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Amazon: When the Man Comes Around


KCLarkin
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Jeff Bezos and the mighty Amazon are a clear and present danger. Among the expected casualties -- Walmart, Costco, Home Depot, Autozone, CVS, Fastenal, Staples, The Gap.

 

Given this widely held view, it would be interesting to see a case study on Best Buy. Amazon introduced electronics, video games, and media in 1999. These product lines were Best Buy's core business. They were also products that were ripe for e-commerce. In the meantime, entire segments of Best Buy's business have largely disappeared: CDs, DVDs, video cameras, digital cameras, GPS...

 

Since Amazon started selling electronics, Best Buy grew EPS 11% per year. BBY's multiple dropped from 37x to 15x earnings. Yet, Best Buy actually outperformed the S&P 500 since Jan 1, 2000. And Best Buy's shares hit all-time highs this year.

 

Is Best Buy a unique tale of survival? Or is the Amazon threat to grocery, pharmacy, home improvement, auto repair, industrial distributors and apparel overstated?

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How do I buy a pickup truck full of lumber and insulation on Amazon? How do I take pieces of an in progress project and physically fit them to what's for sale to see what I need to purchase?

 

Can't wait to order a pallet of Portland Cement and get free shipping on that..

 

Same with Autozone. If I am replacing rotors and notice my pads are bad I'm not going to leave my car jacked up for two days (if things actually arrive on time) until the pads arrive. Do I Uber my kids to school or to work?

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Guest 50centdollars

I read articles were Amazon is going to deliver food by drones. My question is can drones handle thunderstorms, snow storms or hind winds? What happens if a drone hits someone and kills them? What happens if people shoot them down or knock them down?

 

Whole Foods is a blip on the radar in the food business. They are famous for selling celery water and other overpriced crap. The media hypes it because they all live in Manhattan or LA and shop there and think paying $10 for an organic cucumber is a good bargain. They also think this makes them experts on the food business.

 

Its an overreaction.

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How do I buy a pickup truck full of lumber and insulation on Amazon? How do I take pieces of an in progress project and physically fit them to what's for sale to see what I need to purchase?

 

Can't wait to order a pallet of Portland Cement and get free shipping on that..

 

Same with Autozone. If I am replacing rotors and notice my pads are bad I'm not going to leave my car jacked up for two days (if things actually arrive on time) until the pads arrive. Do I Uber my kids to school or to work?

 

At least you can bet that these problems are in the mind of Bezos.

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Yet another thread on Amazon that will rehash previous threads and won't provide any new insights.  ::)

 

I think KCLarkin asked interesting question about Best Buy but then muddied the waters by attaching the second wider question.

 

Best Buy question is possibly a good case study. Perhaps the short explanation is "last man standing" in bricks and mortar category that was Amazon'ized. Like Barnes & Noble although more successful. Likely because some products are more tangible and customers require more support/help in choosing/buying. Note that this did not save Circuit City or Radio Shack.

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That's incredible - I didn't realize BBY has done so well.  Where did you find all of that info about Best Buy?  Is there a specific article?  Makes me question the automatic death of all the retailers you mentioned.  The key point that I think is missing is that both Circuit City and Radio Shack went bankrupt over the same time frame. 

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Interesting question. I buy most electronics online and buy less electronics overall (outside of phones) because the replacement cycle seems to have slowed down. My TV is ~10 years old but isn't all that different than a brand new TV. The last time I went to Best Buy was for a cell phone case that I needed immediately.

 

Does Best Buy do significant financing? A lot of companies seem to have quietly changed from manufacturers/retailers to finance companies from an earnings perspective. I know companies like Conn's will sell TVs and such with monthly payments. I know Best Buy is in that game as well, I just don't know how significant it is for them. Conn's was doing great for a while, but then their financing got too loose and they had to tighten up. They did their financing off their own balance sheet and reported credit metrics in the financials, so the whole cycle was very transparent. Conn's would have healthy margins on the product side and basically aim to breakeven on the credit side. If Best Buy is outsourcing the financing it could be much less transparent.

