Death of Retail: Amazon’s new conquest begins

From Justin Brill, Editor, Stansberry Digest:

Regular Digest readers know the traditional retail sector is in serious trouble…

Brick-and-mortar retailers – especially those located in shopping malls – are filing for bankruptcy in droves. So far, 2017 has claimed The Limited, hhgregg, Wet Seal, Payless, BCBG, and Gymboree, just to name a few.

Meanwhile, major department store chains like Macy’s (M), JC Penney (JCP), and Sears (SHLD) are closing hundreds of locations. And Sears has hinted that it may be nearing bankruptcy.

Of course, while traditional retailers are struggling, online retailers are thriving as consumers turn to the Internet for their shopping needs. Department-store sales slid 4% from May to June, according to the latest U.S. Census Bureau data. Yet e-commerce sales soared 11% during the same period.

It’s no secret that much of the growth in e-commerce is due to Amazon (AMZN)…

Amazon already dominates the online retail world. It accounted for a huge 43% of all U.S. online sales – and for more than 50% of all e-commerce growth – last year, according to retail data firm Slice Intelligence. But it continues to pursue aggressive growth in new markets, as its recent acquisition of upscale grocer Whole Foods shows.

Amazon took control of the company’s 465 stores on Monday, and wasted no time slashing prices on many of Whole Foods’ notoriously pricey products. As Bloomberg reported…

Amazon spent its first day as the owner of a brick-and-mortar grocery chain cutting prices at Whole Foods Market as much as 43%…

The tech giant’s $13.7 billion purchase of Whole Foods has sent shock waves through the already changing $800 billion supermarket industry. The wedding between Amazon and the upscale grocery promises to upend the way customers shop for groceries. Cutting prices at the chain with such an entrenched reputation for high cost that its nickname is Whole Paycheck is a sign that Amazon is serious about taking on competitors such as Wal-Mart, Kroger, and Costco.

“Price was the largest barrier to Whole Foods’ customers,” said Mark Baum, a senior vice president at the Food Marketing Institute, an industry group. “Amazon has demonstrated that it is willing to invest to dominate the categories that it decides to compete in. Food retailers of all sizes need to look really hard at their pricing strategies, and maybe find some funding sources to build a war chest.”

The threat to traditional grocers could be even greater than many believe…

Remember, as we’ve discussed, Amazon has become a master of “bizarro capitalism.” As Porter explained in the April 21 Digest

The last several years have seen the rise of companies that are experts at exploiting technology to reduce labor costs. Free capital and zero per-unit marginal labor costs equals a whole new form of capitalism that’s genuinely unlike anything the world has ever seen before.

These are companies with massive scale, massive sales growth… and virtually zero profits.

Amazon is the most famous example. In just the last three years, the Internet retailer’s revenues have almost doubled (from $80 billion to $140 billion). Meanwhile, its profit margins haven’t budged. They remain less than 2%. With this kind of scale and almost no profit, Amazon has been able to grow faster and faster, into all kinds of new businesses. The company doesn’t have to worry about cash flows to power investments into new lines of business because, after all, capital is free.

So even though Amazon has only earned profits of $3 billion over the last three years, it has been able to invest $17 billion into growing its core business and building new businesses…

It’s a for-profit company that doesn’t intend to make a profit. And it doesn’t have to because there’s unlimited amounts of additional investment capital, available essentially for free.

In other words, while Whole Foods is currently profitable, Amazon doesn’t need it to make money selling groceries.

Traditional grocers already operate on razor-thin profit margins. How will they survive if Amazon chooses to slash prices further and operate Whole Foods at a loss? It’s not only possible… Amazon’s history suggests it is virtually certain.

But Amazon’s plans likely extend beyond becoming the dominant brick-and-mortar grocer alone. The deal gives the company a clear path to dominate the growing $700 billion grocery-delivery market, too.

