Over the past six months we have mentioned on more than one occasion how opportunity arises with each crisis. This is not an effort to always be glass half full guys… It is simply the truth! We have also noted that a crisis will accelerate a movement that was clearly in progress. On both fronts we find the world of retail… or more specifically, the transformation of retail!
Pre-Covid, there was one clear winner in retail… Amazon. Customers continued to migrate to the e-commerce behemoth signaling the future of how we would shop… from our couch! The small retailers were toast. The larger retailers had a fighting chance but were way behind Amazon when it came to their ability in providing their customers whatever they wanted, when they wanted it (i.e., asap). That was six months ago… in coronavirus time, that is like six years ago!
After a summer of pandemic, it appears Jeff Bezos has some legit bedfellows in his effort to sell everything to everyone. For the most part, the small retailer is still walking the plank, but the big box retailers appear to be quite formidable and dare I say have an advantage over the trillion-dollar giant when it comes to retailing.
I’m not sure if Walmart & Costco were slow rolling their e-commerce development prior to the coronavirus or if they were simply forced into meeting their customer needs during this time. But, whatever the reason, they might have found their way to compete with the Big A… curbside pickup!
The ability to order online and an hour later go to a local store to pick up your order is huge. A pandemic forced us to shop this way, but it is likely this pleasurable shopping experience will not go away. So, if a large retailer (Walmart) already has multiple locations across the country, has a great functioning ecommerce website, and an efficient process to get product to its customer base… they might just have a recipe for success.
For full disclosure, we have always liked the prospects of the best operating big box retailers (Walmart, Costco, and Home Depot). While Amazon raced ahead of them in ecommerce, we view big box retailing like we view the entertainment industry… people want a certain product. Success will be in providing it in any which way the customer wants it. Needless to say, the delivery methods are expanding.
As consumers we will benefit from these trends, but what about as investors? For years, investors have bought up Amazon stock as it clearly is/was the dominant retailer (ecommerce or brick & mortar) rewarding it with a massive trillion-dollar plus market valuation. The also-rans, while still holding their own achieving average market returns, they aren’t/weren’t valued in the Amazon stratosphere. Will we see a change in the future?
We all know Amazon is much more than a retailer. It’s really a data management company (i.e., Gathering as much of your data as possible and using it to make money). But, even when comparing their retail operation to the other big box retailers, there is a premium valuation placed on the ecommerce giant. As it becomes even clearer the Walmart’s of the World have more than just a viable business, it will be interesting to see how Mr. Market values them relative to the big guy and vice versa. Does Amazon’s valuation come down or do the other guys see a valuation bump?
Over the long-term we know fundamentals will drive a company’s market value, but in the short run investor sentiment many times takes over. Another opportunity as the result of this crisis… will be interesting to see how it all plays out.
Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities. Chart source: Visual Capitalists.