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IMO if you guys want to get some serious value from this, you should think about the following questions (some of which KCLarkin asked or maybe had in mind):

 

1. What made Best Buy successful while others weren't? Was this predictable when everyone was crying Best Buy BK?

1 a. What made the companies that went BK go BK? Circuit City, Radio Shack, Borders, maybe other recent retail BKs (Sports Authority? Not sure if it's Amazon related).

2. Are lessons from 1. applicable to other areas? How/when or why not?

3. Are any other areas as Amazonable as electronics? (This is where a lot of opinions and rehash go... but that's only one question out of 6. ;) )

4. Are any of the companies / stocks in Amazonable (or non-Amazonable) areas cheap enough based on Amazon panic?

5. Maybe even if they are not cheap (as KCLarkin implies with BBY example), they could be still great investments?

6. Can you predict their business trajectory to answer questions 4. and 5. and avoid 1.a.?

 

Have fun

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Yet another thread on Amazon that will rehash previous threads and won't provide any new insights.  ::)

 

I think KCLarkin asked interesting question about Best Buy but then muddied the waters by attaching the second wider question.

 

This question is not about Amazon (otherwise it would be posted in the Amazon thread). But the question is whether the Best Buy case study can help value investors find any treasure in the various Amazon-related sell-offs this year. Perhaps this is a re-hash of things discussed on the Best Buy thread, but I doubt many investors are aware that BBY has actually outperformed AMZN since 2013. So I thought this might be a useful discussions for people considering investing in things like Autozone, CVS, or MSM. Things that look cheap but are widely considered value traps due to the Amazon threat.

 

Maybe all this thread is good for is to nudge a few investors into reviewing the Best Buy thread.

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4. Are any of the companies / stocks in Amazonable (or non-Amazonable) areas cheap enough based on Amazon panic?

 

IIRC, Best Buy traded down to something like 4x earnings in 2012. So maybe one lesson is that things like AZO (12x) or CVS (13x FCF) aren't really that cheap. On the other hand, they seem more defensible than BBY.

 

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Guest Cameron

IMO if you guys want to get some serious value from this, you should think about the following questions (some of which KCLarkin asked or maybe had in mind):

 

1. What made Best Buy successful while others weren't? Was this predictable when everyone was crying Best Buy BK?

1 a. What made the companies that went BK go BK? Circuit City, Radio Shack, Borders, maybe other recent retail BKs (Sports Authority? Not sure if it's Amazon related).

2. Are lessons from 1. applicable to other areas? How/when or why not?

3. Are any other areas as Amazonable as electronics? (This is where a lot of opinions and rehash go... but that's only one question out of 6. ;) )

4. Are any of the companies / stocks in Amazonable (or non-Amazonable) areas cheap enough based on Amazon panic?

5. Maybe even if they are not cheap (as KCLarkin implies with BBY example), they could be still great investments?

6. Can you predict their business trajectory to answer questions 4. and 5. and avoid 1.a.?

 

Have fun

 

To answer your first question just off the top of my head I would think that Best Buy is selling expensive products in comparison to others that have been killed by Amazon. This was sort of the theory that Barnes and Noble had, they said people would want to touch and select books. I think this is only true when the price is over a certain threshold. Are you just going to shop online and compare products that may cost a thousands dollars without seeing how they look first. The best two examples I can think of is a TV or a Camera, a really good camera isn't just pocket change, they can go for thousands of dollars, I would certainly like to see how it works in person before I just willy nilly bought one.  I also think its a misconception that Circuit City went bankrupt because of Amazon, Best Buy had better locations. Best Buy was eating their lunch long before Amazon

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IMO if you guys want to get some serious value from this, you should think about the following questions (some of which KCLarkin asked or maybe had in mind):

 

1. What made Best Buy successful while others weren't? Was this predictable when everyone was crying Best Buy BK?

1 a. What made the companies that went BK go BK? Circuit City, Radio Shack, Borders, maybe other recent retail BKs (Sports Authority? Not sure if it's Amazon related).

Have fun

 

Tough questions...I'll take a stab.

