How does a retail company make itself Amazon-Proof?
Two decades ago, Amazon was an online bookstore operating out of Jeff Bezos’ garage in Seattle. Today, it’s one of the most influential corporations in the world and the third-largest US company by market cap. With over 40 subsidiaries — including Amazon Web Services, Whole Foods Market, and Amazon Studios — you can be pretty sure that you’ve been a customer of Amazon in one way or another.
For many people, the meteoric success of Amazon epitomizes the more general rise of e-commerce over the same time. Death knells have been rung by analysts and commentators over and over again for traditional ‘bricks-and-mortar’ stores as they try to compete against cheaper prices, free delivery, and the ability to shop from the comfort of one’s own armchair.
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It’s myopic to think that all retail stores are struggling, however. In fact, some very old-world companies are continuing to thrive today as they maintain and grow some important economic moats that just can’t be replicated by Amazon or its likes.
In light of that, here are three companies we see at the moment that our analyst team believes are ‘Amazon-proof’:
1. The Home Depot
One of the most attractive elements of Amazon’s retail platform is the efficacy of its Prime delivery service. Prime customers can avail of free delivery on most of the products they buy and, in some cases, receive it in a matter of hours. That’s a level of convenience that traditional retail stores just can’t compete with.
Not every product is suitable for this type of delivery, though. The value/weight ratio is a way that retailers determine the actual cost of sending products out to customers, and can best be summarized like this:
Three of those four sections are suitable for rapid delivery, but products located in the top right-hand corner of the quadrant are the worst for companies to sell online because their bulkiness outweighs the actual value of the product.
This is why companies like The Home Depot (NYSE: HD) are still thriving in an e-commerce world.
Cans of paint or lumber can be bought on Amazon, but they are low-value products that are expensive to deliver, which ultimately eats into margins. For the consumer, it’s a lot easier to just go to your local store and pick these things up, where you can also inspect them to make sure the product is exactly what you need (imagine trying to return a pallet-load of timber through Amazon!).
For the likes of Amazon, selling products like this is unlikely to ever become a big focus. It’s just not profitable enough when more valuable and easily shipped things like consumer electronics can be delivered at much better margins.
In addition to this, Home Depot is a company that has already proven itself during times of economic turmoil. During the housing crisis, an event that should have obliterated this business, sales only fell 16% from peak to trough and had fully recovered by 2014.
When the economy is good, Home Depot is bolstered by professional sales to homebuilders. When the economy is weak, people remain in their homes longer and embark on more D.I.Y improvements. It’s really that simple.
Home Depot will report its Q1 2020 earnings on Tuesday 19 May.
2. Ulta Beauty
In the midst of the massive shift towards online shopping, Ulta Beauty (NASDAQ: ULTA) opened 67 new stores last year, with 1,241 stores now located in all 50 states.
So what makes selling beauty products different from selling books or electronics?
Ulta Beauty combines the salon experience with the shopping experience. Customers come in to get their hair and nails done by beauty professionals and leave with a bag full of new cosmetics. It’s a brilliantly simple system. Even without the draw of the salon, customers still flock to Ulta stores to try out new brands or seek advice from the staff.
Currently, Ulta has 32 million people signed up to their rewards program (twice as many as Starbucks) and exclusive agreements with some of the most important influencers in the space, including Kylie Jenner.
Outside of the in-store experience, however, Ulta Beauty is not ignoring e-commerce either, looking to grow online sales by 20-30% this fiscal year, making it the fastest-growing revenue stream for the company. This robust omnichannel approach will prove to be crucial in the long-term success of this great company.
Costco (NASDAQ: COST) is the second-largest retailer in the world, promising no-frills shopping to its 99.9 million members, all of whom pay for the privilege to shop in their stores.
While brick-and-mortar retailers are failing all around them, Costco continues to steadily grow comparable sales, with 2019 sales growing 8% to hit more than $149 billion globally. If that wasn’t enough, membership renewals are still above 90% in the U.S. and Canada, while 88% internationally.
The company’s reputation is built upon being absolutely brutal in its quest to keep prices low. At one point, they refused to stock Coca-Cola until they dropped their wholesale price (they did), and stores have been known to keep the lights turned off on sunny days.
This is a company that has a simple idea — wholesale shopping at great prices — that is executed upon perfectly. In today’s world, that’s something that’s deceptively hard to find.
MyWallSt operates a full disclosure policy. MyWallSt staff currently may hold long positions in The Home Depot and Ulta Beauty. Read our full disclosure policy here.