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The Future of Retail: Amazon Plus One

The Future of Retail: Amazon Plus One

(Getty/Leon Neal)

By    |   Thursday, 12 January 2017 03:24 PM

Designed to be a warning against the perils of capitalism, the board game Monopoly has proven to be a success instead. Its enduring popularity— and updated editions—have kept the game both living and profitable.

What’s the secret to its success? If you’re playing by the rules so that the game doesn’t last forever, it’s about being the first to quickly corner the market in various neighborhoods throughout the board—and ideally controlling the whole thing. The ups and downs along the way create a thrill. But since the money is fake, those downturns don’t create the same fear that you might see watching your retirement account fluctuating in value.

But that’s not the only way the real world is different. Despite the popularity of the board game, it’s impossible to create a monopoly in real life just from the private sector. It takes the government to get involved. Consider a utility company. You probably have one provider for electricity at your home. That’s by regulation. Government clamped down on utilities to prevent a coal plant in every neighborhood. That kind of top-down one-size-fits-all approach made sense with electricity generation.

But there’s still more than one utility company in the country. There are several regional firms. There’s no single company delivering a product or service to everyone. There used to be one telephone company, but the government ordered its breakup. After all, if it takes a government to create a monopoly, it has the same power to destroy it. Even governments are split between federal, state and local.

It’s impossible to create a monopoly on the free market because of competition. If one firm is dominating business and does something to draw the ire of customers, a competitor can step in with better service or better pricing to make a profit as well. If there’s only one company and it’s making money hand over fist, others will be attracted to the potential profits and set up shop. That’s capitalism at work.

Yet despite this fact, investors are pricing Amazon (AMZN) as though it were already a monopoly. And as a result, Mr. Market is pricing retail stocks as though they were already going out of business.

I get it. It’s hard to look at a company like Sears Holding (SHLD) and not see the inevitable bankruptcy and failure. But Sears shouldn’t have been driven into the ground by Amazon. It should have been driven into the ground by Target (TGT) or Wal-Mart (WMT).

Sears has a long history, going back to a mail-order catalogue over 100 years ago, selling items to families across the country and offering everything from clothing to food to firearms and housing. It shifted that business to mall storefronts over time. It’s failed to move past the now-declining mall model. So it’s clear that some retailers are still on their way out—but most can continue to scrape along.

On the flip side, Amazon is trading as though it has nowhere to go but up. An analyst recently posted a theoretical valuation for what the company would look like with a market cap of $1 trillion dollars. I don’t see that happening anytime soon. After all, a tree grows toward the sun but not to the sun. There are limits to growth.

But here’s the thing: Amazon’s profits aren’t just low, they’re non-existent. Margins are thin, and while the company has pumped up the revenue with services like Amazon Prime, the company trades at 182 times earnings. That’s cheap when you consider that it’s traded as high as 700 times earnings.

The biggest problem with Amazon isn’t its stock or its valuation. It’s the fact that shareholders don’t seem to have much of a say in what’s going on. Sure, they’ve had a great ride—shares are up nearly 8-fold since the end of the financial crisis. But it’s been a roller coaster that doesn’t provide the safety of dividends or the stability of a company that reports steady earnings. If investors were to suddenly want those things, the share price would drop like a rock.

Finally, there’s a reason for all of Amazon’s side projects. They’ve done just about all they can do in the retail space. They’re a far cry from being a book reseller back in the early days of the Internet in the 1990’s. They can offer just about everything in that area. And while they don’t have the costs of brick-and-mortar stores, particularly rent, they do have to contend with the low margins of retail. If anything, they’re the reason why consumers are so price-conscious these days.

So what does the future of retail look like? We’re in the stages where one specialty retailer will end up as the competitor to Amazon in that category. In the book space, for instance, that’s Barnes & Noble. Need a book but can’t wait for Prime delivery? Head to your local store. Barnes & Noble (BKS) outlasted competitor Borders, which went into bankruptcy following the financial recession.

Last year, Sports Authority proved that it wasn’t an authority in the industry when it filed for bankruptcy. But there’s still Dick’s Sporting Goods (DKS), the brick-and-mortar alternative to buying your sporting goods on Amazon.

And of course, there are things like groceries. While Amazon can compete there, if you’re not in a market with same-day shipping, if you want to eat today, you’ll have to go to a store today.

Thanks to Amazon’s dominance, their share are sky-high. But many retailers are trading like value stocks. Following last week’s selloff, shares of Kohl’s (KSS) look particularly interesting. Shares trade at 12 times earnings—about half that of the average S&P 500 stock—and yield 4.8 percent.

The company lost 20 percent of its value last week following a modest decline in same-store sales during the holiday season. I get it—for retail, the 4th quarter of the year is the big show. But on the other hand, clothing isn’t always appreciated as a holiday gift—especially when it needs to be tried on.

The free market doesn’t create monopolies. While there are arguably too many brick-and-mortar retailers still competing in the Internet age, we’ll likely end up with a duopoly in every specialty retailer category. Those Amazon competitors will be able to hold their own—and at today’s prices provide a great value to boot.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report.

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The free market doesn’t create monopolies. While there are arguably too many brick-and-mortar retailers still competing in the Internet age, we’ll likely end up with a duopoly in every specialty retailer category.
retail, future, amazon, economy
Thursday, 12 January 2017 03:24 PM
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