Google's Ecommerce Flywheel

Google continues to quietly build their US Ecommerce flywheel to compete with Amazon. An example of the three pillars:

Same Day and Next Delivery for all of the following stores (note the majors):

Ads (except for top news stories and one result) cover the entire first page of a search:

Voice purchasing for the majors including Target and Walmart.

We tend to focus on the Walmart vs Amazon battle but Google has quite the flywheel of their own.

 

Best Buy's True Secret to Thriving

This recent NY Times piece highlighted prices, human focus, brick & mortar showcase/fulfillment, cost cuts and luck as the reasons Best Buy has succeeded against Amazon. 

I'd argue Best Buy continues to see success for the following reasons: 1) accelerating out of sales of media (CD's) and pushing into larger ticket items like appliances; 2) focus on services (Geek Squad, installation, premium home theater, mobile); 3) strong store in store concepts with major players like Samsung, Apple, Lenovo; 4) loyalty program; 5) market/competitive factors.

Number 5 is the most important to focus on. Best Buy eventually gained the scale necessary to force Circuit City and other regional electronics players out of business. Although the spend within consumer electronics space hasn't seen growth recently, Best Buy is the only major national player making it much easier to capture customer's spend. The electronics space is nothing like department store space that has a number of national players all fighting for a piece of the pie. Best Buy's most strategic move was focus on weeding out the one national player and several regional players. Nothing to do with Amazon.

Source: https://www.nytimes.com/2017/09/18/busines...

Kohl's: A Deal With The Devil?

Just last week, Kohl's announced a partnership with Amazon to open 10 "smart home experiences" in the LA and Chicago area. Initial responses from the media and industry pundits ranged from, "why deal with the devil" to "Kohls is giving away the store on this deal." These types of headlines and views, remind me of all the retailers that have taken the "enemy" stance with Amazon. Some have succeeded. Whilst not completely attributable to Amazon, some have failed. Fast forward to today and  Kohl's announced they will accept Amazon returns at 82 of their stores. Acceptance of returns includes taking possession of the item(s), packing the item(s) and shipping the return back to Amazon. Kohl's even plans to setup designated parking spaces.

Now that we understand the extent of the full partnership, is this a deal with the devil? Absolutely not. 

As Amazon announces partnerships with key brands like Nike, buys retailers like Whole Foods and posts solid year over year sales growth each quarter, Amazon's momentum and allure only grows. With legacy retailers facing overinflated store bases, declining comp sales and online sales that are expensive to attain, it was only a matter of time before one tied up with Amazon. By partnering with Amazon, Kohl's gains that first mover advantage as the first brick & mortar retailer in the apparel space to partner with what is soon to be the largest apparel retailer. What does Kohl's really have to lose? Just think of the potential upside to these types of deals:

  • Foot traffic to stores (despite returning Amazon product)
  • On-trend electronics sales within voice space
  • Inclusion within the Amazon flywheel

Don't be surprised to see a success story out of this partnership that includes rollout to additional stores or a branded web store on Amazon.com. Call it unconventional, call it crazy, but Kohl's is setting itself up for a partnership that will lead to many more opportunities than threats. Let's not forget that at one point Amazon ran Borders.com, Toysrus.com and Target.com. 

Source: http://www.businesswire.com/news/home/2017...

August Retail Sales: A Surprising Twist

Retail sales results have been generally quite consistent. The categories of building materials (Home Depot, Lowes) and internet non-store retailers (Amazon) have been strong whilst department stores (Kohls, Nordstrom) and electronics have struggled. 

That trend stayed intact for the most part, but there was one surprising twist. Internet non-store retailers posted an 8.4% gain over last year which is the lowest in well over 3 years. We are used to double digit gains with year to date currently showing as 10.5%. Secondly, department stores saw a bit of relief as the group was only down 0.8% versus a year to date figure of down 3.3%.

