I love my once-a-week routine of picking up my five-year-old grandson from school (he's in Junior Kindergarten), and one of our regular afternoon stops was, for some time, the nearby Booksellers at Laurelwood. On our last trip there, I explained to my grandson that the place was closing, as I pointed to the empty magazine racks and all of the books on sale. I think he got the closing part, but probably didn't fully comprehend my explanation of why. As we walked through the children's section, I thought about how there would be no more author talks and book signings, no more story time for the kids, and no more Sunday afternoon trips there to pick up a few magazines. It was all really quite sad. It was also inevitable.
Denial is often the handmaiden of inevitability, the combination owing to our natural tendency not to fully understand disruptive change. How many times, since the dawn of Internet commerce, have people said, But people will always shop at...(fill in the blank: Sears? J.C. Penney? Radio Shack?). It may be true that some people will continue to shop there, but the sentiment ignores the fact that the difference between success and failure is often at the margin. All it takes is for enough shoppers to divert some of their buying to online options, or to use bricks-and-mortar stores as showrooms for subsequent Internet purchases (this is known as "Showrooming"). Factor in the investment in overhead and space that major stores like Macy's have made, and you get a business model that suffers from economic arthritis. And failure does not have to mean outright collapse, but for our purposes here, failure as a rewarding investment.
Consider the specific characteristics of certain types of bricks-and mortar stores that left them vulnerable to disruption. Macy's and Target, for the most part, do not make the goods they sell, so there is nothing proprietary about their offerings. Their value to customers came from the stores being marketplaces where consumers could purchase a variety of merchandise. In the days before online shopping, this made sense. Now, however, there are vast online marketplaces where consumers can buy many of those goods. The latest John Grisham novel is the same everywhere it is sold, so there is no product differentiation that would make buying it in a physical store more compelling than ordering it online. If you are old enough to remember the television show Green Acres, then you will recall that Sam Drucker's General Store was the only game in the town of Hooterville. Now imagine the existential threat to Mr. Drucker if Walmart had opened a Superstore nearby. In the real world, that's pretty much exactly what Walmart did, and the behemoth retailer laid waste to many Mom and Pop stores all over the country, particularly in rural towns. Sound familiar? That's because Amazon has done the same thing--and part of the denial tendency was viewing Amazon as a technology company instead of as the mammoth retailer that it truly is. Amazon is a technology company only in the sense that Fedex is an airplane company.
I shared a story in this space a few years ago about how I had visited the bookstore and asked for a particular title. The clerk checked his computer screen and told me that the book was not in stock, but that they could order it and have it for me in two weeks. Two weeks? Really? Had they never heard of Amazon (AMZN, $852) and Fedex ($FDX, $195)? If physical store retailers like the bookstore want to stay in business, they had better rethink and ramp up their customer service. My wife owns a clothing boutique, the Pink Door here in Memphis, where she sells Lilly Pulitzer clothing and accessories. She will do anything to cultivate loyal customers, including delivering their purchases to their homes. Customer service is one area where bricks-and-mortar stores could gain an advantage over their online competitors, but apparently some of them have been so blinded by denial that they did not appreciate the nature of the competitive, disruptive threat. If anyone is going to survive and thrive in this environment, I think the smaller boutique stores have the best chance of doing so.
So, who are the likely survivors here? Probably the retailers who sell goods that cannot be readily shipped at a reasonable cost or where the products have a "kick the tires" element to them. Also those retailers that provide services that have a tactile aspect to them, the deep discounters, and those legacy retailers who have mastered e-commerce.
You can literally kick the tires of a riding lawnmower at Tractor Supply (TSCO, $71), a specialty retailer that caters to the farm and rural markets. You won't find them next to Gap at the mall. I see on their Website that they have a riding lawnmower for $2,499.99 that you can have delivered by truck or pick up in the store for free. I can't imagine my Fedex delivery guy hauling this up to my front porch. It weighs 520 pounds.
You can't get your hair cut or your eyebrows waxed on the Internet, although I am sure that somewhere, someone is working on that. Ulta Beauty and Salon (ULTA, $288) sells a cornucopia of makeup, cosmetics, and fragrances, and they also offer salon services. To the extent that buying makeup is a tactile experience, ULTA has some Amazon-Proof qualities.
My wife and I took our grandson with us to Costco (COST, $167) a few years ago, and I took a picture of the two of them in front of the entrance and posted it to Facebook. A friend of mine posted a reply: "So they sell toddlers at Costco now?" I replied to him, "Yes, but you have to buy 100 of them." And to it goes with the big warehouse stores, and part of the genius is the annual membership fee. Once we have paid for that, we feel it makes sense to go to Costco about once a month to purchase paper towels, toilet paper, razor blades, and printer/copy paper in large quantities. The same can be said about Amazon's Prime service and, of course, the Netflix (NFLX, $145) subscription model. If you've paid for it, you might as well use it. People from all walks of life and all socioeconomic levels seem to have found that loading up on stuff that they're going to need at some point makes sense, if the price is right.
And the right price is something on offer at T. J. Maxx (TJX, $79), whose parent company also owns Marshalls and Homegoods. The draw here is that they sell designer clothing that may have just recently been moved out of the full-price stores, and they boast of an ever-changing selection of goods to get customers into their locations. You can sign up for their email list to be notified of the latest goods and bargains.
Walmart (WMT, $70) got even more into online commerce with the recent purchase of Jet.com. Jet specializes in a variety of what they call "everyday essentials," and the prices of the goods in your shopping basket will drop as you buy more stuff. Jet was co-founded by Marc Lore, who had also started Diapers.com, which he sold to Amazon.
I love to shop at Williams Sonoma (WSM, $49), but I haven't been in one of their physical stores in more than a year. They are an example of a company that caught on early and mastered their e-commerce business. Morningstar, the investment advisory service, gives shares of WSM its highest rating of five stars and a fair value estimate of $71. WSM also owns Pottery Barn and West Elm, and the dividend yield is a nice 3.15% with a payout of just less than half of earnings. This looks like a value.
The companies mentioned above likely have a decent shot of surviving the juggernaut of Amazon. Meanwhile, Macy's has announced more store closings, and the stock of Target (TGT, $54), which has been in a downtrend since December, plunged to fresh 52-week lows at the end of February after reporting disappointing earnings and lowering guidance for the future. The company did announce that it will be opening 100 smaller stores by 2019, perhaps a recognition that having all that marketplace space is actually a liability. The shares do yield about 4.4%, but I'll take WSM's lower yield instead of waiting for Target to right its ship. Green Acres may be "the place to be," but not Target.
Someday I imagine I'll be telling my grandchildren stories of how we used to visit this type of shop called a "bookstore." Maybe I'll find some old rotary phones and television rabbit ears and start a museum for them. I guess progress begets nostalgia. To paraphrase what Humphrey Bogart said to Ingrid Bergman in Casablanca about Paris, I guess we'll always have Costco. Well, maybe.
Life is short. Get busy!
Jim
Disclosure/Disclaimer: My family members and/or I own shares of AMZN, FDX, COST, TSCO, ULTA, NFLX, TJX, WMT, and WSM. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as advice to buy or sell any security. Wikipedia was the source for some of the information in this article.
