If you have been following my retail articles closely, you may have noticed I have been advising investors to be cautious about investing in retail majors. There are several reasons why the current status quo in the retail segment is going to be disrupted over the next several years. One of the primary reasons is e-commerce; more specifically, Amazon’s (AMZN, Financial) disruption of the space.
E-commerce accounts for only a small portion of the overall retail market, but it has increased steadily over the years and will continue to do so. The problem is, e-commerce is not creating new customers. It is taking away customers from brick-and-mortar stores. As more and more people shop online, fewer and fewer are going to physical stores.
When that happens, big-box retailers will find their margins squeezed even further. Only the strongest and most unique retailers will be able to stand their ground.
Does that mean the brick-and-mortar store concept is dead? By no means. There is a massive cash-oriented segment of the consumer population that is never going to move to online shopping. Then there are the tech-averse who do not trust online security.
There is also the matter of groceries and perishable goods. Shipping these products is a time-sensitive task and customers are not going to settle for “nearly fresh” produce, meat and other grocery items.
Yes, there is a market for online grocery ordering, but even a company like Amazon - with its billions of dollars - is not likely to take on the logistical nightmare of setting up a nationwide grocery delivery system. Besides, where groceries are concerned, most people still like to see, touch and smell their produce before buying.
That is the big e-commerce weakness big-box retailers must now leverage to their own advantage. Having a storefront means physical touch points for customers. This presence can then be extended to the online realm as an option.
For all these reasons, Amazon has been testing the waters of the physical retail space for almost a decade or more. While still unsuccessful, the company keeps pushing this agenda. Projects like Amazon Go and Amazon Fresh-branded stores are part of that agenda.
“Amazon wants to open 20 brick-and-mortar grocery stores over the next two years and the online retailer believes the U.S. market has room for up to 2,000 of its Amazon Fresh-branded grocery stores over the next decade. “- Business Insider
In the end, the retailers who will survive and thrive are the ones that can provide multiple delivery options to their customers - in-store, online and pick up. These three models must be part of every retailer’s capabilities in the future.
Physical retail chains like Wal-Mart (WMT, Financial) and Kroger (KR, Financial) need to leverage their store presence and implement strong complementary digital channels. Online retailers need to beef up their physical presence and be able to compete in the groceries segment - even if it is limited to certain cities in the beginning.
Wal-Mart seems to be on the right track with its new model of Supercenter, Neighborhood Market and Online retail because it is a great way to extend its services deep into urban locations. Costco’s (COST, Financial) membership-only model will ensure sales keep ticking along. Amazon is at the top of the e-commerce pile and must now look to expand physically. Kroger, the dark horse of retail, will find a way to grow based on its multi-brand acquisition model.
But for smaller retail chains, unless they are able to retain customers by offering more and more value over time, it is going to be a rough five years. Margin and price battles are now giving way to value and convenience battles, and the weak may just end up being acquisition fodder for the strong.
The only sensible way to invest in the retail segment is to carefully assess the capabilities of each company in terms of how much value they can add to their customers’ lives in the future and what they are doing now to achieve that. If they do not meet your minimum requirements, they should not be in your portfolio.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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