Amazon Effect WF 2012

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  • 1. The Amazon EffectA View From Wall StreetWells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of thereport and investors should consider this report as only a single factor in making their investment decision.Please see page 36 for rating definitions, important disclosures and required analyst certifications.All estimates/forecasts are as of 9/18 unless otherwise stated.Matt Nemer, Senior AnalystTrisha Dill, Senior AnalystKate Wendt, Senior Analyst(415) 396-3938(312) 920-3594(415) 396-3977matt.nemer@wellsfargo.comtrisha.dill@wellsfargo.comkate.wendt@wellsfargo.comwiththinkshopper
  • 2. AgendaeCommerce GrowthAmazon’s GrowthRetail’s ResponseWells Fargo SecuritiesProprietary Research
  • 3. Introduction: Who We Are and How We’re DifferentThe only team on Wall Street to follow traditional retail and online retail/ marketplaces,in our viewHOW W E A R E DIFFERENT§  Only firm on the Street to combinecoverage of mass merchants andother “traditional” retailers, withonline retail and marketplaces.§  Conduct proprietary analyses in price,search, and the shopping experience.§  Cover 25 stocks, but our analysiscovers hundreds of other public andprivate retailersHOW AN A L Y S T S OPERATE§  Strive to be “experts” on theirsectors (retail, technology,healthcare, etc), conduct extensiveresearch on companies, createmodels to predict performance.§  Assign a Buy, Sell, Hold, orequivalent rating to stocks4
  • 4. 5eCommerce Growth
  • 5. -6%16%15%24%26%27%28%31%25%22%3%2% 5%6%2%4%2%3%7% 7%6%3%-10%-5%0%5%10%15%20%25%30%35%2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011eCommerce Adjusted Retail Sales6Source for chart: U.S Census Bureau. Adjusted retail sales exclude vehicles and parts.Source for image is © iStockphoto.comimage #2492027eCommerce is AcceleratingThe spread between eCommerce and retail growth has widenedOver the past 5 years, eCommerce growth hasoutpaced total retail growth by an average of9.1%. The spread narrowed during the recession,but widened to 10% in 2010 and 2011.Annual U.S. Sales Growth (%)
  • 6. Mobile and tablets accounted for 9% of online sales in 2Q12, up from 6% in 2Q11But, more than 50%of U.S. smartphone usersturned to their phoneto perform retail-relatedactivities while in a store.Source: ComscoreMobile is Exploding, and Smartphones AreInfluencing Offline Sales
  • 7. 8Amazon’s Growth
  • 8. TTM Revenue$28,665$40,278$54,326$25,000$30,000$35,000$40,000$45,000$50,000$55,0002010 2011 2012$MM35%growth41%growthSource: Company Reports: TTM revenue for Amazon compared to the prior TTM periods, including bothinternational and North America revenue. Retail revenue estimates for FY14 are from Thomson First Call.Amazon Continues to Take Significant ShareAmazon’s on pace to become 3rd largest retailer based in the U.S. by 2014
  • 9. TTM Capex$576$1,374$2,122$500$750$1,000$1,250$1,500$1,750$2,000$2,2502010 2011 2012$MM54%growth139%growthSource: Company reportsAmazon is Investing Heavily in GrowthAmazon’s capex is greater than any other retailer except Walmart and Target
  • 10. Powering hundredsof thousands ofbusinesses includingNetflix, Instagram,Pinterest, andNASA, throughAmazon WebServices (AWS)Created a newPremium DeliveryExperience team,focusing on evenfaster shipping(same day)Launch specialtysites in key retailverticals like toys,home, and soon tobe sporting goods(through Quidsi)Plans to open 18fulfillment centersthis year (including2 in California),taking them to 87 atyear endExpanded PhysicalLocker DeliveryTest from Seattle,London, and NewYork to SiliconValley and hasopened severalsmall stores(Zappos,BeautyBar)Launched a new"Prime Expansion"team, tasked withdriving awarenessof the Primeprogram andexpanding thescope of benefitsAmazon Has Been BusyWhat else has Amazon been up to?Source: Company reports and company websites
  • 11. Retail’s Response
  • 12. “Weve been focused onstepping up the intensity ofour global ecommerceopportunity. Our goal is tohave a deeper relationshipwith our customers to drivegreater loyalty, andecommerce is key to thatstrategy.” – Mike Duke,Walmart, CEO (August, 2012)“We’ve been thinking aboutwhere growth is going tocome from across all retailover the next 10 years. Andcertainly square footagegrowth is not where thatgrowth is coming from.” -Jamie F. Nordstrom, the headof Nordstrom.com(April, 2012)Source: Company reportsA Wake Up Call For RetailC-Suite moves beyond a state of denial
