"Retail Is The Titanic": This Is The Biggest Threat From The Coming Amazon Monopoly

In the latest in-depth overview of the troubles facing the US retail sector, which also serves as a recap of several previous articles posted on Zero Hedge, the FT's Robin Wigglesworth asks "Will the death of US retail be the next big short", something covered here back in March in "Why Some Think This Is The Next "Big Short" and subsequently in "The Retail Bubble Has Now Burst": A Record 8,640 Stores Are Closing In 2017."

That said, there are several notable incremental data points, including dramatic soundbites by what appear to be new shorts in the space such as Stephen Kethcum of Sound Point...

The reshaping of how Americans shop by the internet is accelerating. The US retail industry faces a growing headache, with 10 companies pushed into bankruptcy already in 2017, according to Standard & Poor’s. Even Sears, a once mighty department store chain founded in 1886, is now tottering.

 

“We think the magnitude of this short could be bigger than subprime,” says Stephen Ketchum, the head of Sound Point Capital, a hedge fund that manages more than $13bn in assets. “Go to the Amazon website and type in ‘batteries’. What you see is just the tip of the future iceberg. And retail is the Titanic.”

 

“Because it is such a slow bleed, it is important to get both the direction and the timing right,” Mr Ketchum says. “We are focused on shorting the companies that have reached a tipping point for one reason or another.”

... as well as some familiar faces:

Victor Khosla, founder and senior managing partner of Strategic Value Partners, a $6bn distressed debt hedge fund, says the list of troubled retailers his firm now monitors is “extraordinarily long”, but he is staying well away.

 

“Trying to figure out the bottom is hard. We have spent a lot of energy understanding these businesses, and have concluded that the vast majority of them are uninvestable,” he says. “Many of these were great businesses at some point in time, but the internet and changing consumer habits have destroyed them.”

... and some skeptics:

David Tawil, president of Maglan Capital, says: “Although it is a good short, I don’t think that, at this point, it is the short, nor is it a big short.”

The balance represents several charts familiar to regular readers such as the collapse of traditional retail offset by the surge of online stores:

... the relentless capture by Amazon of not only market share but also market cap:

... both underscoring the so-called Amazon effect:

Shuttered shopping malls and struggling department stores are the most visible example of what analysts have termed “the Amazon effect”, as spending migrates from bricks-and-mortar shops to the online realm dominated by the likes of Jeff Bezos’s internet retailing giant. But it is also likely just the first stage, with some investors predicting that every corner of commerce is about to experience a painful burst of creative destruction as shoppers migrate online.

 

“There’s a big shakeout in how people consume goods,” says another big hedge fund manager. “It will have a massive economic impact . . . It is already a bad year, and it feels like it has the momentum to become something bigger.”

Wigglesworth also points out the familiar CS chart of upcoming store closures by square footage...

...and by total units:

The FT also provides a debatable defense of why brick-and-mortar is better than online:

... retail is not going away, and as some chains go out of business the survivors will pick up some of their customers. Most economists expect wage growth in the US labour market to pick up in the coming years, helping to support consumer spending.

 

“Websites cannot give you goosebumps, and that is where physical stores still have an advantage,” says Byron Carlock, head of PwC’s US real estate practice. “I don’t see consumers shying away from consuming. Good retailers will figure it out.”

But what we found most interesting was two-fold: first the realistic assessment of what happens once the next recession strikes, due any minute according to the near negative print in C&I loan growth:

... what looks like a slow-moving train wreck could speed up should American consumers — who at the moment are enjoying low interest rates and subdued unemployment — suffer another shock. For example, in the unlikely event that the Federal Reserve embarks on aggressive rate rises and pushes the economy into a recession, retailers could be hit both by higher borrowing costs and consumers tightening their belts.

And the second was the FT's catch of a data point first observed by Goldman, namely the dramatic difference in labor intensity between online and conventional retail companies. Here's the punchline:

The impact of the retail sector’s problems on the fabric of the US labour market is likely to be severe. Goldman Sachs estimates that ecommerce companies only require 0.9 employees per $1m of sales compared with 3.5 for a bricks-and-mortar store, and the sector is on course to lose about 100,000 jobs this year.

As WIgglesworth points out, while initially modest, this transition is "only the beginning of a broad, accelerating trend as even more shopping migrates online."

He is correct, because it is this labor transformation that is the biggest threat from the quasi-robotic, mostly part-time labor Amazon, and its upcoming monopoly: the bigger Amazon, and other online retailers become, the fewer workers will be needed to operate with the same revenue efficiency in what has traditionally been one of the largest employment sectors in the US. Here it is charted:

For the concluding soundbite we go to, Nadeem Meghji, head of North American real estate at Blackstone, the world’s biggest investor in property, who says that “it’s a slower bleed than the housing crash, but that was a cyclical story. Retail is different because it’s slower, but secular."

