Is this business Amazon.com-(NASDAQ:AMZN) proof?
That's the question I ask myself when considering an investment in a retail company. More and more often, the answer is no.
Amazon the conqueror
Amazon continues to disrupt and dominate more and more areas of the retail industry. With the e-commerce titan's recent push into the world of fashion, traditional retailers such as Macy's (NYSE:M), Target (NYSE:TGT), and even the mighty Wal-Mart (NYSE:WMT) are all at risk of losing ground to the online juggernaut.
Amazon is rapidly taking share in the apparel market. In fact, research firm Cowen & Co expects Amazon to surpass Macy's as the No. 1 U.S. clothing retailer by 2017.
Amazon's ascent has been staggering: just four years ago, the Internet retailer's apparel sales were 1/5 the size of Macy's. Since that time, Amazon has moved aggressively to court fashion brands and expand its clothing offerings. That's intensified competition with not just Macy's, but also major retailers like Wal-Mart and Target.
Cowen estimates that Amazon now offers a much larger selection of apparel, with Amazon selling 343,000 different branded apparel items compared to 292,000 for Walmart, 85,000 at Macy's, and 35,000 for Target.
Cowen also noted that the loyalty inspired by Amazon's Prime membership service and the convenience of its fast shipping options are further helping to send more shoppers to Amazon. The research firm found that 11% of Target's and Wal-Mart's apparel customers also shopped for clothing at Amazon during the first six months of 2015, a three percentage point increase from the prior year.
Dark skies for traditional retailers
Unfortunately for these primarily brick and mortar retailers, this trend is likely to accelerate in the years ahead. A recent survey by Mizuho Securities showed that when it comes to shopping on a smartphone, 45% of smartphone users start with Amazon, compared to only 2% for Wal-Mart and 1% for Target.
As these results demonstrate, Amazon is quickly becoming the first -- and likely the last -- place people shop on mobile devices. With the shift toward mobile shopping well under way, Amazon's dominant position in this burgeoning area should only grow in importance. That's likely one of the reasons Cowen is projecting that by 2020 Amazon's clothing sales will have risen 26% per year since 2011, compared to only 2.5% for the apparel industry.
Macy's, Wal-Mart, Target, and other traditional retailers are working to improve their online operations, but it's likely to be too little, too late. Amazon's built a powerful brand based upon a superior selection of goods, excellent customer service, low prices, and convenient delivery. That's a value proposition its rivals will find difficult to match.
Looks can be deceiving
When thinking of high-risk retailers, Macy's, Target, and Wal-Mart may not be the companies that first come to mind for most investors. Yet that only serves to heighten the danger. I'd argue that these businesses are not as safe as many investors believe, as their current sizable cash flows and relatively low-priced stocks may not be enough to offset their potential for significant market share losses. As such, the shareholders who fail to take notice of the Amazon threat risk being blindsided with painful losses in the years ahead.