 

Perhaps you get this bifurcated industry, where it consolidates into one or two giants on the B&M side, and one or two giants on the e-commerce side, for a given product class. So you have two options in terms of how you want to buy (B&M vs online), and then two options on where you want to buy within that category. The Coke/Pepsi effect.

 

On the B&M side (in terms of who lasts), I think part of that consolidation is maximizing the retail footprint. Being really smart about what people are walking into the store to buy, and being really smart about store size and location.

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IMO if you guys want to get some serious value from this, you should think about the following questions (some of which KCLarkin asked or maybe had in mind):

 

1. What made Best Buy successful while others weren't? Was this predictable when everyone was crying Best Buy BK?

1 a. What made the companies that went BK go BK? Circuit City, Radio Shack, Borders, maybe other recent retail BKs (Sports Authority? Not sure if it's Amazon related).

2. Are lessons from 1. applicable to other areas? How/when or why not?

3. Are any other areas as Amazonable as electronics? (This is where a lot of opinions and rehash go... but that's only one question out of 6. ;) )

4. Are any of the companies / stocks in Amazonable (or non-Amazonable) areas cheap enough based on Amazon panic?

5. Maybe even if they are not cheap (as KCLarkin implies with BBY example), they could be still great investments?

6. Can you predict their business trajectory to answer questions 4. and 5. and avoid 1.a.?

 

Have fun

 

To answer your first question just off the top of my head I would think that Best Buy is selling expensive products in comparison to others that have been killed by Amazon. This was sort of the theory that Barnes and Noble had, they said people would want to touch and select books. I think this is only true when the price is over a certain threshold. Are you just going to shop online and compare products that may cost a thousands dollars without seeing how they look first. The best two examples I can think of is a TV or a Camera, a really good camera isn't just pocket change, they can go for thousands of dollars, I would certainly like to see how it works in person before I just willy nilly bought one.

 

Maybe. Counterarguments: independent camera stores pretty much died. And the people I know who buy expensive cameras seem to buy them online... but maybe I just don't know the "right people".

 

I bought my last X laptops ($300-$1100 prices), cameras ($500 area), TV ($800 IIRC) online. If I were to buy top level DSLR, I'd buy it online too. But, yeah, I'm not selective (in things or stocks haha), so perhaps I'm wrong anecdotal person too. ;)

 

I've argued "touch" argument for clothes and shoes in the past. But I really don't know anymore...  ::)

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Both the "last man standing" and "market over-reaction theories" are too simplistic. I used 1999 as the starting point only because that is when Amazon launched the electronics category. But the real case study is the 2012-2014 period, when Best Buy recognized the dire threat and instituted a strategy to counter-act the threat.

 

Here is how Newsweek described Best Buy's predicament:

Best Buy’s challenge is like that of a trapped animal: it needs to gnaw off its limbs quickly before all hope is lost.

 

A few things that seemed key:

- Strong balance sheet

- Brought in turnaround CEO who confronted the "brutal facts"

- Price match guarantee with Amazon

- Lowered prices to be more competitive with Amazon (~2% higher from one)

- Invested in customer service and product lines that needed service (e.g. cellular)

- Strong integration between online and offline

- Extended warranties and services?

- Extensive cost cuts

- A willingness to take a short-term hit to earnings and margins

 

A company that might be going through a similar turnaround now is Grainger. They are systematically lowering their list prices to make them more competitive. They are also streamlining their branch network.

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Guest Cameron

IMO if you guys want to get some serious value from this, you should think about the following questions (some of which KCLarkin asked or maybe had in mind):

 

1. What made Best Buy successful while others weren't? Was this predictable when everyone was crying Best Buy BK?

1 a. What made the companies that went BK go BK? Circuit City, Radio Shack, Borders, maybe other recent retail BKs (Sports Authority? Not sure if it's Amazon related).