I don't believe this changes the long term trend, but was quite surprised to see this twist. Could it have been Amazon Prime Day hangover? Maybe department stores "bought" sales in the month of August with higher markdowns?

Source: https://www.census.gov/retail/marts/www/ma...

God Bless the USPS

The Postal Service has a legal monopoly to deliver first-class mail and non-urgent letters. It is the only entity that can put something into a mailbox or through a mail slot. It is legally obliged to provide the service at the same level and price nationwide. That means, even with mail volume down 40 percent since 2006, the Postal Service still must visit 155 million mailboxes every day.

Since 2007, the Postal Service has been required to allocate 5.5 percent of its fixed costs to package delivery and to incorporate that into its pricing. That figure made sense then, but today, 25 percent of the Postal Service’s business is package delivery. And thanks to features of the Amazon deal – such as Sunday delivery, grocery delivery, even delivery from fish markets to local restaurants – the expenses have climbed.

In fact, they’ve climbed so much, according to a recent analysis by Citigroup, that the Postal Service should be charging Amazon $1.46 more per package than the $2 or so it does now. “Amazon now enjoys low rates unavailable to its competitors,” the Journal story said. “It’s as if Amazon gets a subsidized space on every mail truck.”

It’s not just the free ride in the truck. It’s the $200 million three years ago to furnish carriers with 270,000 Internet-connected handheld scanners needed for real-time package tracking. It’s the $5 billion or more to replace the Postal Service’s 190,000 delivery vehicles with new ones better equipped to handle packages.

Let's get this straight. If the Postal Service could stop delivering to a portion of American households, they would. No carrier can profitably deliver to EVERY household in America. Complain about their service, complain about their losses, but without the USPS, FedEx and UPS wouldn't have final mile delivery and ecommerce wouldn't see the current and planned growth rates we all enjoy. Thank you USPS.  

Source: http://www.washingtonexaminer.com/for-ever...

Distribution As a Differentiator In Retail

Amazon's distribution/fulfillment centers exceed the combined number of distribution centers within retail. Please note that a number of the big box retailers are missing but the numbers don't lie. Amazon has nearly 2x more than the entire retail industry. Some may argue this is excessive whilst others may say this sets up Amazon for the next several decades of multi-channel fulfillment.

When taking stores into consideration as fulfillment centers, Amazon falls to the middle. With that said, this is a bit of a stretch in comparison. The economics and throughput of stores pales in comparison to distribution centers. The scale, reach and automated nature of Amazon fulfillment centers clearly sets Amazon up to leverage distribution as a differentiator for decades to come.

Source: http://feedproxy.google.com/~r/zerohedge/f...

Amazon Private Label vs Brick & Mortar Private Label

Everyone is well aware of Amazon's private label but brands within electronics. Not everyone is aware of their offerings within apparel and fashion. If 1010data's findings are showing initial traction. Note the Pinzon (home/bedding), Lark & Ro (women's apparel) and Buttoned Down (men's dress shirts) in the chart below. 

Whilst the growth numbers are impressive for the aforementioned apparel brands, keep the scale in mind. Building scale with an etail/.com only offering takes a significant amount of time. Secondly, Amazon's offering of other brands and 3rd party seller brands is so vast that sales are dispersed across an incredibly long tail. Contrast that scale with the scale of Target's private label kids brand Cat and Jack. You can argue the offering of Cat and Jack is much broader than Amazon's apparel brands, but one can't be amazed at the concentration of sales in brick & mortar stores. Cat and Jack did $2 billion in sales in its' first year thru July. 

Source: https://www.licensing.org/inside-licensing...

Department Store & Off Price Retail Earnings Commentary: Macys, Kohls, TJ Maxx, Nordstrom

Another quarter has passed with Q2 earnings providing a preview on where retailers believe the important and critical quarters of Q3 and Q4 will end up. All reports are now complete (excluding Costco) and the exaggerations of the death of retail have subsided but there are obvious pockets of strength and weakness. Nordstrom and Saks full line stores surprised to the upside, Off Price continued its' march and Dollar Stores showed the best comp sales increase in several years. Bottom line: Q2 was better than expected, there seems to be optimism for Q3 and Q4 within Off Price, Dollar Stores and one Department Store.

