive.
Yet if specialty retail is becoming a wasteland, why would private equity want to pay billions for one?
Wash, rinse, repeat
There seems to be a familiar script that's followed when a private equity firm buys a company: it cuts costs to the bone, loads it with debt, and then spins it back into the public markets, supposedly a better business.
A lot of the changes needed to turn a company around are difficult to effect as a publicly traded business because of the short-term mentality of many investors. Of course, a management team that allows that kind of thinking to influence its own decisions is probably already defective.
But does the newly emerged company represent a good deal for investors? On the one hand you have a company like dollar store chain Dollar General (DG 3.25%), which was taken private by Kohlberg Kravitz Roberts in 2007, larded with around $4 billion in debt, and then IPO'd again in 2009. It has quadrupled in value since then.
On the other hand, toy seller Toys "R" Us -- which was taken private in 2006 by Bain Capital Partners and KKR for $6.6 billion -- now has over $5 billion in debt, but was recording wider losses than the year-ago period. Its private equity owners tried to take it public in 2010, but eventually pulled the IPO, and there's no end in sight for when they'll be able to exit.
Toys "R" Us also said comparable sales at existing U.S. stores fell 5% during Christmas, partially as a result of more kids turning to digital entertainment, but also because Amazon.com is taking customers away. In fact, Amazon reported that on Cyber Monday, customers ordered more than 18 toys per second from mobile devices alone.
Too little, too late
There's no guarantee Dick's Sporting Goods or PetSmart will fare any better than Toys "R" Us if and when they go private. Dick's rival, The Sports Authority, has been private now for many years and says it realizes now how important the online channel is for it now after years of ignoring it. Similarly, it took PetSmart a long time to wake up to the Internet's potential; its myopia prevented it from hiring a dedicated executive to manage its digital platform until just last year.
But with Amazon.com so far afield now, it may have ruined any chance for them to ever be retailers that are something special to investors again.