2. Are lessons from 1. applicable to other areas? How/when or why not?

3. Are any other areas as Amazonable as electronics? (This is where a lot of opinions and rehash go... but that's only one question out of 6. ;) )

4. Are any of the companies / stocks in Amazonable (or non-Amazonable) areas cheap enough based on Amazon panic?

5. Maybe even if they are not cheap (as KCLarkin implies with BBY example), they could be still great investments?

6. Can you predict their business trajectory to answer questions 4. and 5. and avoid 1.a.?

 

Have fun

 

To answer your first question just off the top of my head I would think that Best Buy is selling expensive products in comparison to others that have been killed by Amazon. This was sort of the theory that Barnes and Noble had, they said people would want to touch and select books. I think this is only true when the price is over a certain threshold. Are you just going to shop online and compare products that may cost a thousands dollars without seeing how they look first. The best two examples I can think of is a TV or a Camera, a really good camera isn't just pocket change, they can go for thousands of dollars, I would certainly like to see how it works in person before I just willy nilly bought one.

 

Maybe. Counterarguments: independent camera stores pretty much died. And the people I know who buy expensive cameras seem to buy them online... but maybe I just don't know the "right people".

 

I bought my last X laptops ($300-$1100 prices), cameras ($500 area), TV ($800 IIRC) online. If I were to buy top level DSLR, I'd buy it online too. But, yeah, I'm not selective (in things or stocks haha), so perhaps I'm wrong anecdotal person too. ;)

 

I've argued "touch" argument for clothes and shoes in the past. But I really don't know anymore...  ::)

 

I think its an interesting point, maybe it depends on age group and situation, my parents recently went out and bought iWatch's from Best Buy because they wanted to try them on etc. Now on the flip side of that my mother purchases different bands for the Watch all the time on Amazon. I have a friend in college who had been working and saving to get a laptop, they searched online to decide which to buy and then went to the store that same day and got it, when I asked why they did that he said he wanted to make sure he really wanted it. But as you said maybe it depends on who you know. Personally I like to buy books in a store and buy products online rather than a store where I would be approached by a salesman because when I'm buying I really don't want to be bothered.

 

While revenue has fallen for BBY over the last 5 years I was surprised to learn they still achieve almost 40B in revenue a year, so its hard pressed to say Amazon is killing them. The problem I have in the retail dilemma is Amazon going into Brick and Mortar, when they were first trying to do it with books it made no sense to me, they have a lower cost structure online when compared to B&M so why give that up. The purchase of Whole Foods and the thesis from some investors that they will be mini-warehouses makes no sense to me either, since Amazon Fresh has been around since 2007 i believe. To me, and I have no problem being proven wrong, I look at the purchase of Whole Foods as Amazon throwing in the towel for online groceries. 

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Guest Cameron

 

- Brought in turnaround CEO who confronted the "brutal facts"

 

 

This is what auto parts CEO's are dealing with right now, downplaying Amazon has never worked.

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Both the "last man standing" and "market over-reaction theories" are too simplistic. I used 1999 as the starting point only because that is when Amazon launched the electronics category. But the real case study is the 2012-2014 period, when Best Buy recognized the dire threat and instituted a strategy to counter-act the threat.

 

Here is how Newsweek described Best Buy's predicament:

Best Buy’s challenge is like that of a trapped animal: it needs to gnaw off its limbs quickly before all hope is lost.

 

A few things that seemed key:

- Strong balance sheet

- Brought in turnaround CEO who confronted the "brutal facts"

- Price match guarantee with Amazon

- Lowered prices to be more competitive with Amazon (~2% higher from one)

- Invested in customer service and product lines that needed service (e.g. cellular)

- Strong integration between online and offline

- Extended warranties and services?

- Extensive cost cuts

- A willingness to take a short-term hit to earnings and margins

 

A company that might be going through a similar turnaround now is Grainger. They are systematically lowering their list prices to make them more competitive. They are also streamlining their branch network.

 

I should have been sure that you'll have more in-depth arguments and models. ;)

 

As I said on BBY thread though, for me, their turnaround is unlearnable and untransferable to other companies. Perhaps because I am not willing to spend enough DD or I'm not interested enough in the sector(s). So I'll bow out from comments on your more in-depth models.