“The social and economic consequences are going to be huge,” warns Mr Meghji. “It’s a massive secular change to how our economy and society operates.”

* * *

For our take on this disturbing social and economic transformation, we urged readers to skim "The Retail Bubble Has Now Burst": A Record 8,640 Stores Are Closing In 2017

Comments

pitz Mon, 07/17/2017 - 17:50 Permalink

Amazon monopoly?  What is the author smoking?  Amazon can't even make money at retail, nevermind form a monopoly.  They're just a few bad days on the stock market away from dissappearing. 

Honest Sam pitz Mon, 07/17/2017 - 18:02 Permalink

You are looking in your rearview mirror at Fundamentals, which have now sunk to the level of Scatology.  Scatalogical investing has made Fundamental investing suffer the death of a million small cuts over the last decade, and the Coop de Graz was executed on November 8, 2016 and counting.  The impossible is now the predictable.  Many shorts over the last 8 years have lost everything, and they are now living under a box, in Compton, cold, hungry, and on IV's of Ripple wine. We have now entered the chaos that comes from being sucked into Black holes of the Economic kind, where stock price no longer is a factor reflective of a P/E ratio.  P/E is now as antediluvian as hilary's prehensile tail. Forsake Benjamin Graham! Embrace his Evil Twin.

In reply to by pitz

J S Bach Shocker Mon, 07/17/2017 - 19:38 Permalink

Yes, Amazon's techniques are the future, which intones the death knell of retail stores.  However, they musn't achieve a total monopoly on those techniques.  Ma-Bell was broken up in the 1980s.  The same can be done with Amazon.  As we see with the free internet and MSM news media... competition always brings out truth and balance in both politics and economics.

In reply to by Shocker

Centerist Honest Sam Mon, 07/17/2017 - 18:46 Permalink

I wouldn't necessarily speak of just Amazon's stock price as a description of its long-term viability.  A company that runs in the red for too long eventually risks a downturn leading to its doors being shuttered.  Perhaps the loss at which Amazon operates in order to gain market share won't ever turn into real profits.  It seems that the company must have a genuine monopoly in order to really be profitable, and at that point, Amazon will jack prices up.When that happens, brick and mortar will come back with a vengeance.

In reply to by Honest Sam

Honest Sam Centerist Wed, 07/19/2017 - 12:46 Permalink

Apparently Bezos recognized very early on long before a government policy that was formally 'invented' in 2008 , called Too Big Too Fail.While AMZN continues to astound with a plus 1025 share price, it is in the Vanguard of companies like GM were deemed TBTF.Again, fundamentally it should be a buck a share, or on the pink sheets.But, it ain't.

In reply to by Centerist

Row Well Number 41 pitz Mon, 07/17/2017 - 18:04 Permalink

"Amazon monopoly?  What is the author smoking?  Amazon can't even make money at retail, nevermind form a monopoly.  They're just a few bad days on the stock market away from dissappearing. " As long as Amazon has FED fueled hedge funds buying the dip, they can and will continue to form a monopoly.  Then they can increase prices as much as they want to make up for the cost of killing brick and morter retail.

In reply to by pitz

takeaction pitz Mon, 07/17/2017 - 18:16 Permalink

In the car audio industry.....many companies that sell on Amazon or allow their products to be sold on Amazon are being BOYCOTTED.  Take for instance Pioneer Car Stereos.  Pioneer has a laze fair attitude which has driven the profit right out of carrying their brand...so guess what is happening...Big stores like ours are no longer carrying their product...We are choosing brands like Phoenix Gold.  Phoenix Gold is a HIGH END Car Amplifier and speaker company...that will NOT ALLOW any INTERNET SALES.  Here are the amps...http://phoenixgold.com/catalog/amplifiers/Try and find the Elite series on the Internet....ZERO.  These are the brands and products stores like ours must sell.  You can't shop it online...and they are badass.  We must make a profit to keep our doors open.  You will see many more brands get into trouble in the future if they allow sales on the net.  Look at sears...DOOM.Just giving you a heads up on how many brick and mortar stores are choosing their products.  If it is sold on the net at or below cost...We don't want it.Another thing that is happening in the Electronics business is this...Instead of trying to find brands that are not on the net...just create your own.I am good friends with the buyer at this store CAR TOYS...54 locations.  They just build and name their own product so that it can't be shopped.  This speaker set is their own line....make it for $39....sell it for $229.  You can't shop it. NO price matching....NOTHING.https://www.cartoys.com/q62?mkwid=s3IxuTDGl&pcrid=192670191996&pkw=&pmt…Right now in my store....we are following suit.  I am designing my own amp and speaker line...order container loads....ZERO online presence....Big changes are happening.....who wins and who fails will be the ones that figure it out...I hope this insight of just my little part of the world tells you what is going on to fight the Internet sellers selling out of their garage...

