What Wal-Mart and Target Started, Amazon and eBay will Finish
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For those retailers who have so far survived the onslaught of Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Costco (NASDAQ: COST), the full fury of Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY) is just being unleashed.
Amazon started off selling books. The success of that endeavor has been seen in the decline of book sellers such as Barnes & Noble, Borders, and Books-a-Million. From that beginning, Amazon has also moved into clothing, DVDs, laptops, tablets, garden supplies, tools, automotive and industrial supplies, among many other items.
Like Wal-Mart and Target, which started off as retail stores, Amazon too is now moving into groceries. While competition from Wal-Mart and Target has not affected the viability of fellow big box store Costco, which has both sales and earnings-per-share growth rising on a quarterly basis, it has destroyed grocery store chains such as SuperValu, Food Lion, and Winn Dixie, which could not survive against the new pricing paradigm.
Again, like Wal-Mart and Target, Amazon optimizes and maximizes the logistical functions in a superior manner. The next threat emanated from Amazon is its move into same day delivery of the goods purchased. For this, Amazon has spent billions of dollars building warehouses around America. Billions more will be spent on robots and other systems to make the delivery of the items as efficient as possible. Needless to say, gas at $4 a gallon increases the appeal of same day delivery.
eBay just posted very strong results for the second quarter of 2012. The second and third areas with the highest growth rate for eBay were jewelry at 20% and home and garden at 19%. Health and beauty also expanded by 15%, another threat to brick-and-mortar retailers. ebay, like Amazon, has evolved from just auctioning off unwanted posters to now moving many new goods such as jewelry, home and garden supplies, and health and beauty products.
Consumer electronics sales also rose by 11% for eBay. At the same time, Radio Shack and Best Buy appear to be on the way to joining Circuit City. For retail stores in the consumer electronics sector, much, if not all, of what the average consumer needs can easily be found at the nearest Target, Wal-Mart, or Costco. What cannot be is easily ordered online from Amazon and eBay. This confluence of factors took Circuit City into bankruptcy and now has share prices for Best Buy and Radio Shack plunging.
It appears as if Amazon is now targeting the consumer electronics sector with more of its own products to complement the Kindle. There is certainly no shortage of superior smart phones being offered by superior companies such as the iPhone from Apple or the Galaxy Nexus from Samsung, but Amazon is widely reported to be coming out with a Kindle version. This will make it much more difficult for Radio Shack or Best Buy to recover as consumers try out the Kindle, which will most likely not be offered in those stores.
A major reason for this is that profit margins in the brick-and-mortar sector of the retail sector are slim, even for Wal-Mart (3.68%), Target (4.15%), and Costco (1.73%). That is not the case, however, for online retailers such as eBay, which has a profit margin of 28.66%. The tremendous costs of building out Amazon's nation-wide infrastructure to effectuate same day deliveries is suppressing its profit margins. However, Amazon does have sales growth of more than 33% on a quarterly basis, topping that of Wal-Mart (8.47%), Target (5.85%) and Coscto (8.25%).
In addition to lower prices, a significant factor for the success of Big Box retailers was the convenience of integrating grocery shopping. It can all be done now in just a single trip. Now Amazon and eBay are moving to make that even more convenient by allowing for everything, including the delivery of goods, to be actuated from home by a few taps on the keyboard. While Costco, Wal-Mart, and Target are not going anywhere, many other retail stores will be going out of business.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Amazon.com and Costco Wholesale. Motley Fool newsletter services recommend Amazon.com, Costco Wholesale, and eBay. 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.