JC Penney

  • Posted the 4th consecutive quarter of negative same store sales growth of -1.3%
  • Margin improved from last year's quarter
  • Focus on additional rollouts in big ticket areas like appliances and home continue along with expanded Sephora store in concepts
  • Bottom line: JC Penney will continue to close stores and limp along as malls continue to weaken and their digital offering remains average

Kohls

  • Posted the 6th consecutive quarter of negative same store sales growth of -0.4%
  • Margin declined slightly from last year's quarter
  • Kohls still remains as one of the few large scale department stores that has publicly stated no plans of store closures
  • Bottom line: While the same store sales decline was marginal, I remain skeptical that all of the pain is behind them

Macys

  • Same store sales came in down 3.6%, the 10th consecutive quarter of negative growth
  • Margin declined slightly from last year's quarter
  • Full year guidance was confirmed
  • Bottom line: Pain will continue with further store closings and pressure on the existing stores, Backstage and Blue Mercury aren't enough to reverse the course.

Nordstrom & Nordstrom Rack

  • Same store sales came in positive for both groups with Nordstrom at 1.4% and 3.1% for Nordstrom Rack
  • Strong online results in Nordstrom.com and Nordstromrack.com/Hautelook offset the store results of down 4.4% for Nordstrom and Rack down 1.0%
  • Margin was lower than last year as the company was a bit more promotional to offset the store weakness
  • Guidance was essentially unchanged with same store sales to remain flat
  • Bottom line: Nordstrom remains the best of breed department store with an adequate mix of full price and off-price

Ross

  • Posted another strong quarter with 4.0% same store sales growth
  • Guidance for Q3 is 1.0-2.0% growth versus a 7.0% increase in Q3 of 2016
  • Bottom line: Ross continues to do well and should continue to gain share with their flagship Ross banner and dd's Discount stores despite a non-existent ecommerce offering

TJX

  • The TJ Maxx & Marshalls duo posted a 2.0% same store sales growth; up from 0.0% last quarter
  • The overall same store sales increase was 3.0% driven by the HomeGoods increase of 7.0%
  • Guidance was raised for the full year
  • Bottom line: TJX continues to see growth in their existing store base and is aggressively opening new stores. Once the store growth slows, look for TJX to truly get into ecommerce and further focus on international growth.

Other Points to Note

  • Dollar Stores both posted the best same store sales figures in years
  • Saks posted one of their best quarters in several years

 

Q1 Earnings Commentary: Department Stores

Q1 Earnings Commentary: Off Price

Disney Still Loves Netflix

With this one statement about Netflix, Disney's revered CEO Bob Iger set the world ablaze on the debate as to whether Netflix can survive without Disney:

With this strategic shift, we’ll end our distribution agreement with Netflix for subscription streaming of new releases beginning with the 2019 calendar-year theatrical slate. These announcements marked the beginning of what will be an entirely new growth strategy for the company, one that takes advantage of the opportunities the changing media and technology industries provide us to leverage the strength of our great brands.

This was a strategic move that in no way ends the Disney Netflix relationship:

  1. Bob is setting the stage for the next round of negotiations. Bob realizes Disney content is worth more than the current Netflix deal. 
  2. Bob realizes that HBO, Showtime and many others are interested in Disney content.
  3. Bob realizes he has a captive audience in the Disney ecosystem requiring Disney to provide their own streaming service.

Bottom line: Disney is not ending their relationship with Netflix. Disney is resetting their relationship and will ultimately provide the content to the highest bidder or group of consumers paying the most. Netflix has become a necessary evil with deep pockets that Disney will forcefully play with for decades to come.

Source: https://seekingalpha.com/article/4096625-w...

