Amazon's Q1: Services Growing

Nothing to worry about with Amazon's latest quarterly numbers. Growth in sales and cloud revenue was slightly down from the previous quarter growth rates. One point to note is services as a percentage revenue. Previous quarter was approximately 30% given the holiday period. This quarter came in at 34% in a trend that will likely continue as Amazon focuses on the cloud via AWS and its marketplace selling platform. Again, growth story still intact, this behemoth isn't stopping anytime soon. Slideshow below:

Amazon Seller Survey: FBA is the Differentiator

Feedvisor recently polled 1,600 3rd party sellers. Amazon continues to provide the best platform to list, manage, communicate and ship across all marketplaces. Keep in mind that Amazon is the only marketplace providing a fulfillment option for sellers. All other marketplaces require the seller to ship the product direct to the consumer. Huge differentiator as to why Amazon continues to dominate the marketplaces for small and medium size 3rd party sellers.

Bottom line: Amazon FBA is a distribution center and customer loyalty program on-demand.

1. Most sellers are new to Amazon
2. Majority of seller sales are on Amazon
3. eBay is the top sales channel other than Amazon
4. Walmart is the next sales channel sellers plan to expand in 2017
5. 60% of sellers use Amazon Sponsored Products keyword buying

Q1 Retail Sales Recap: Internet Retailers & Building Material Stores Growth

With the latest March sales now in the books, I thought it would be worthwhile to compare January 2011 to March 2011 to January 2017 to March 2017. Some highlights:

• Internet Nonstore Retailers posted an astounding 60% growth rate for the top spot.
• Building Materials Retailers like Home Depot and Lowes posted a 45% growth rate.
• Lower gasoline prices led to a decline of 14%.
• Unsurprisingly, Department Stores posted a decline of 18%.

The trends are undeniable. The shift to the internet and categories like restaurants has been alive and well for years. All categories except gasoline and department stores were positive.

Ecommerce Isn't Cheap

Recently came across (h/t: @scotwingo) an AlixPartners study of 20 publicly traded retailers that publicly announce online sales separately from brick & mortar along with earnings. The findings are as you would expect. Ecommerce growth does not come cheap and has led to severe declines in profitability. The cost of shipping, the high return rates and additional labor in the chase for growth just isn't paying off in EBIT percentages.

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Even worse is how much tougher the shift to online purchasing has become for battered department stores. It's no wonder off-price retailers like Burlington, TJX and Ross aren't in a rush to push into ecommerce as long as new store openings fuel growth. 

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Auto Industry Expert Bob Lutz on Tesla & Autonomous Cars

Always interesting to hear Bob Lutz' take on current state of automobile industry. Can't disagree with his rational view on Tesla despite the feel of animosity. 

What’s your take on Elon Musk and Tesla?

I don’t know why it is that otherwise intelligent people can’t see what’s going on there. They lose money on every car, they have a constant cash drain, and yet everybody talks as if this is the most miraculous automobile company of all time.

What do you think will happen with Tesla down the line? Bought by a traditional auto company?

Maybe, but who needs it? [Musk] has no technology that’s not available to anybody else. It’s lithium-ion cobalt batteries. Every carmaker on the planet has electric vehicles in the works with a 200-300-mile range.

Raising capital is not going to help, because fundamentally the business equation on electric cars is wrong. They cost more to build than what the public is willing to pay. That’s the bottom line.

What about the design?

The one advantage [Musk] has is that the Model S is a gorgeous car. It’s one of the best-looking full-size sedans ever. The Model X? It looks like a loaf of bread. There’s no arguing the Model 3 is nice-looking but it doesn’t break any new ground aesthetically.

Don’t get me wrong, what Musk has achieved, whether it is profitable or not, is incredible. He’s created an automobile company based solely on electric vehicles, and they have pretty good, not yet completely reliable, autonomous capability.

For the guy who pushed the Volt, you seem pretty down on electric cars.

They are unarguably a ton of fun to drive. The Tesla Model S? The one with ‘ridiculous mode’? Zero to 60 in like 2.2 seconds? That’s got to be like a shot off an aircraft carrier.

But the mainstream still prefers gasoline. It’s more convenient. You don’t have the recharge time. It has unlimited range — you can refuel any time, any place.

The electric vehicle market is maybe 1%. It could go up to 4 or 5%. Surveys show maybe 4 or 5% of Americans feel so deeply about climate change and the environment that they’re willing to make a personal sacrifice to make their contribution. Most of them are called Prius owners.

