#14 – Amazon Domination

Wow. Amazon’s stock just hit $950, Q1 2017 earnings topped $33bn and retailer after retailer is collapsing. Previously I wrote in #4 – Will Amazon take over the world?, that Amazon was destroying brick and mortar retailers. A refresh of the analysis, highlights the trend is not slowing down.  Amazon’s revenue in 2012 (60bn) vs. 2016 (140bn) against 9 large retailers (best buy, sears, macy’s, jc penny etc.) highlights this incredible change in the retail landscape.

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#10 – An Awakening… Reflections from Trip to China

They say that you only know what you know. That what you read, consume and surround yourself shapes your perspective on how you look at issues and interact with the world. After visiting major corporations resident in Hong Kong (e.g., HSBC), Schenzen (e.g., Huawai) and Macau (e.g., Sands) – this couldn’t be any truer, and I could not feel more naïve after the trip reflecting. I was in a bubble – of European and American politics, culture and business. Surrounded by a nation caught up in the saga of Donald Trump in the US, walking around in China, I realized how sorely I was missing perspective. I like to think I read a fair bit from various sources – Bloomberg, Financial Times etc, yet what I realized I was also reading from a Western bias. Always trying to put the Chinese Company or consumer into my vantage point (of what a Westerner would expect), and frankly having little understanding of a part of the world where more than half the world’s population lives and is responsible for most of the world’s global growth over the past two decades.

Being in the country, opened my eyes, to what was really happening on the ground. It was fascinating watching the hungry, ambitious and entrepreneurial mindset of the Chinese. The huge strides they have made in short time span, The size of these major global companies (e.g., Alibaba, Huawai) that we as American consumers have not really come across yet. Couple this, with the incredible demographics (1.2bn people, rapidly growing economy etc.) and natural business opportunities afforded many within the firewall of China (that is if you are supported the Chinese Government) – China is truly a dynamic and emerging economy. One that is now rapidly moving from an export oriented – low value chain producer, to an innovator of some of the most advanced technologies on the marketplace today. It now longer can be viewed as a “copy cat” or “lowest cost producer”. This would be a mistake.

Key Trends

Many of these trends were things that I understood prior to visiting China, but were further validated and enriched:

  • Access to internet is rising tremendously in China and other emerging economies (more than 50% of China now has access to internet) and this is growing rapidly.[1]Mobile. Mobile. Mobile. Forget Desktops and Land Lines. Online retailers/customer interaction platforms are dominating customer time and money. Wechat, Alipay, Amazon – are spreading into different aspects our life
  • Where needs are not being met in emerging economies (e.g., lack of basic banking services for more than 50% of Chinese[2]) than innovative solutions that leapfrog existing technology are being deployed (e.g., Wechat). I would strongly recommend all watch an overview of Wechat’s capabilities if you have not already: https://www.nytimes.com/video/…/china-internet-wechat.html
  • Demographics create a competitive advantage for businesses that are growing and have a foothold in China. India and China have nearly 2.6bn people. In the vicinity you have Indonesia, South Korea etc. As the middle class grows, as more get access to internet and get cellphones – the market will just keep growing! Asia has to be front and center in every multi-national with ambition of growing global footprint.
  • Reduction of cost of goods/raw materials through technological gains (e.g., 3D printers) that allow every day citizens to create and innovate has leveled the playing field and provided massive gains to productivity
  • China’s firewall of protecting there state sponsored companies has created a breeding ground for companies that have grown and innovated unfettered (Alibaba, Tencent) and creating ecosystems and products that are nowhere in the market. Can American companies compete with this model?
  • More and more competition between countries is through their major multinational companies, put simply the battleground is between Microsoft, Apple, Google, Amazon and Facebook vs. Alibaba, Baidu, Tencent, Huawei and JD
  • Given China’s unfair advantage it provides Chinese Companies due its firewall/protection provided, and nature of the mature and hyper competitive US market – it appears that countries like India is where ground zero will be. A democratic country with free elections that allows foreigners to invest with some controls. Already major investments by Amazon and Alibaba should provide

So what’s the insight?