Your Social Rating is Your Worth

More scores that rate your trustworthiness are coming to China’s internet—which is great for a quick discount, but concerning for civil liberties.

Tech giant Tencent is gradually testing and and expanding its “social credit” system that will give users a numeric rating based on their spending habits and social connections, two years after rival Alibaba launched its own social credit system. A source familiar with the matter this week confirmed that Tencent expanded its pool of “beta test” users for Tencent Credit, the name of its social credit system. The beta test users were given access to the service on QQ, a Chinese chat app.

According to media reports (link in Chinese), users must input their real names and Chinese ID numbers to reveal their scores, which ranges between 300 and 850. The company breaks down that score into five sub-categories: social connections, consumption behavior, security, wealth, and compliance.

Incredible. This has to be right out of the Black Mirror episode using social media as the ranking system by which the main character bases her worth. Which of the majors (Google, Facebook, Apple) will try some version of this first? 

Source: https://qz.com/1049669/chinas-tencent-hkg-...

Globally Made vs. USA Made

American Apparel's new owner Gildan (Canada based) recently relaunched the American Apparel website. As part of the relaunch, the new owner is providing customers the option to make a choice for globally made vs. American made items for their "Made in USA" capsule. This is a departure from the American Apparel of old that boasted 100% of the product was made in the USA (typically Los Angeles). For the new "Made in USA" capsule, the difference in price ranges from 16-26% lower for the globally made versions. American Apparel notes that the quality is identical and both versions are sweatshop free.

This is the first time I've seen a blunt choice given to the consumer and I'd bet that most consumers will likely choose the global version. What say ye?

Digital Ad Kool-Aid

In the fourth quarter, the reduction in marketing that occurred was almost all in the digital space. And what it reflected was a choice to cut spending from a digital standpoint where it was ineffective: where either we were serving bots as opposed to human beings, or where the placement of ads was not facilitating the equity of our brands.

So P&G cut over $100 million out of its digital advertising spend in the fourth quarter, and this is what happened, according to Moeller: “We didn’t see a reduction in the growth rate.” And he added, “What that tells me is that that spending that we cut was largely ineffective.

Stories of brands cutting their digital ad spend are still few and far between. Facebook and Google have nothing to worry about as they both recently posted record sales and earnings. A majority of advertisers are still drinking the Digital Ad Kool-Aid.

Amazon Earnings: More of the Same

Amazon released earnings last night. Despite a beat on revenue, earnings came in well below expectations and the market is trading the stock down 2-3% pre-market. I have updated the various slides and note 3 main themes:

  1. Revenue growth accelerated from recent quarters for product sales; AWS growth was lower but still above 40%
  2. Services now responsible for 35% of net sales as Amazon seeks to improve margins and hold less inventory
  3. Earnings were much lower given the investments in North America and international markets like India

The last few quarters showed profits that exceeded Wall Street's expectations and made the general public finally see that Amazon does truly make a profit. That comfort level brought a stock performance gain of almost 40% year to date. This quarter brought a much lower margin and profit that may bring back some of those fears. With that said, the business looks strong and continues to provide us with more of the same: revenue growth, move to services and investing in growth. Nothing to worry about here.

Sears & Amazon

Amazon is staking a claim in the appliance market in a big way in a partnership with Sears Holdings.

The embattled retailer announced it will sell its prized Kenmore-branded appliances on Amazon. The deal opens the way for the broadest distribution to date of Kenmore products outside of Sears stores and its websites. Distribution will be nationwide, and Sears Home Services and Innovel Solutions units will provide delivery, installation, and other services.

So why did Sears wait so long? Did Sears consider Amazon an enemy all this time? Other retailers such as Children's Place have put the enemy thoughts aside and figured out how realize the value of Amazon for extending their channel offering and growing sales. As marketplaces grow and legacy brick and mortar retailers struggle, brands will seek to leverage Amazon's devout customer base and breadth of ways to sell. Sears is an example with Amazon and Abercrombie is now example with Alibaba's Tmall. It will just take more time for other brands to come around.