You’re bullish on autonomous cars.

As much as one side of me deplores it because I love to drive, when you look at the skills of the average driver, and the reaction times, and the incidence of alcohol and drug use as a factor in accidents, and the amount of national productive time that’s wasted in traffic jams, it is time to find a different solution.

So what's a driving enthusiast to do?

They will have to go to private racetracks. They’re springing up like golf courses. Those will be nice because they’ll be unfettered by regulations, since they’re not on public highways, and they will be the equivalent of riding stables and dude ranches now.

Amazon Kills 3rd Party Seller Emails

A complaint I commonly hear from Amazon customers is the annoyance caused by emails. There are emails from Amazon with suggested products to purchase, new product announcements, delivery or shipping notifications from either 3rd party sellers or Amazon, 3rd party sellers requesting product feedback and 3rd party sellers requesting seller feedback. With 50%+ of products sold on Amazon now from 3rd party sellers, Amazon is now providing customers the ability to opt out of 3rd party seller emails. To do so, customers make there way to this page to edit there preferences. 

Once you are in edit mode, you will notice that Amazon has added a check box for Seller Communications and Seller Feedback (see below).

Overall this is a major plus for customers and will allow Amazon to disguise the number of products coming directly from 3rd party sellers to ensure it doesn't start to have the "eBay feel." With that said, it's safe to assume the number of product reviews and seller reviews will slow and building a winning product from scratch will become even harder. 

Have We Reached Peak Cash? Not Necessarily

Goldman recently outlined countries and their progress in eliminating cash transactions. It is often believed that technology is the driver for the demise of cash:

However, the availability of technology alone has not ensured the demise of cash. As the following chart shows, there are several advanced economies in which it is still the dominant mode of payment in volume terms (surprisingly quite a few European countries are in the bottom left quadrant).

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Japan is a striking example of this; lots of tech and lots of cash.

The US also stands out, and this could at least partly be attributed to the fact that regulators in the US have explicitly stated that the market should manage the shift to digital payments by itself.

On the other hand, Scandinavian countries are on the cusp of becoming some of the first cashless societies, as a result of industry-co-ordinated steps and government initiatives. Swish, a payment app developed jointly by the major Swedish banks, has been adopted by nearly half the Swedish population, and is now used to make over nine million payments a month. About 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits and many, especially in rural areas, no longer have ATMs. In conjunction with that, cash transactions were just c.2% of the value and 20% of the volume of all payments made last year (down from 40% five years ago).

Denmark’s move to a cashless society is a deliberate result of policy, with the government removing the obligation for some retailers to accept payment in cash.

Without this legislative push, we believe cash is very difficult to disrupt and substitute. After all, it is a free and convenient mode of transacting. So far, the selling point of the most broadly used alternatives to cash (cheques and cards) is greater convenience. But that hasn’t been sufficient to meaningfully reduce the market share of cash in countries outside Scandinavia and Canada.

Digital Ad Skepticism Inflection Point?

Bloomberg recently highlighted how skepticism is building for digital ads on platforms like Facebook and Google due to ad fraud, high costs and limited attention spans: 

Digital advertising's longstanding problems aren't improving. Newly published research by a group of marketing firms found nearly 20 percent of digital ads were bogus -- that is, not seen by humans, or deliberately invisible on websites and apps. That's a lot of wasted ad spending. Again, bogus ads are a perennial problem, but they've been tolerated for too long.

Marketing firm Adobe said this week that the costs of digital advertising were growing more quickly than the cost of TV ads and that the growth in spending on web search ads wasn't resulting in a commensurate increase in visits to the advertisers' websites. That echoes the disillusionment expressed by an executive at Procter & Gamble -- the world's biggest buyer of advertisements --who said big companies weren't seeing fast enough sales growth to justify the $500 billion spent annually on ads.

Brick & Mortar Carnage

The list of retailers thus far for 2017 added Payless and Bebe this past week:

Bankruptcy (Store Closure Count)

1. American Apparel (110)
2. Payless (170)
3. The Limited (250)
4. RadioShack (522)
5. Wet Seal (171)

Looming Bankruptcy

1. BCBG (120)
2. Bebe (170)
3. HHGregg (88)

The Black Edge →

Recently finished Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street, a fascinating recap of the SAC Capital and Steven Cohen case that involves Preet Bharara and his 76-0 record against insider trading cases. The book includes 3 years of investigative research and is quite a compelling read. The entire story is based around the definition of the black edge:

Karp’s third category of information was “black edge,” information that was obviously illegal. If traders came into possession of this sort of information, the stock should be restricted immediately—at least in theory. In the course of doing their work, analysts inevitably came across this type of information—a company’s specific earnings numbers before they were released, say, or knowledge that the company was about to get a big investment—although the vast majority of what the traders trafficked in was gray.

