From Seeking Alpha:
Over the past week, Barron’s has been working on an article centered on retailers that are resisting the Amazon (NASDAQ:AMZN) tide. Over that same period, I’ve been doing the same thing, but my focus has been on AMZN, and how the hunter may become the hunted; the disrupter suddenly disrupted. That’s the theme of this article.
As a sense of how even a bull on some non-AMZN retail names gushes about AMZN, the interviewee for that article, Dana Telsey, said this in mildly questioning the extent of AMZN’s stock price surge in 2017:
Amazon’s opportunity to expand in so many categories is amazing.
Yet, I wonder.
. . . .
My reaction to the research I’ve been doing is that AMZN is at risk of another difficult spell. Competitors can possibly exceed it, as shown below. Even Ms. Telsey went on in the next breath to criticize the mighty AMZN, saying:
Amazon does very well on the basic soft offering, but still has work to do to improve the offering and the experience. Retail is a roller coaster. You need to reinvent, remodel, remerchandise. Brands matter. Whether it’s Victoria’s Secret for L Brands; PVH, with Tommy Hilfiger and Calvin Klein; or Coach, they have staying power, and they’re innovating…
Neiman Marcus technology allows customers to compare how they look in different outfits. And more retailers are working to make visiting a store not just about buying an item, but about engagement, creating a social and/or unique experience for the consumer that makes them want to visit again and make a purchase.
I’m not predicting that AMZN is the next BlackBerry or Nokia, but I wonder if the next few years will see a revaluation of AMZN downward and its competitors – the ones that are the true innovators and fighters – upward.
. . . .
It appears that after years of faltering online activity, AMZN’s competitors are taking increasingly effective action. In addition, they may eventually prove that having numerous stores (“emporia” especially when large), having higher profit margins than AMZN, is a huge advantage in this fight:
Ultimately, it’s not too onerous for a large, profitable retailer to add e-commerce capabilities, though it takes time and money to get it right. The price is a temporary strain on profits.
In contrast, it’s impossible for AMZN to develop anything approaching the physical store system that the large, multi-state, and sometimes international, retailers have taken many years, sometimes many decades, to put together.
Link to the rest at Seeking Alpha
PG disagrees with the statement in the OP, “Ultimately, it’s not too onerous for a large, profitable retailer to add e-commerce capabilities.”
The large multistate physical store systems of formerly-profitable retailers like Barnes & Noble, JC Penney, Sears, Aéropostale, Macy’s, Sports Authority, Office Depot, etc., etc., have not done very well lately.
An even bigger question in PG’s mind is, exactly which “large, profitable retailer” has added a successful ecommerce operation?
Walmart qualifies as a large, profitable retailer.
The Wall Street Journal reported that Walmart’s e-commerce sales in 2015 totaled about $14 billion. As a comparison, Amazon’s sales hit $107 billion that year, a figure that included its web-service division.
Walmart’s first ecommerce strategy was to build its own e-commerce capabilities when Amazon was much smaller than it is today. The execs in Bentonville spent gobs of money, but that strategy bombed. It turned out that ecommerce was harder than it looked.
Walmart’s more recent ecommerce strategy is to buy ecommerce companies. Last year, Walmart bought the e-commerce startup Jet, which also owns online furniture seller Hayneedle, for $3 billion. The company also acquired ShoeBuy, a competitor to Amazon-owned Zappos and Moosejaw, an online retailer of outdoor apparel and sporting equipment. Walmart also bought a stake in JD.com, a Chinese e-commerce company that competes with both China’s market leader Alibaba and Amazon.
PG still hasn’t seen any particularly successful ecommerce capabilities show up at Walmart yet.
Here’s the thing with buying technology companies, including ecommerce companies — the best programmers own a lot of stock in the acquired companies. Ditto for the best product managers. Typically, these people are locked into the acquired business with three-year employment contracts as part of the acquisition.
The best programmers have been working 80-100 hour weeks to push the acquired company’s valuation as high as possible. After the acquisition, their main focus is on relaxing and buying expensive toys with a bit of the money they’ve made off their stock. Sure, they show up at work, but they’re also best friends with the local Ferrari dealer. And the local Tesla dealer. And a couple of boat and airplane sales people. Plus they’ve always wanted to hike the Pacific Crest Trail but never had the time before.
These same programmers are adding venture capitalists and headhunters to their phone contacts. The VC’s and headhunters are happy pay for long and expensive lunches and dinners and share industry gossip about hot new startups until the employment agreements expire.
Problems also arise when the really smart talents from the startup discover they’re reporting to not-very-bright corporate types at the acquiring company.
Microsoft, which is a reasonably competent technology company, has acquired a large number of smaller tech companies over the years. PG has known some of the top talent in those tech companies. They rent a nice house on one of Seattle’s many lakes, disappear into the Redmond maw for three years, then they’re out doing what they want to do, either sailing around the world for a year or, more likely, starting a new tech company. In any case, most of the real value Microsoft (and other large companies) acquired in the tech acquisition walks out the door.
It takes real and rare talent to do ecommerce well and, while getting the user interface right is vital, there are an even larger number of things to get right behind the scenes. Not just any programmer can do this and the behind-the-scenes stuff can be very difficult to copy or reverse-engineer.
Even though it’s a large company, Amazon has shown a continuing ability to attract and retain top-tier technical and marketing talent. It has also demonstrated the ability to constantly push the boundaries of ecommerce. Even if a competitor could build a perfect copy of this year’s Amazon ecommerce platform, by the time the copy was finished, Amazon would have made hundreds of improvements to its systems and deployed thousands of additional warehouse robots. This requires a combination of brilliant management that really understands technology and creative technologists that can respond to extraordinary demands management places on them.
The critical raw material for any technology business or operation is technical talent. With it, you can leap tall buildings and recover from bad business decisions. Without it, you’re going to either be lame or copying other companies’ products.
One final question: Where would a talented computer science major from Stanford or Carnegie Mellon or MIT rather work – Amazon or Calvin Klein?