As an added feature, Sears will sync its full line of Kenmore Smart appliances with Amazon’s Alexa. The integration means that customers will able to control the appliances with a voice command.

Kudos to Sears for seeing the potential of the Alexa line.

Image by: Steve Lovelace

Source: http://www.chainstoreage.com/article/onlin...

3 Prime Day Facts

Tons of coverage on Prime Day but thought I'd take a few minutes to highlight the true facts of the 3rd year of Prime Day:

1. Sales Did Not Exceed Black Friday or Cyber Monday, Sales Did Exceed Amazon's Black Friday and Cyber Monday Sales - Estimated sales of $1 billion pales in comparison to Black Friday and Cyber Monday for all of retail. 

Total Sales - Amazon's Prime Day vs All Retailers ($ Billions)

2. Prime Day Is Profitable - All of the deals except for Amazon product are paid for and marketed by brands and sellers. The 25% discount you see on a product is a markdown or discount paid for by the brand. Amazon is paying for the discounts on products like the Echo but all other products are 100% paid for by the brand or seller. 

3. Prime Day is Part of the Fly Wheel - The $1 billion in sales is about 2.5x an average day but estimated to be 3-4x an average day in July. Therefore, it isn't a major driver for Amazon So why do it? Build excitement, sell more Prime memberships and offer one more benefit to the Prime ecosystem. Imagine Prime Day (or soon to become Prime week) in Whole Foods. Doorbusters in July?

One last thing...Amazon followed the lead of Alibaba's Singles Day, 11.11. The sheer scale of Singles Day compared to Prime Day, Black Friday and Cyber Monday is astounding:

Total Sales - Amazon's Prime Day vs All Retailers vs Singles Day ($ Billions)

Nike's Ambitious $50 Billion Goal for 2020

Nike dominated news headlines the past few weeks with announcements of a massive layoffs, selling direct to Amazon and capping off Thursday with an earnings release. All of the headlines led to a volatile week of trading for the stock from a low of $50 to a high of $59.71. Despite the optimism, Nike still seems to be struggling. 

Upon closer inspection of the earnings, there was one major positive with emerging markets growing 21% (18% with foreign exchange) vs. the previous year of -7% (12% with foreign exchange), but that is where the good news stopped:

  1. Nike's largest market North America posted flat sales growth.
  2. Nike's 2nd (Western Europe) and 3rd (China) largest markets both posted significantly lower growth rates when compared to the previous year.
  3. Nike's gross margin in the quarter declined 180 basis points and for the year declined from 46.2% to 44.6% due to higher product costs and unfavorable exchange. 

NPD's latest data on Nike's battle with Adidas shows tough times are still ahead for the mainline brand and Nike's iconic Jordan brand. You can't help but admire Adidas posting currency neutral growth of 31% in North America and 30% in China. Whilst Adidas is clearly the smaller rival with higher growth rates on a lower base, the market share gains are clearly being had by Adidas.

Will the announcement of selling direct to Amazon, laying off 1.2% of global employees and reducing SKUs lead to a turnaround? Questionable. Nike is already a top 3 brand in apparel/footwear on Amazon given the plethora of 3rd party sellers on the marketplace. Selling directly to Amazon will shift sales from those 3rd party wholesalers to Nike at a higher margin but will take a considerable amount of time. Layoffs provide meaningful cost savings in the margin department but SKU reductions will likely lead to leaving sales on the table. 

Each of these turnaround tenants lack the growth needed to meet Nike's public announcement goal of $50 billion in annual sales by 2020. Keep in mind it took Nike 13 years from 2002 to 2015 to gain $20 billion, how will the company ever increase another $20 billion in 5 years time (2015 to 2020). Until Nike shows a significant improvement in growth of key markets such as China and Emerging Markets, $50 billion is a number that seems a bit optimistic.

