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This page was added to your “We get to monetize in a very unusual way. When [Amazon] wins a Golden Globe, it helps us sell more shoes.”
This sounds not far from the strategy brands have been executing for decades in endorsing celebrities and athletes (i.e., content) to sell more products. What is unusual, relative to brands, is that Amazon doesn’t appear to have the high levels of merchandise margins available to produce television content that wins Golden Globes. So, maintaining a high-cost fly-wheel that monetizes by selling commodity products (Amazon Prime) – or makes a market for others to sell commodity products (Amazon Fulfillment) – makes us very skeptical that Amazon’s retail unit can generate the magnitude of long- term profits we think are necessary to justify today’s enterprise value. Using our best estimates, we believe Amazon currently holds less than 2% market share of U.S. retail sales, using the U.S. Department of Commerce’s definition of retail sales, excluding cars and fuel. The exact share and/or exact definition of the size of the market is not particularly important; the relevant point, to us, is that the absolute share is not significant. Even if we assume, for example, that Amazon quintuples its U.S. market share, that would leave 90% of the U.S. retail market up for grabs. We think that investors and retailers alike obviously must be aware of Amazon – now, and for the last 10-15 years, for that matter – but both also should be aware of the size of the opportunity to be found in the substantial portions of the market where Amazon is not. As we consider our own retail exposure, we take the same approach: we have not invested in traditional retailers in suburban malls pursuing business-as-usual strategies; rather, our holdings have differentiated models based upon non-traditional buying strategies (T.J. Maxx, Ross Stores) or upon targeting underserved rural populations with merchandise assortments that are often difficult for, or unattractive to, competitors (Tractor Supply Company). These companies have taken a thoughtful approach to their operations and to their competitive position in relation to online retail, and they have found ways to remain relevant. Finally, we would point out that Amazon just wrote a $14 billion check to Whole Foods to admit, very publicly and very clearly, that online retail is not as suitable in some categories as it is in others, and this was after they tried to do it their own way for ten years.
From David Rolfe (Trades, Portfolio)'s Wedgewood Partners second-quarter 2017 shareholder letter.
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About the author:
Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.
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