There is very little argument that retail is a tough business. What is making it even tougher is the continual technological disruption by individuals like Jeff Bezos. From books to groceries and from fashion to drugs, Amazon.com Inc. (AMZN, Financial) has reshaped the retail landscape significantly.
However, we noticed there exists certain areas that have been immune to the competitive threat of Bezos’ empire. It also appears to us that market leaders in such fields tend to easily dig an economic moat that can remain wide enough for these businesses to stay Amazon-proof (or digital disruption-proof in general), at least for the mid-term future.
Take the off-price retailers as an example. Their business model is not complicated. These discounters sell popular and quality brands to value-focused consumers with the pricing of 20% to 60% below both Amazon and full-line department stores. At the same time, they help “clear” unsold inventory and extra capacity for brands and larger retailers. What is important here is that off-price retailers offer a discovery-based "treasure hunt" experience that is difficult to imitate online, making the physical store a compelling atmosphere for their target customers. This is why industry leaders like The TJX Companies (TJX, Financial) and Ross Stores (ROST, Financial) shrugged off competition from e-commerce players and earned high returns on capital for their shareholders year after year (see below).
Costco (COST, Financial), the leading wholesale club, employs a similar strategy of creating the “treasure hunt” in-store experience. Additionally, the company nurtures customer loyalty and maximizes customer savings through its prepaid membership model to become more Amazon-proof. Today, there are about 100 million Costco members with an aggregate renewal rate of more than 90%. According to a previous study, covering 100 items sold at both Amazon and Costco, shopping at Costco was cheaper by nearly 20% on average. Like TJX and Ross Stores, the company also delivered a track record of satisfactory returns on capital for recent years (see above).
We believe that selling small-ticket items is also challenging to replicate online, as the high costs associated with running an e-commerce site may not make the low-margin option an attractive or even economically viable investment. Without facing too much competition from technology disruptors, Dollarama (TSX:DOL, Financial) is another name on our high-return retailer list. Canada’s largest and only national dollar store chain offers a compelling value proposition on a wide variety of merchandise at select fixed price points up to $4, with 30% of its sales coming even from products priced at or below $1.25.
Finally, It is similarly cost-ineffective for online platforms like Amazon to build infrastructure to ship bulky items to rural locations that are far away from city centers and less dense in population. Therefore, a niche focus has enabled Tractor Supply (TSCO, Financial), the U.S.’s largest rural lifestyle retailer, to consistently generate industry-beating returns on capital in today’s fast-changing digital era.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Ross Stores.
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