For an overview of what else I'm reading you can click here.

Netflix & Utter Domination

"By the end of this year, unless somebody mounts a tremendous counterattack—which is getting increasingly harder—Netflix will have utter domination of one of five or six genres that exist," comedy-special producer Brian Volk-Weiss

David Letterman on Current State of Retail

David Letterman with New York Magazine. Was it hard to adjust to civilian life?

It’s still hard. I have trouble operating the phone. That’s the God’s truth. I needed a pair of shoelaces. And I thought, Hell, where do you get shoelaces? And my friend said, there’s a place over off I-84, it’s the Designer Shoe Warehouse. So I go over there, and it’s a building the size of the Pentagon. It’s enormous. If you took somebody from — I don’t know, pick a country where they don’t have Designer Shoe Warehouses — blindfolded them and turned them loose in this place, they would just think, You people are insane. Who needs this many shoes? It’s sinful. It’s one of these places where there’s no employees and every now and then there’s just a scrum of shoe boxes. I’m not finding the damn shoelaces, and finally I think, Maybe it’s one of those items they’ve got at the counter. I go up there and I’m nosing around the counter and, by God, there’s shoelaces. This is after about an hour. So now I’m waiting in line and the woman checking people out says in a big loud voice, “May I help our next shoe lover, please?” I just started to tremble. Nobody else seems to have a problem with going to a store! You don’t want to have painted yourself into some elite position where it’s “Bob, go out and get me some shoelaces.” It makes you feel stupid. Here’s where I’m comfortable: There’s a bait-and-tackle store near my house. They’ve got guys in there, and you can buy live bait, you can buy artificial bait, they’ll put new line on your reel. You can talk to them about rods. They’ll tell you where to go for a largemouth bass. That’s exactly where I want to be.

Anonymity Isn't Helpful

A 2013 study determined that ninety-five per cent of individuals could be positively identified based on just four locations they’d visited. “Just show me where your phone is between midnight and eight o’clock, and I’ve pretty much figured out who you are,” one veteran location-data analyst told me. “There’s no such thing as anonymized data,” the technology writer Clay Shirky, Crowley’s former professor at N.Y.U. and a mentor from his Dodgeball days, agreed. “There’s only useful and non-useful data.” At the moment, individualized data isn’t that useful to marketers. But that could easily change, especially for those peddling big-ticket items. Moreover, Foursquare’s user information is now its most desirable asset, and would be acquired by a third party if the company were sold.

Ariela Ross isn’t among them. Although she hasn’t used Foursquare for years, she told me recently that she didn’t mind sharing her own location with companies “if it makes my life better and more efficient.” Industry experts believe most of us will take the same view, if we haven’t already. “It’s happening,” Albert Wenger, a Foursquare board member, said.

The Upstarts: Uber & Airbnb are Dominant Corporations

Recently finished The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World by Brad Stone. I have been a fan of Brad Stone since I read The Everything Store: Jeff Bezos and the Age of Amazon. This latest book is entertaining for those interested in Uber and Airbnb as it weaves through the history of both startups along with the characters and funding sources that drove them to the goliaths they have become today. The book provides quite a bit of detail on legislative fights, competitors that emerged along the way and a peek into where they are headed for the next leg of growth.

What I found most interesting and prescient given the spate of negative Uber news recently was the author's casting of Airbnb and Uber in good guy bad guy roles. It was particularly evident within this passage:

The abundance of company worship at the Airbnb Open was tough for any hardened journalist to handle. But the hosts themselves, walking around the Grande Halle and attending speeches and seminars with whimsical names like “Hospitality Moments of Truth,” were disarming and inspiring. They were Airbnb’s most persuasive evangelists. Here was a group that loved the company and what it stood for, demonstrating a kind of loyalty and passion that Uber, for example, would never see from its drivers. 

Regardless of role, one thing is certain. These two startups gained the scale and impact no legacy hotelier or transportation company has in the history of the world. These two companies have worked to disrupt the largest companies in the world and in turn have become them. As Brad Stones notes and implies how the name upstart was given:

And if they can’t meet their own lofty goals? Or if the intensity of competition pushes them further toward a ruthless, win-at-all-costs mentality? Then Uber and Airbnb risk validating the worst claims of their critics—that they used technology and clever business plans merely to replace one set of dominant companies with another, amassing a staggering amount of wealth in the process.

