How to Survive the Amazon Revolution
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 the most disruptive force the retail industry has seen in the last decade. The online retailer is largely responsible for the demise of companies like Circuit City and Borders, and many others are under serious danger of going through the same path. However, what doesn´t kill you makes you stronger, and some companies are finding intelligent ways to adapt and thrive in the challenging environment created by the Amazon revolution.
The Right Way to Compete on Costs
In a move that could backfire in a big way, Best Buy (NYSE: BBY) has recently announced it plans to match the prices offered by online competitors like Amazon this holiday season. This is good news for shoppers, but it could be terrible news for Best Buy investors.
The company has a higher cost structure than Amazon, not only because of sales taxes, but also due to location, inventories and salaries among other things. Besides, Amazon sells its products for razor thin profit margins, so Best Buy will likely have to take a big loss in the fourth quarter due to its price matching strategy. According to an estimate by price API company Invisible Hand, the decision could cost Best Buy over $400 billion.
What does Best Buy gain from this? Probably not much, at least not in the long term. Best Buy can´t compete versus Amazon on pricing for a long time, the online retailer is bigger, stronger and it has a lower cost structure. Unless you have a viable strategy to reduce costs and translate those savings to consumers, selling at a loss is an unsustainable strategy.
Costco (NASDAQ: COST) on the other hand, is in a very different situation. The company delivered better than expected earnings for the last quarter, fueled by a 5% increase in same warehouse sales and a 4% growth in customer traffic. Costco focuses on food and fuel, and it sells those items near cost levels, generating its profitability from membership fees.
This is a smart business strategy which makes the company an undisputed price leader and a very successful retailer in remarkably challenging times. Amazon has the potential to seriously damage or even kill many competitors over the next years, but Costco is not on that list.
Adding Value to Retail
According to Asymco, Apple (NASDAQ: AAPL) is the most efficient retailer in the world. The Cupertino giant has the highest sales per square foot in the retail business, and sales at Apple stores grew by a 17% year over year in the third quarter of 2012. The popularity of Apple products has clearly been a factor behind its noteworthy success in retail, but the company sells its devices through different channels, so customers could choose other venues if they preferred to do so.
Apple is doing so well at retail because it's not just selling products; it's providing a satisfying customer experience. Design, internal distribution, and product availability play a big role in this strategy, and customer service is absolutely central. Apple stores are the face of the company's brand, and a fabulous venue for communicating with clients. Apple stores provide a fantastic customer experience, and that's the way the company adds value to its retail operations.
Nordstrom (NYSE: JWN) is another retailer reporting healthy results in spite of heavy macroeconomic headwinds for high end retail. Total sales rose 14% in the last quarter, while revenue at stores opened at least a year was up 10.7%. Net income grew by a 15% year over year, and it could have done better if it weren't for all the money the company is investing its rewards program for shoppers.
Nordstrom can continue succeeding as long as it keeps providing a pleasing experience for shoppers. The company has always been famous for its flexible return policy and the attentiveness of its employees. Things like the general aspect of the stores, tidiness, smell and decoration cannot be matched by Amazon, and Nordstrom understands it needs to differentiate itself using those tools.
Brick and mortar retailers have one big advantage over Amazon, the ability to control customer experience to a higher degree. Companies like Apple and Nordstrom are making good use of this benefit, and that's the main reason why they have been doing so well in spite of a challenging environment.
Shopping for the Right Retailers
The retail landscape will continue being disrupted by Amazon over the next years, and many companies will suffer from this phenomenon. When shopping for retail stocks, ask yourself the following question: How does the company protect itself from Amazon? The answer may surprise you, as some retailers are doing remarkably well thanks to strategies like a powerful cost leadership or a differentiated shopping experience.
acardenal owns shares of Apple and Amazon. The Motley Fool owns shares of Apple, Amazon.com, Best Buy, and Costco Wholesale. Motley Fool newsletter services recommend Apple, Amazon.com, Best Buy, and Costco Wholesale. 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.If you have questions about this post or the Fool’s blog network, click here for information.