 

 

What I Learned From Jack Ma of Alibaba

Alibaba recently hosted an event in Detroit called Gateway 17 which invited 3,000 small and medium size businesses across apparel, consumer goods, hard goods and food. Speakers included Martha Stewart, Charlie Rose, Dan Gilbert and Alibaba's founder Jack Ma himself. Given Jack's commitment to President Trump to provide the US with 1 million jobs, the event was also heavily attended and covered by the media. 

The overarching theme of the event was to convince US small and medium size businesses of the size and need of the Chinese market as the middle class grows and China shifts from a manufacturing economy to a consuming economy. Jack Ma was featured in a Charlie Rose interview on stage on the evening of day 1 and provided day 2's keynote. This was my first time seeing Jack Ma live and a few themes stuck with me:

  1. China, China, China - Alibaba has tried to setup shop in the US, launched platforms like 11 Main in the US but recognizes these initiatives as mistakes. Jack realizes that using the US for product as opposed to selling product in the US is Alibaba's best route. Jack notes that the US drove the global economy for the last 30 years but China will likely drive the next 30. 
  2. Alibaba Is Like No Other - Jack believes Alibaba and Amazon aren't competitors. Alibaba empowers small businesses to sell on the internet. Amazon is ecommerce retailer. You can argue that point but Jack says, "Alibaba is not a company. Alibaba is an economy. By 2036, we hope to be the 5th largest economy in the world." With ambitions like that, Alibaba stands alone.
  3. Greater Purpose - Jack mentioned 100 days of flying in 2017. Is Jack running Alibaba day to day? No. Jack believes it is his civic duty to spread the word of Alibaba but even more so China. What helps China likely helps Alibaba. 

The scale of Alibaba and China is something the world has never seen. As economies like China and India become consumer economies, the opportunities for ANY market are endless. The internet makes each of those customer's accessible if done the right way.

Disclosure: At time of publishing, I was long Alibaba stock.

jack_ma_@ryanmcraver

The "Add to Cart" War

Astute piece by Buzzfeed on the war happening behind the scenes of Amazon to keep prices ultra-competitive within the Amazon walls:

Behind the scenes on what may appear to be a simple product page on Amazon, a bustle of sellers are all scrambling to win your business. They're fighting over a small yellow box that is emerging as one of the most important battlegrounds in online shopping.

To the average user who lands on a product page it's all pretty straightforward. To the left are photos of the item — a cell phone charger, let's say. To the right, there's the "Add to Cart" button. Pretty simple, right?

But dozens of sellers may all be offering that same charger, and only one is chosen by Amazon's systems to get the sale when you hit Add to Cart. The others are relegated further down the page, and the vast majority of Amazon users never bother to look at them.

At any point in time, products can have 5-10 sellers competing to sell the exact same product. Although Amazon doesn't explicitly explain which seller earns the "buy box," it is known to be a combination of price and seller reviews. If a seller does not have the buy box, their product is still available for sale but highly unlikely to take place. Therefore, owning the buy box on the main product page is crucial to success for any 3rd party seller. 

What about when you are competing with Amazon themselves? How do you expect to beat Amazon on their own site when they have the most reputable account? Almost impossible. Amazon's pricing will continue to match or decrease price until a seller stops.

Note: I will be discussing this and other Amazon related topics at GrowCommerce on July 20 in NYC. 

Source: https://www.buzzfeed.com/leticiamiranda/th...

Mobile Store That Comes to You

What do you get when you cross an autonomous bus with a brick & mortar store? 

Moby Mart is a mobile store on wheels. It’s about the size of a small bus, and the idea is that eventually it will use artificial intelligence and computer vision to navigate city streets. (The current prototype is controlled by humans.) It carries some basics, like fresh food, as well as things like sneakers and magazines. Like Amazon Go, the retail company’s recently announced autonomous store concept, there are no lines, no cashiers, and no cash. You just scan the items you’re taking, and the Moby Mart app automatically handles the transaction for you.