  • If you are not watching what China is innovating and doing, then you might not adapt (personally and professionally)
  • Recognize the pro’s and con’s of the different governmental styles being deployed in the US, Hong Kong, China and other Asian nations to support business growth and the well-being of citizens and the corresponding business models that adapt. An example is the Chinese care less about data privacy then Americans, therefore facilitating the ability for Wechat to combines nearly all the features of Facebook, Venmo, Spotify in one App. There are practical implications that can be applied to businesses trying to succeed in China
  • To be determined if the strong central planning, allocation of resources and protection afforded by China proves to be a better model than Democracy for the long run in the 21st century. One will need to watch for potential bubbles where competition from the broader marketplace does not exist in certain sectors of the economy, as well as the general quality of life / happiness of the populace
  • Recognize the demographics at play, how they are adapting and where China/India and other Asian nations have significant more head room to grow (a natural advantage for the long haul)
  • Watch India!

So where to invest?

It is still quite difficult to invest in China. Certain companies have listed on the NYSE or the Hong Kong Stock Exchange, yet with some broader questions on the level of disclosure (may still exist). But as noted above there are some broader trends at play globally. Namely, mobile and internet usage is rising, and consumer buying preferences are rapidly changing. The starkest is brick and mortar retail vs. ecommerce. Take a simple look even in the US, Amazon Revenue from 2012 to 2015 vs. Macy’s revenue picture, doing it with less employees and no retail footprint.

 Company Metric 2015-12 2013-12
Amazon Revenue ($, bn) 107,006 74,452
# of Stores 0
# of Employees 250,000
Macys Revenue ($, bn) 27,079 27,931
# of Stores 850
# of Employees 160,000

In summary – tech companies that provide a disruptive growth story with exposure to Asia, are going to be ways to play longer term trends that are changing the way consumers behave and purchase goods.

 

 

#4 – Will Amazon take over the world?

Over the past 15 years – investors, small business owners and consumers heavily debated the positive and negative impacts of Walmart. How much was Walmart impacting local small towns?  How important was Walmart for the US economy?  And the debate made sense (given the negative press on how Walmart paid and treated it’s employees), and the sheer size of Walmart (~450bn of revenue in 2012) more than many  International Countries total GDP (larger than Poland’s total GDP!)

But as we all know, and use… Amazon has emerged, and the dominance, growth and potential Amazon has been incredible. Via smart infrastructure investments distribution, warehousing and shipping logistics – Amazon has been able to amass online delivery capabilities second to none. Complimented by a ingeniously designed Amazon Prime loyalty program and a significant set of product offerings (e.g., Kindle, Cloud, Echo etc.)

Demonstrated in simple summary of total Revenue and YoY growth (from 2012 to 2016)  as compared to retail distributors in various sectors of the economy Amazon competes in, the story is striking.

  • On average no competitor has had an average growth rate of above 10% revenue growth in a period where Amazon has averaged well above 20%
  • Amazon’s total revenue has doubled from 48bn in 2012 to more than 107bn in 2016
  • Many of Amazon’s competitors are flat and are down in revenue from 2012-2016 (Staples, Sears, Best Buy, Barnes and Nobles)
  • What’s even more amazing it is likely that much of Walmart and Target’s stagnation in revenue growth is solely due to Amazon!!
  • Amazon is now almost the size of Costco and likely be the #2 retailer by the end of 2017 (in terms of total revenue)
  • Not pictured below are the companies already feeling the pain of the consolidation and dominance of the Walmarts and Amazons (Sports Authority, Borders, Radio Shack)

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You might say – shouldn’t we be looking at net income, or the bottom line? and in some respects, it is important to look at how much Amazon is making (which was nearly 1.3bn a record high in 2016) but then we would lose sight of the massive investments Amazon is making in it’s infrastructure capabilities (to deliver and penetrate new markets e.g., supermakets/fresh direct) which impact the overall picture of net income.

My view is you will continue to see massive pressure on the likes of Staples, Best Buy, Bed Bath and Beyond, Barnes and Nobles – etc. really forcing them to become the only destination for that segment (for when a customer wants to try something out in person) otherwise why do you need them?