In reply to by pitz

HRH Feant2 (not verified) takeaction Mon, 07/17/2017 - 21:05 Permalink

You bought a container load of audio stuff? And you are not going to sell online?

Yikes.

You can sell quality. But nothing you wrote screams quality. Zero.

You are just a hustler with a hustle. Good luck. You'll need it.

In reply to by takeaction

Dsyno takeaction Mon, 07/17/2017 - 23:29 Permalink

"If it is sold on the net at or below cost...We don't want it."

"This speaker set is their own line....make it for $39....sell it for $229. You can't shop it. NO price matching....NOTHING. Right now in my store....we are following suit."

So your entire comment is about the sales tactics you're using to trick your customers into buying merchandise for more money than if you had to compete with the Internet.

That is not a sustainable business model. Sooner, rather than later, your customers are going to wise up. Just reading your comment, like hell I'd shop in your store, knowing you're using these tactics to knowingly rip me off. You can fool some of the people, some of the time...

In reply to by takeaction

duo Mon, 07/17/2017 - 17:54 Permalink

One stop into a Best Buy and you'll know why brick and mortar is dying.  Employees that don't know anything about what they are selling.  A very narrow selection of products based on some MBA's calculation of sales/sq foot a year earlier.  When I go to BB I know I'm not getting the best price, but I still leave empty-handed 80% of the time because they don't have anything I want in stock.  Luckily we have a Fry's nearby, but that is a ghost town whenever I visit.

CRM114 duo Mon, 07/17/2017 - 19:41 Permalink

Agreed. Had the exact opposite experience twice this afternoon. Highly knowledgeable staff who are honest ("This will last 5 years or so"), good  selection, let me try stuff, great offers. One item was out of stock - name and phone number, they'll call me when it's in (and they do, every time, and keep calling if I miss it). 10 seconds. All much better than online ordering.It's really simple - retail must offer what online can't - that means employing good staff, training them, and keeping them.

In reply to by duo

HRH Feant2 (not verified) duo Mon, 07/17/2017 - 21:03 Permalink

I go to Best Buy when I break a headset or a gaming mouse and want it right away.

The other reason I go to BB is to see stuff in person. I agree, the employees in my area are 50/50. Some are smart, some are idiots.

After visiting BB I let my fingers do the walking: online.

In reply to by duo

cornflakesdisease duo Mon, 07/17/2017 - 23:19 Permalink

What I call top 40 merchandising.  There was a time Worst Buy had a huge selection of movies, music, etc.  Not anymore.  Guess what?  I don't shop there anymore.  Walmart?  Their inhouse cheese and Kraft; both cheese food.  My grocery store? 7 brands of cheese and 5 that are real cheese.

In reply to by duo

CheapBastard Mon, 07/17/2017 - 17:58 Permalink

It's the broke middle class as well as online buying. Amazon is not the sole cause.Plus, there are now tousands of online sellers from China who sell $200 dresses (for example) for $14 + $3 shipping from China since the USPS gives China much better postal rates then they give Americans via what's called the "epacket rate."Unless the Democrats and a hadful of dopey republicans stop blocking tax cuts and Obamacare fixes, the economy for 90% of Americans will only get much worse.

shovelhead adr Mon, 07/17/2017 - 18:25 Permalink

Glitzy ads convincing you that 'Some Fancy Designer' had something remotely connected to that $12 Chinese dress besides an added lable doesn't come cheap.People whose incomes that haven't grown in 15 years are deciding that the 25-35% markup in bricks and mortar, gas and time expended is not a worthwhile additional cost.

In reply to by adr

JuliaS adr Mon, 07/17/2017 - 20:28 Permalink

This is like lens caps for cameras. One looks like a bottle cap, has as much plastic as a bottle cap, probably comes off the same assembly line yet sells for $50.I can get a Chinese "knockoff" lens cap for half a dollar. It was never worth $50. And when it comes to so-called knockoffs, there this thing called "branding". Companies like Canon and Sony will source no-name brands themselves and stick labels on them. What is considered a fake is often the exact same product that hasn't had a sticker slapped on it. Exact same Chinese producer signing an exclusivity deal and then selling extra stock on the side anyway.