  • 13. 18%2%15%27%-10%0%10%20%30%40%50%60%Wal-Mart Stores Inc. CVS Caremark Corp. Home Depot Inc. Target Corp. Lowes Cos.2011 y/y growth in non-IT/eCommerce capex2011 y/y growth in IT/eCommerce capex 102%110%Source: Company reports: Note Target capex include the U.S. business only and exclude the company’sexpansion into CanadaThe top 5 largest retailers spent $5.2B ontechnology-related capital expenditures in2011, which grew 21% over 2010, nearly 4xthe growth rate in non-tech spendingIT/eCommerce Capex Growth (%)eCommerce Investment AcceleratesGrowth in IT spending was 4x non-IT spending in 2011
  • 14. Signs of InnovationRecent examples of innovation from top retailersSource: Company reports and websites, © iStockphoto.comimage #20947075 and #20913095
  • 15. InstacartSource for all images: Company websitesSigns of InnovationOptions to Amazon Prime are emerging
  • 16. 2Q eCommerce Growth RateSource: Company reports14%20%24%28%40% 40%35%28%22%14%39%10%15%20%25%30%35%40%45%NordstromZumiezKohlsDicksGNCFinishLineGap,Inc.UrbanOutfittersVitaminShoppeBestBuyWilliams-Sonoma`Fastest Growth Channel for RetailMultichannel retailers are enjoying double-digit eCommerce growth
  • 17. Niche, verticallyintegrated brandsCelebrity endorsedproductsFashion/LuxuryUnique one-of-a-kinditemsConsumerServicesSubscriptioneCommerceSource for all logos: Company websitesNew Retail Models Are EmergingOnline only business models that can co-exist with Amazon, in our viewEtsy
  • 18. Nordstrom invests$16.4MM in onlineapparel retailerBonobosWalmart tolaunchsubscriptioneCommercecompany,Goodies, the“BirchboxApproach” toartisanal foodproductsQVC/LibertyInteractiveacquires Send TheTrend, a membersonly ecommercesite for accessoriesand beautySource for all images: Company website (Bonobos), andiStockphotoNew Retail Models Are EmergingEstablished retailers also experimenting with new models19
  • 19. Costco (2Q earnings call) – “In terms of Costco.com,year-to-date sales are up over last year.Target (2Q earnings call) – “Year-to-date online salesHave been running about flat.Limited Brands (2Q earnings call) – “In the directchannel, second quarter sales were up 3%.”Source: Company reportsBut It’s Not All Good NewsSome large retailers are still growing below the market
  • 20. Wal-Mart Stores Inc. ü ü üCVS Caremark Corp. ü** ü**Costco Wholesale Corp.Walgreen Co. ü* ü* üHome Depot Inc. ü* ü* üTarget Corp. üLowes Cos. ü üBest Buy Co. Inc. ü ü ü*+Sears Holdings Corp. ü ü üMacys Inc. ü+Rite Aid Corp. ü** ü**Staples Inc. ü ü+TJX Cos.Kohls Corp.J.C. Penney Co. Inc. ü ü+Dollar General Corp.Gap Inc. ü*+Office Depot Inc. ü ü üNordstrom Inc. ü ü üLimited Brands (Victorias Secret)GameStop Corp. Cl A ü ü üBed Bath & Beyond Inc. üFamily Dollar Stores Inc.Ross Stores Inc.AutoZone Inc. üShiptoStoreSame DayShip ToStoreStoreInventoryLookup (onwebsite)Source: Company websites; +New Feature, *Beta Testing, ** policies are for prescriptions and/or photos onlyStill Room For Omnichannel ImprovementOnly a few retailers allow shoppers to move seamlessly across channels
  • 21. §  95% of retailers provide a store locatorfeature§  83% provide a general search function§  77% list a way to contact customer service§  Only 31% provide an in-store inventory look-up feature§  Only 16% allow customers to buy online andpick up in a store§  Only 9% provide a deal of the day/flash sale.. . . B U TSource: Wells Fargo Securities, LLCMobile Features Still Have a Ways to GoFew retailers offer a truly integrated mobile experience, in our view
  • 22. WFS Proprietary Research
  • 23. Category Analyses: Which Sectors Are Exposed toAmazon?Consumer electronics, books, and office supplies are structurally exposed, butwhat about other retail categories?Grocery and Dollar Stores Consumer Electronics, Books, OfficeSuppliesMORE EXPOSEDLESS EXPOSEDAmazon Exposure Spectrum24Source for all images: © iStockphoto.comimage #20365230 and image #19668860