Amazon also announced plans to weave its Prime membership program – which already boasts an estimated 85 million customers, or about 25% of the U.S. population – with a Whole Foods rewards program.

Along with new lower prices, these moves could bring in millions of new Whole Foods shoppers… and drive additional sales of Amazon’s existing products.

Traditional grocers should be worried indeed.

In the meantime, one major retailer is trying to fight back…

Wal-Mart (WMT) shifted its growth strategy toward e-commerce last year. And while it remains in a distant third place behind Amazon and Apple (AAPL), the retail giant just stepped up its fight in a big way…

Last week, Wal-Mart announced it is teaming up with Google to offer voice-activated shopping – an area where Amazon has essentially had a monopoly position with its virtual assistant Alexa.

Soon, customers using Google’s virtual assistant will be able to buy hundreds of thousands of Wal-Mart products through the Google Express online marketplace. And this will allow Wal-Mart and Google to compete directly with Amazon in this small but rapidly growing corner of the market.

The deal could also highlight a potential path forward for some other traditional retailers…

In fact, according to Cooper Smith – director of research at retail advisory firm L2 – connecting with big tech companies like Google is one of the few viable options these companies have left. As financial-news network CNBC reported…

“A lot of luxury brands like LVMH, which has refused to touch Amazon with a 10-foot pole, are talking about banding together to create a new luxury e-commerce space. Amazon hasn’t been able to disrupt that market yet. Google and Facebook are the platforms with the reach, those are the alternative platforms that would help brands and retailers reach consumers without having to partner with Amazon,” Smith said.

Chris Horvers, retail analyst at JPMorgan Chase, was on CNBC Wednesday morning with a similar sentiment: “Wal-Mart’s move to enable voice ordering and linking the history is really important. The idea is if we can get the Home Depots and the Costcos to enable that and the Targets to enable that same feature, you start to develop an alternative platform to Amazon… We need to create an alternative site where the rest of retail can go and create critical mass from a customer’s perspective.”

Of course, the odds are still long…

Many brick-and-mortar retailers will not survive. And those that do will have dramatically smaller footprints, if they continue to operate physical stores at all. As Porter explained in the August 18 Digest

My top, most certain trend is the death of retail. I have no doubt that within 10 years, more than half of the retail space in America will no longer exist. And that’s probably too conservative an estimate. The destruction in retail is likely to be far worse and occur far faster, like a 75% decline within five years…

We buy everything – groceries, clothes, cars, toys, tools, services – absolutely everything online. I won’tgo into stores anymore. Not even for a pack of gum. Wegmans will bring me gum along with all my groceries within hours, and the workers stack them all neatly for me in my garage. They even put the food and drinks into my fridge for me.

The rest of the country is right behind me, walking away from the mall and from Target (TGT), too. Nevertheless, most people don’t understand just how big of a change this will be for the U.S. economy.

Consider a few important facts… Between 1970 and 2015, the number of malls in the U.S. grew twice as fast as the population. As a result, America has a truly absurd amount of retail space per capita… America has more than 7.5 billion square feet of shopping center space. That’s about 23 square feet of mall space per person. On a per-capita basis, that’s 10 times more than Germany.

As we’ve discussed, this means a huge number of shopping malls are doomed. So what happens next?

As a result, shorting mall owners is one of the surest ways to invest in this trend.

Longtime readers will recall Porter and his team recommended shorting shares of GGP (GGP) – formerly known as General Growth Properties – last September. GGP is one of the largest and most troubled mall landlords in the U.S. More than 90% of its 127 properties have JC Penney, Sears, or Macy’s as an anchor tenant. And more than 40% have all three.

Even if these retailers somehow survive – which is unlikely – the vast majority of their stores will be left vacant… and GGP’s cash flows will disappear.

Porter’s thesis is already playing out. GGP shares are down about 15% so far this year and recently touched a fresh three-year low… and Stansberry’s Investment Advisory subscribers are already up about 25% on the short position in less than a year.

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