In reply to by adr

Anteater CheapBastard Mon, 07/17/2017 - 18:24 Permalink

More than 15 years ago, I got a Chinese wholesaler catalogue accidently put in my post box.These US retailers get Chinese 6-packs or 12-packs, pre-bar-coded, already packaged, theyhang them up on a rack in a few minutes, and charge you 600% to 1200% profit on everyitem that says 'Made in China'. So frankly, if US retail falls to Amazon, that's good for US!Why should we pay the 600% to 1200% to Corporate:State? Fuck them, like they fuck US!Their (legal definition) idea of a 'small business' is any business under $25,000,000 a year,so when their paid-advertising MSM moans about 'small business', well, I don't make $25Mwith my small business, and I've been struggling since 1992 just to pay my g'damn taxes!

In reply to by CheapBastard

geno-econ Mon, 07/17/2017 - 18:10 Permalink

Anyone who can purchase huge quantities, more than anyone else, from China, has the inventory and warehousing capability, as well as distribution system direct to customers, controls the market far more than a one only monopoly Box Store in Paduka, USA.   Amazon is a tremendous threat to retailing as we know it, will destroy jobs, determine monopoly pricing and become a Dictatorship controlling all aspects of government and media.  Our representatives in Washington are asleep regarding the threat, or are too eager for campaign financing contributions and favorable press coverage from the Washington Post.    

cornflakesdisease geno-econ Mon, 07/17/2017 - 23:27 Permalink

This is true.  I own a small manufacturing company that makes a agricultural products.  When I try to source certain simple metal components from the USA, they want 300% more, and the quality is so so.  When I buy from a large supplier who buys from China, the costs is far cheaper and the quality is the same.  I can not find anything close in price.  I have searched high and low, even in China buying direct.  I also can't find the product direct, because my supplier I buying them by the million.  No one is cheaper.  They have the monopoly.

In reply to by geno-econ

Glyndwr will return Mon, 07/17/2017 - 18:10 Permalink

The Amazon or big box model when oil is 4x the price?Their models when the trust horizon drops to the small town city limits?Their models when the last remnants of trust in banks is gone?Their models when the masses finally wake up and realise 90% of what retail offer YOU DONT NEEDTheir models when you would rather have a pension (because shortly you are going to have to start saving again) Oh, and you are quoting the FT - Formerly Trustworthy

Sudden Debt Mon, 07/17/2017 - 18:10 Permalink

If you only shop online and don't like to go to the stores or pay a penny more...you deserve to be unemployed, poor and desperate. Americans like to do it all to themselves.Amazon in Europe doens't stand a chance in hell because EU consumers want the service and personal touch.Americans... don't give a rats ass about anything.BUY CHINESE CRAP YOU LOSERS!! BUY EVERYTHING ONLINE!!!! BUY ONLY THE CHEAPEST CRAP!!!DON'T DO WORK YOU'RE NOT CERTIFIED TO!!!! OTHER WILL GLADLY TAKE YOUR JOBS WHO JUST DO IT EVEN IF THEY'RE NOT QUALIFIED!!!FUCKING IDIOTS!!  EVERYTHING IS ALL YOUR OWN FAULT!! DON'T BLAME ANYBODY ELSE!! YOU ARE ALL THE CAUSE!

JohnG Sudden Debt Mon, 07/17/2017 - 18:20 Permalink

Clearly you have never been forced to go to hellmart and fight the FSA crowd just to get a bag of dog food.If it is 1 cent cheaper, I buy elsewhere.  If that's Amazon, so be it.Besides, at this point I am making my economic footprint as small as possible, and everything black market and barter that I can.Starve them.

In reply to by Sudden Debt

Ben A Drill Sudden Debt Mon, 07/17/2017 - 18:28 Permalink

You could say the same thing about Walmart.

IMO, it's the no sales tax and free shipping why I shop online.

I buy things you can't buy in my city even if I looked super hard. It's not all made in China. Here are some online stores I shop at on a regular basis.

1. Knives ship free
2. JM Bullion
3. LL Bean
4. Bulk ammo and like companies
5. Fish USA
6. Gallery of guns and like companies

In reply to by Sudden Debt

cherry picker Sudden Debt Mon, 07/17/2017 - 18:27 Permalink

If amazon is so big, why do I see full parking lots at he malls where I live?One article pointed out that there are too many malls too close together and both were trying to survive where the population could only support one mall.Sears was mismanaged more than anything.I tried amazon a few times.  wasn't impressed.  prefer to see and hold what I will be buying  returns.  most places let you return.. amazon you have to ship it.

In reply to by Sudden Debt