PriceSmart Faces the Amazon
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
PriceSmart (NASDAQ: PSMT) stood out as a good performer on Friday, as investors remain attracted to the warehouse club's growth prospects in Central and South America. The company's stock looks expensive now, with a 39.58 P/E, but its business model offers a few major advantages that insulate it from the setbacks that are hurting other big box retailers. The membership club model should help PriceSmart continue to perform well in the future, while protecting it from the scariest competitor for companies that sell electronics at brick and mortar outlets, Amazon.com (NASDAQ: AMZN).
In April, Amazon created a Spanish language Kindle store. The Kindle store features several prominent Mexican writers, and Amazon could easily add popular books from writers in Central and South America. The Kindle initiative focuses on Amazon's original strengths in the publishing industry, and Amazon's electronics and home entertainment products could also appeal to shoppers in Central America. Amazon already has a dedicated website for Spain that markets Kindles, smartphones, and other consumer electronics to Spanish speakers.
Like PriceSmart, Amazon competes by offering very low prices on a wide variety of consumer products, and the traditional bookseller Borders could not deal with the competition from cheap online book sales. Amazon's recent investment in warehouse robots made the company an even bigger competitive threat to brick and mortar retailers.
The rapidly growing popularity of smartphones throughout the world has given Amazon an additional competitive advantage. A bargain hunter can use a traditional retail store as a showroom, going into the store to look at products until she finds one she likes, and then going back home to buy the product at a lower price on Amazon. A traditional retailer can't deal with smartphone browsing very effectively because it needs to maintain higher margins than an Internet company to deal with rent and other overhead costs.
The warehouse club model gives both PriceSmart and Costco (NASDAQ: COST) some protection from Amazon. Warehouse clubs restrict store access to their members, which limits browsing by shoppers who don't intend to buy products at their stores. The warehouse club model allows both PriceSmart and Costco to charge lower prices for the products on their shelves because of their membership fee revenue, which limits the attraction of Amazon's discounts.
Costco demonstrated that a warehouse club in the United States could raise its membership fees and keep its customers. PriceSmart's Central American customer base might be more sensitive to a fee hike, but the company doesn't need to charge high membership fees to stay profitable. The availability of an additional, and very predictable, source of income is very good for these retailers' long term prospects. Amazon does have its own source of membership revenue with its Amazon Prime shipping discount program.
Amazon doesn't report specific revenue figures for Central or South America, although the company's 2011 annual report does show that shoppers outside of North America provide almost half of its revenue. In 2011, Amazon reported $26.7 billion in revenue from its North America segment, and $21.4 billion in revenue from other parts of the world. Amazon's European operations obviously provided many of these sales, but the company has announced that many shoppers from Latin America do visit its websites, and the new Spanish language site could attract shoppers from PriceSmart's main markets.
The club membership model should limit the impact on PriceSmart from Amazon's international expansion plans. PriceSmart's membership fee income will help it keep store prices low and help it make sure that the shoppers in its warehouse clubs are there to buy its own products. The warehouse club model has helped Costco fend off competition from Amazon in the United States, and it seems like it can also succeed in Central and South America.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Motley Fool newsletter services recommend Amazon.com, Costco Wholesale, and PriceSmart. 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.