Retailers, be afraid.
If conquering the e-commerce industry wasn’t enough, Amazon is now coming after market share from physical brick-and-mortar retailers. While retailers are scrambling to compete in e-commerce, Amazon is bringing the fight to them.
Amazon started as an online book retailer in 1994 and is now an e-commerce conglomerate employing over 300,000 employees. In an industry they cannibalized, it’s a cruel twist of fate that Amazon has now opened 11 physical books store, with more on the way.
Even more interesting than their foray into book stores, Amazon recently paid $13.7 billion to acquire Whole Foods. Amazon has sent a clear signal they’re looking to monopolize the shopping experience the same way Google controls search engines and Facebook dominates social media.
However, unlike Google and Facebook, which both produce double-digit profit margins, Amazon has thrived on remarkably thin margins. Even Walmart, Amazon’s biggest competitor, yields a higher profit margin. Going back to the 3rd quarter of 2009, Walmart has averaged a profit margin of 3.32%. Amazon, over the same time horizon, has averaged a meek 1.17% profit margin. Although it’s smaller by comparison, it’s likely not surprising after considering the investments Amazon has made in technology, infrastructure and building out a leading supply chain network. Furthermore, Amazon intentionally lowers prices in a quest to squeeze out competitors. More on that shortly.
Herbert Spencer, an accomplished theorist and philosopher, proposed the term “survival of the fittest” after reading Darwin’s theory of evolutionary biology. His observation resonates as loudly today as it did in 1864. Retail is a tough business: narrow profit margins, unrelenting competition, new technologies and shifting consumers preferences weed out all but the strongest retailers. As a result, retailers are always jostling for position, chasing the proverbial “location, location, location”. This was the case when Canadian Tire vacated their location on Calgary Trail in favor of a much larger, much more high profile location in south Edmonton Common. Whole Foods, the American grocer which has expanded into Canada and the UK, had plans to move into the old location. For reasons that they did not disclose, they announced earlier this year they would not be moving forward with the location (same for a planned location in Calgary which was also scrapped).
Grocery stores have shown the same resistance to change as the taxi industry did. With deference to all of the taxi drivers who have been impacted, Uber is simply cheaper and easier to use. Amazon might just be the Uber of supermarkets. They will not only lower prices (as proven by their willingness to accept comparatively lower profit margins), but also introduce technology we’re not even aware of yet. Imagine looking at your phone and getting pricing, reviews and ratings on every product in the entire grocery store. After filling your cart, you simply walk out the store and get emailed a receipt. It may sound far-fetched, but that technology already exists in Amazon’s book stores.
Our prediction: we think we’ll see 3 – 5 Whole Foods in Greater Edmonton within the next few years. We would make this assertion solely on the premise of who they’re looking to take market share away from. Within Greater Edmonton, Walmart has 18 locations and Costco has 6 locations. We think south Edmonton, northwest Edmonton, Sherwood Park and St. Albert would look quite appealing as potential locations for Whole Foods / Amazon.
Also, Amazon does not currently have a fulfillment centre in Alberta, Saskatchewan or Manitoba, even though it’s a trade area of roughly 4.5 million people. Another prediction: if Amazon is looking to add a fulfillment centre in Western Canada, Edmonton is the logical choice. Not only does CN Rail have a mainline from both the Vancouver and Prince Rupert Ports, but CP Rail is planning a large intermodal yard with excellent access to the airport and QE II. This will allow for convenient shipping by rail with the ability to further ship to Saskatchewan and Manitoba. Edmonton’s central location will also allow for efficient truck shipments anywhere in the province. It is purely speculative on our behalf, but we think there’s a good chance we see Amazon and Whole Foods make a grand entrance into our market.
Circling back to our earlier comment about Amazon’s propensity to lowering prices to force out competitors, Amazon cut prices at Whole Foods by as much as 43% on the day they took over. They made a $13.7 billion acquisition – paying a premium in the process – and immediately lowered prices.
Retailers previously fretted over Walmart coming into their market.
Amazon looks even scarier.
Profit margin is the profit (as a percentage of revenue) after deducting fixed and variable costs. It is calculated by dividing net income by revenue.
Take any and all of our predictions and guesses purely as conjecture. It might even be considered satire if we were clever enough to be ironic. Do not rely upon anything we say as investment, legal or accounting advice. We thought Clinton was going to win the Presidential election so we could/might/will be completely wrong on any or every prediction we make.
We do not work for Amazon, nor have any affiliation or relationship with them (notwithstanding the occasional Amazon delivery to our office).
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