We can no longer call either company a startup. Uber and Airbnb are dominant corporations.

Related: Airbnb vs. Hotels, Airbnb Gains Coveted Business Customer

Q4 Retail Sales Comps: Off Price & Warehouses Strong

Q4 comps are complete for the majority of retailers. Highlights include:

• Off price continues to aggressively steal share.
• No department store posted a positive comp.
• Warehouse clubs continue to rebound.

Q2 Retail Earnings Recap can be found here. 

Q3 Retail Earnings Recap can be found here.

App Overload?

 Indeed, Adobe’s latest global mobile report found double digit declines in both app installs (38%) and launches (28%), over the past two years.

With domestic Web traffic plateauing, marketers are also looking overseas. The massive smartphone growth in China, India and Brazil is responsible for driving over 400 million new people online, according to Adobe.

Stateside, the report also found that Google’s Accelerated Mobile Pages is being increasingly welcomed by consumers. In fact, it now accounts for 7% of all traffic for top U.S. publishers, which represents 405% growth over 2016 levels.

JC Penney: Sacrifice the Few for the Many

I applaud JC Penney's management on pushing through with store closures as they realize the current trend doesn't require an annual grooming...but something a bit more drastic to return to the more profitable days. Many of the legacy retailers need to face reality and close the long tail of stores driving low returns or negative returns. Sacrifice the few for the many.

Penney said Friday that it will close 130 to 140 stores as well as two distribution centers over the next several months as it tries to improve profitability. The company said that it would also initiate a voluntary early retirement program for about 6,000 eligible employees.

The stores it is closing represent about 13 percent to 14 percent of its current store count of about 1,000, but less than 5 percent of total annual sales.

Retail Apps Dead?

Surprised we are still debating this as both are arguably needed. Your most willing and loyal customers need an app. Everyone else, needs the mobile web.

Is the app dead? It has certainly been written off in conference speeches over the year as well as the occasional alarmist headline, but what we've all pretty much known all along really does now appear to be coming true. Consumers just don't want a mobile phone packed with screen after screen of apps. They don't want to scroll through page after page of icons, looking for an app that only allows them to interact with one brand.

The research also showed that the majority of retailers are focusing on mobile Web marketing. They are putting money into mobile advertising, content and search that will be discovered through a browser, not by swiping right and left a few times before their app logo comes into view. People are accustomed to searching online for relevant content, and the retailers' reaction to apps would suggest they are happy to search on mobile too.

January Retail Sales & 2016 Recap

January sales were up 5.6% to January 2016. The top 3 growth businesses were gasoline, internet retailers and health & personal care stores:

• Gasoline posted a 14.2% increase year over year as price increases have set in.
• Non-store/online retailers posted a strong 12.0% gain over last year. 
• Heath and personal care stores posted an increase of 8.5% year over year monthly gain.

One point to note is the food services (restaurant and bars) now exceed the general merchandise category of warehouses and department stores. 

On the downside, the bottom 3 included:

• Department Stores multi-decade decline continues but was muted vs. previous months only down 3.2%.
• The Electronics vacuum of sales to online continues with a decline of 1.3%. 
• Sporting goods, hobby, book and music stores saw a decline of 0.8%. 

Overall a very strong report even when excluding the massive spike in gasoline. Traditionally weak categories even saw muted weakness compared to last several months. When looking at the recap of 2011 through 2016, the overwhelming themes remain:

1. General merchandise struggles with the department stores
2. Non-Store internet retailers and Restaurants/Bars continue to ascend and gain at the expense of others and capture the overwhelming majority of growth.

December Retail Sales were posted here.

Amazon's Growth Breakdown

Amazon recently provided a bit of granularity on their growth rates by business that helps to illustrate total size of Amazon Prime (65 million members) and the rate at which Prime subscriptions are growing.

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A few points to note:

1. Retail products are growing at a slower rate due to law of large numbers but still accelerated in 2016. 
2. 3rd party is growing at a 40% clip and continues to be the 2nd largest revenue category.
3. Other which includes advertising and co-branded credit cards remains small but has exploded as Amazon has focused on providing 3rd party sellers with tools to sell more through keywords and banner ads.
4. Prime and AWS growth rates have slowed but remain above 40% and 50% respectively.