 

Good luck  8)

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How do I buy a pickup truck full of lumber and insulation on Amazon? How do I take pieces of an in progress project and physically fit them to what's for sale to see what I need to purchase?

 

Can't wait to order a pallet of Portland Cement and get free shipping on that..

 

Same with Autozone. If I am replacing rotors and notice my pads are bad I'm not going to leave my car jacked up for two days (if things actually arrive on time) until the pads arrive. Do I Uber my kids to school or to work?

 

At least you can bet that these problems are in the mind of Bezos.

Nationwide partnerships. Order through Amazon and delivered by the local branch.

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I look at the purchase of Whole Foods as Amazon throwing in the towel for online groceries.

 

IMO online groceries are either in the Chasm or at best in the Bowling Alley ( ref http://boards.fool.com/gorilla-game-faq-version-10-12756024.aspx http://boards.fool.com/the-technology-adoption-cycle-talc-14336664.aspx?sort=threaded  ) area of TALC. And Whole Foods purchase is either an attempt to knock down a pin and to get across the chasm. It's definitely not in tornado. It may never get there or it may not get there for another 5-10 years.

 

 

 

And, yeah, I am abusing GG terminology a bit, but I still think it's possibly useful to describe this area.

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How do I buy a pickup truck full of lumber and insulation on Amazon? How do I take pieces of an in progress project and physically fit them to what's for sale to see what I need to purchase?

 

Can't wait to order a pallet of Portland Cement and get free shipping on that..

 

Same with Autozone. If I am replacing rotors and notice my pads are bad I'm not going to leave my car jacked up for two days (if things actually arrive on time) until the pads arrive. Do I Uber my kids to school or to work?

 

At least you can bet that these problems are in the mind of Bezos.

Nationwide partnerships. Order through Amazon and delivered by the local branch.

 

This seems to be what they are doing in industrial distribution. There are lot's of local distributors that don't have the technology to compete with Fastenal, MSC, or Grainger. They might be willing to partner with Amazon.

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Guest Cameron

I look at the purchase of Whole Foods as Amazon throwing in the towel for online groceries.

 

IMO online groceries are either in the Chasm or at best in the Bowling Alley ( ref http://boards.fool.com/gorilla-game-faq-version-10-12756024.aspx http://boards.fool.com/the-technology-adoption-cycle-talc-14336664.aspx?sort=threaded  ) area of TALC. And Whole Foods purchase is either an attempt to knock down a pin and to get across the chasm. It's definitely not in tornado. It may never get there or it may not get there for another 5-10 years.

 

 

 

And, yeah, I am abusing GG terminology a bit, but I still think it's possibly useful to describe this area.

 

This is an interesting point, I don't see anything wrong with online groceries not working if it means Amazon innovates the B&M grocery stores. Bouncing off that terminology online groceries haven't grown much as a percentage of the overall market so your not abusing it, I would say its in Chasm more than Bowling Alley. Online groceries make sense for those in cities, if I had to guess that probably the majority of customers currently fit that bill. 

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How do I buy a pickup truck full of lumber and insulation on Amazon? How do I take pieces of an in progress project and physically fit them to what's for sale to see what I need to purchase?

 

Can't wait to order a pallet of Portland Cement and get free shipping on that..

 

Same with Autozone. If I am replacing rotors and notice my pads are bad I'm not going to leave my car jacked up for two days (if things actually arrive on time) until the pads arrive. Do I Uber my kids to school or to work?

 

I find I order them just in case. Last time my breaks started making noise, I just ordered all 4 rotors and all 4 sets of pads on Amazon. Some of the pads had some meat on them still, but I just replaced them anyway.

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That's incredible - I didn't realize BBY has done so well.  Where did you find all of that info about Best Buy?  Is there a specific article?  Makes me question the automatic death of all the retailers you mentioned.  The key point that I think is missing is that both Circuit City and Radio Shack went bankrupt over the same time frame. 

 

Is that true though? I thought Circuit City went bankrupt long before Radio Shack. In fact unless I'm remembering incorrectly Best Buy had more to do with killing Circuit City than Amazon.

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