Amazon Is Killing These Companies
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon (NASDAQ: AMZN) is transforming the retail business in a permanent way. Many things we used to buy at brick and mortar stores are now being purchased online, mostly from Amazon and other big retailers with strong online presence. This trend is only going to get stronger in the following years, and it presents an enormous challenge for many companies.
That´s the law of capitalism after all: innovations that benefit consumers and make big profits for some companies usually hurt or even kill the less innovative competitors. As an investor, you should make sure not to be positioned in one of those businesses that are on the wrong side of the innovative trends. Even if the price looks cheap from a historical perspective, or valuation ratios make you think you are looking at a bargain, if the business is permanently deteriorating, any price may turn out to be too high.
Book retailers are probably the clearest example of an industry I would completely avoid. Barnes & Noble (NYSE: BKS) tried to compete with Amazon by launching a new e-reader, the Nook. But the company doesn't have the business scale or financial resources that Amazon has and business seems to keep getting worse day after day. There is one question Barnes & Noble needs to answer: Why would someone buy a book here and not through Amazon? I can't think of any convincing reason.
Electronics retailers like Best Buy (NYSE: BBY) and RadioShack (NYSE: RSH) are also in a very difficult position. People may enjoy getting advice from employees or even having the chance to see and touch the products, and that helps these brick and mortar retailers. But many customers go to these stores to gather information and make a decision, and then place an order with Amazon and receive the products at home.
In the business of electronics retail, price is a crucial competitive factor, since it makes no difference for the customer to buy a certain product from one retailer or the other. These traditional stores make a big effort to offer competitive prices, but they have much higher cost structures than Amazon for numerous reasons like inventory, real estate, employees, etc. Over the long term, they are on the wrong side of the changing business dynamics.
Actually, the same logic applies to selling any items that don't require a physical presence, especially when the products are not very differentiated. The office supply business is another industry that looks vulnerable. Companies like Staples (NASDAQ: SPLS), Office Depot (NYSE: ODP) and OfficeMax (NYSE: OMX) don´t have a promising future and I would not buy these stocks even at extremely low prices.
Motley Fool newsletter services recommend Amazon.com and Staples. The Motley Fool owns shares of Amazon.com, Best Buy, RadioShack and Staples. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