  • 24. 4.8%2.2%6.8%6.1%0.0%2.0%4.0%6.0%8.0%Dicks vs. Amazon Cabelas vs. AmazonExcl. Shipping Incl. ShippingAverage prices vs. Amazon, byretailer§  Partially driven bythe prevalence ofMAP pricing, but thedifferential wasn’tmuch differentincluding shippingAmazon had onlyslightly better prices……and sporting goods retailers are also benefiting from:§  Better content and availability of sizes and colors vs. Amazon§  Lack of product on Amazon from key vendors (Nike, The North Face)§  Good search term relevance, with Dick’s and Cabela’s ranking well in natural search for manyof their key categoriesSource: Company websites and Wells Fargo Securities, LLCSporting Goods vs. Amazon: Deep DiveInvestors perceive sporting goods retailers as exposed to Amazon; our analysisshowed they are surprisingly well positioned
  • 25. 36% 37%63%67%73% 74% 76%96%0%10%20%30%40%50%60%70%80%90%100%Hunting Camping Outdoor Fishing Golf TeamSportsExerciseEquipmentAthleticClothing &FootwearPercent of search terms with paid search resultsSource: Google and Wells Fargo Securities, LLCSporting Goods vs. Amazon: Deep DiveSub-categories within sporting goods vary widely in their degree of competition
  • 26. §  Less MAP pricing or adherence to MAP creates more opportunity to lowerpricesAmazon’s core product prices vs. each retailer(28%)(15%) (14%)(1%) (1%)(30%)(25%)(20%)(15%)(10%)(5%)0%AMZN vs gnc.comAMZN vs gnc.comw/Gold CardAMZN vsvitaminshoppe.comAMZN vsluckyvitamin.comAMZN vsvitacost.comAmazon had significantly better core product pricesSource: Company websites and Wells Fargo Securities, LLCVitamins & Supplements vs. Amazon: Deep DiveExcellent category for eCommerce, but Amazon getting more aggressive
  • 27. Percent of paid search terms with a top 3 result33%27%11% 10%4%0%5%10%15%20%25%30%35%amazon.com vitacost.com luckyvitamin.com vitaminshoppe.com gnc.comAnd most surprisingly, appears to be getting very aggressive in paid searchSource: Company websites and Wells Fargo Securities, LLCVitamins & Supplements vs. Amazon: Deep DiveExcellent category for eCommerce, but Amazon getting more aggressive
  • 28. Source: Company websites and Wells Fargo Securities,LLC For WSM this analysis includes similar productsKey categories at Bed Bath & Beyond and Williams-Sonomahave high product overlap with Amazon…Bed Bath overlap with Amazon89%83% 83%69%61%0%20%40%60%80%100%KitchenElectricsCookware Cutlery Cleaning BakewareWilliams-Sonoma overlap with Amazon74%71%57%54% 53%0%10%20%30%40%50%60%70%80%Cooks Tools Electrics Bakeware Cutlery CookwareHome Furnishings vs. Amazon: Deep DiveSlowing growth in sales and margins could be related to Amazon
  • 29. Tracking the Churn to Amazon from 100 Retail SitesExit traffic for the top 100 retailers shows which sites are losing the most(and least) traffic to AmazonDollar stores/discountersSporting goodsFurniture/homeConsumer electronicsFashion footwearOffice suppliesCategories and companies that arehanding over traffic to Amazon(>4% traffic loss):Categories and companies thatare less susceptible to Amazon(<0.2% traffic loss):30Source for all images: © iStockphoto.comimage #19772721, #18673956, #19668860, #13674022, #18640096, and image #15824457
  • 30. Source: comScore6.3%5.9%4.6%4.5%4.3%0.2%0.2%0.1%0.1%0.1%FossilBarnes & NobleSystemax (Tiger Direct, CompUSA)Brown Shoe (Famous Footwear)Steve MaddenShoe CarnivalBig 5 Sporting Goodslululemon athleticaTalbotsFamily DollarTracking the Churn to Amazon from 100 Retail SitesCompanies with most and least traffic loss to Amazon
  • 31. 0%5%10%15%20%25%30%Less than 10% Between 10%and 20%Between 20%and 30%Between 30-50% More than 50%JuneSeptemberSource: Wells Fargo Securities, LLC and Survey MonkeyOnline Tax SurveyTexas survey suggests online tax poses limited risk to Amazon or eCommerceHow much of your spending do you do online?
  • 32. Do you buy more or less online than you did ayear ago?0%5%10%15%20%25%30%35%40%45%50%Significantly more More About the same Less Significantly lessJuneSeptemberSource: Wells Fargo Securities, LLC and Survey MonkeyOnline Tax SurveyTexas survey suggests online tax poses limited risk to Amazon or eCommerce
  • 33. 0.00.51.01.52.02.53.03.5Convenience Lower prices Selection No sales taxJuneSeptemberSource: Wells Fargo Securities, LLC and Survey MonkeyOnline Tax SurveyTexas survey suggests online tax poses limited risk to Amazon or eCommerceWhat are the reasons you shop online?(1 = least important and 4 = most important)
  • 34. Disclosures
  • 35. Disclosures