The Amazon effect on stock markets
Wherever Amazon goes, it leaves a path of destruction.
As soon as Amazon made its deal with supermarket chain Whole Foods public, grocery stocks got hammered.
When the company announced it’s launching a clothes shopping service, retail stocks felt the pain.
You get the picture.
For a long time, the damage was largely contained to the US.
But now the e-commerce giant is rapidly expanding overseas, it’s having an impact on global stock markets.
Investors are catching on.
With someone as ambitious as Jeff Bezos at the helm, no retailer on the planet can feel safe. No sector will be spared.
“The Seattle-based company is hastening a global move to online shopping that is plunging many overextended retailers into crisis, forcing some to eliminate physical stores, cut prices or even file for bankruptcy,” the Wall Street Journal writes.
Global retail stocks are suffering from the “Amazon effect”.
Europe’s retail stocks haven’t profited from Europe’s stock market rallies. Australian retail stocks are down 10% and Amazon hasn’t even opened its doors there yet.
Retailers around the world are sleeping with one eye open. They know Jeff Bezos is coming for them.
Amazon is inflicting pain everywhere
Australian retailers will have observed Amazon hoovering up its competitors in the American and European markets with mixed feelings.
Relief that CEO Jeff Bezos hadn’t targeted their market yet – and dread, knowing he’d turn his attention to their market eventually.
Now that moment has arrived.
Amazon is looking to open its doors to the Australian market sometime in 2018.
Aussie retailers should be worried. Amazon appears to be inflicting pain in waves.
Their European counterparts are currently feeling the heat.
“Europe had been partly sheltered from Amazon’s impact until recently,”says the WSJ.
“In 2015, the Stoxx Europe 600 retail sector had gained 8%, even as the US SPDR S&P Retail ETF fell 9.9%.”
Now that same European retail stock index is down 3.7% this year, even though the wider European benchmark has gained 6.9%.
It won’t surprise you that fund managers are scrupulously avoiding European retail stocks.
And the damage isn’t limited to the shares of Amazon’s direct competitors.
The company is also at the forefront of turning shopping more and more into an online activity.
Even for fresh groceries you don’t have to leave your own home anymore. You can now order whatever you need online and have it delivered to your home.
With Amazon pushing down costs for delivery, it almost doesn’t pay anymore to drive to the shopping centre yourself!
That’s why investors seem to be losing confidence in brick-and-mortar shops.
“International real-estate investment trusts tracking shopping-mall operators have been hit hard in the past 12 months as brick-and-mortar stores come under pressure,” notes the WSJ.
“France’s Klepierre SA and the UK’s Intu Properties have fallen 21% and 22%, respectively. Shares of Scentre Group, the owner of Westfield shopping centres across Australia and New Zealand, have fallen 19%.”
Ironically the only company that could actually reverse this trend of physical stores going out of favour is… Amazon.
Amazon’s deal with Whole Foods immediately turned it into a big physical retailer. In addition, the company has been buying up thousands more department stores.
According to reports it’s looking to expand its physical footprint. It see this as a way to improve its distribution networks.
After killing off all its competitors on the high streets by revolutionising online shopping, Amazon may eventually move into all those shops their rivals used to own.
Who’s going to stop Amazon?
For global retailers, it would appear the writing’s on the wall.
With someone as ambitious as Jeff Bezos, who doesn’t look like he’s going to rest until he sells everything to everyone, every shopkeeper will have to assume they’ll have to compete with Amazon at some point.
No sector, no categories can still be considered immune to Amazon’s feverish expansion.
It invites an obvious question. Is there anything or anyone who can stop Amazon on its quest to world domination?
“Only two things can plausibly stop Amazon: Walmart and antitrust,” Sean Keyes, who’s a keen follower of this story, predicts.
“Walmart could do it because it’s huge, and it has a lead in groceries. If it can move its grocery sales online, it can leverage that to start selling everything else and fight Amazon that way.
“But the problem is logistics – Walmart was built for brick and mortar retailing. It’s going to find it very difficult to do next-day delivery based on its existing logistics network.”
That leaves antitrust legislation as Jeff Bezos’s boogeyman…
“Antitrust is the bigger one,” Sean confirms.
“The EU or the US Government could turn on Amazon. Already you see rising stars and influential voices in the Democratic and Republican parties start to question technology companies’ power, Amazon specifically (see Sen. Cory Booker, or Bill Kristol).
“Given that customers love Amazon dearly – as opposed to the way they feel about Facebook, say – there’s a good chance it’ll evade these guys.”
So that’s what’s standing in the way of Amazon going to even bigger highs.
But as Sean implies, these aren’t challenges that are impossible to overcome.
After reading The Everything Store, an unofficial biography of Jeff Bezos and his company, I can say I wouldn’t bet against him.
What does this mean for you as an investor?
Well, despite that Amazon shares are already among the most expensive around, it doesn’t look like its momentum is slowing down.
Still, if you’re thinking of investing in Amazon shares directly it’ll cost you.
Perhaps it’s better, then, to invest in companies that depend on Amazon’s success.
As Jeff Bezos’s company cannibalises global retail markets, the stocks of certain shares leveraged to Amazon could shoot up even faster. And they’re cheaper to boot.
It’s essentially “investing in Amazon like it’s 1997”, as Sean Keyes would say.