Amazon isn’t the No. 1 villain in retail sector’s demise

Retail stocks have been annihilated recently, despite the economy eking out growth. The fundamentals of the retail business look horrible: Sales are stagnating and profitability is getting worse with every passing quarter.

Jeff Bezos and Amazon get most of the credit, but this credit is misplaced. Today, online sales represent only 8.5 percent of total retail sales. Amazon, at $80 billion in sales, accounts only for 1.5 percent of total U.S. retail sales, which at the end of 2016 were around $5.5 trillion. Though it is human nature to look for the simplest explanation, in truth, the confluence of a half-dozen unrelated developments is responsible for weak retail sales.

Our consumption needs and preferences have changed significantly. Ten years ago we spent a pittance on cellphones. Today Apple sells roughly $100 billion worth of i-goods in the U.S., and about two-thirds of those sales are iPhones. Apple's U.S. market share is about 44 percent, thus the total smart mobile phone market in the U.S. is $150 billion a year. Add spending on smartphone accessories (cases, cables, glass protectors, etc.) and we are probably looking at $200 billion total spending a year on smartphones and accessories.

Ten years ago (before the introduction of the iPhone) smartphone sales were close to zero. Nokia was the king of dumb phones, with sales in the U.S. in 2006 of $4 billion. The total dumb cellphone handset market in the U.S. in 2006 was probably closer to $10 billion.

Consumer income has not changed much since 2006, thus over the last 10 years $190 billion in consumer spending was diverted toward mobile phones.

It gets more interesting. In 2006 a cellphone was a luxury only affordable by adults, but today 7-year-olds have iPhones. Our phone bill per household more than doubled over the last decade. Not to bore you with too many data points, but Verizon's wireless's revenue in 2006 was $38 billion. Fast-forward 10 years and it is $89 billion — a $51 billion increase. Verizon's market share is about 30 percent, thus the total spending increase on wireless services is close to $150 billion.

Between phones and their services, this is $340 billion that will not be spent on T-shirts and shoes.

But we are not done. The combination of mid-single-digit health-care inflation and the proliferation of high-deductible plans has increased consumer direct health-care costs and further chipped away at our discretionary dollars. Health-care spending in the U.S. is $3.3 trillion, and just 3 percent of that figure is almost $100 billion.

Then there are soft, hard-to-quantify factors. Millennials and millennial-want-to-be generations (speaking for myself here) don't really care about clothes as much as we may have 10 years ago. After all, our high-tech billionaires wear hoodies and flip-flops to work. Lack of fashion sense did not hinder their success, so why should the rest of us care about the dress code?

In the '90s casual Fridays were a big deal – yippee, we could wear jeans to work! Fast-forward 20 years, and every day is casual. Suits? They are worn to job interviews or to impress old-fashioned clients. Consumer habits have slowly changed, and we now put less value on clothes (and thus spend less money on them) and more value on having the latest iThing.

All this brings us to a hard and sad reality: The U.S. is over-retailed. We simply have too many stores. Americans have four or five times more square footage per capita than other developed countries. This bloated square footage was created for a different consumer, the one who in in the '90s and '00s was borrowing money against her house and spending it at her local shopping mall.

Today's post-Great Recession consumer is deleveraging, paying off her debt, spending money on new necessities such as mobile phones, and paying more for the old ones such as health care.

Yes, Amazon and online sales do matter. Ten years ago only 2.5 percent of retail sales took place online, and today that number is 8.5 percent – about a $300 billion change. Some of these online sales were captured by brick-and-mortar online sales, some by e-commerce giants like Amazon, and some by brands selling directly to consumers.

But as you can see, online sales are just one piece of a very complex retail puzzle. All the aforementioned factors combined explain why, when gasoline prices declined by almost 50 percent (gifting consumers hundreds of dollars of discretionary spending a month), retailers' profitability and consumer spending did not flinch – those savings were more than absorbed by other expenses.

Understanding that online sales (when we say this we really mean Amazon) are not the only culprit responsible for horrible retail numbers is crucial in the analysis of retail stocks. If you are only solving "who can fight back the best against Amazon?" you are only solving for one variable in a multivariable problem: – Consumers' habits have changed; the U.S. is over-retailed; and consumer spending is being diverted to different parts of the economy.

As value investors we are naturally attracted to hated sectors. However, we demand a much greater margin of safety from retail stocks, because estimating their future cash flows (and thus fair value) is becoming increasingly difficult. Warren Buffett has said that you want to own a business that can be run by an idiot, because one day it will be. A successful retail business in today's world cannot be run by by an idiot. It requires Bezos-like qualities: being totally consumer-focused, taking risks, thinking long term.

Vitaliy N. Katsenelson, CFA

I am the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

I wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (Polish is one of them – go figure.)

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.” (They must have been impressed by the eloquence of the Polish translation.)

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Comments

cbxer55 Sat, 08/05/2017 - 18:36 Permalink

I don't have a "smart" phone, and don't shop at Cramazon. I just don't shop elsewhere very much either. I spend a good amount eating out, but I'm single and don't have a girlfriend. Not looking for one either, because then I end up having to go shopping, which I hate. For me, it's pretty simple. If a lot of people go someplace, I avoid that place. I hate crowds, and avoid anyplace where a crowd will be. And thus, I don't spend a lot of money buying crap I don't need. Clothing will last a long time if taken care of. I have like 30 pairs of jeans hanging in my closet, so I won't be buying any pants for a long time to come. Numerous of those haven't even been worn yet, still have the tags on them. ;-)I prefer sleeveless shirts of the non-cotton variety. These also last a damn long time, and I have a lot of them. Shoes last a long time if you take care of them, haven't bought shoes in several years. So, what should I go buy that I don't need? LOL!!!!!

Utopia Planitia jeff montanye Sat, 08/05/2017 - 21:59 Permalink

Tell you Single Dufus losers what.  YOU go set up a Single Dufus system for YOU.  There is nothing stopping you from doing that.  Nothing.  Then you can hire Maxine Waters and the Bern to make all your healthcare decisions FOR YOU.  Then you can be happy.BUT LEAVE THE REST OF US ALONE!!!I have lived under and seen what SINGLE DUFUS does.  You NO LONDGer MAKE ANY OF YOUR OWN HEALTHCARE DECISIONS.  The bureaucrats make all the decisions FOR you.If you are so incapable of making your own healthcare decisions then go ahead and hire somebody to do it for you.  I won't stop you from doing that.  BUT YOU ARE NOT GOING TO DO THAT FOR ME!!! NOT NOW, NOT EVER, NEVER!!!If the only thing you care about is price then I feel sorry for you.  You will get what you deserve.  Price is not the principal consideration for anybody who is capable of THINKING.If things were done YOUR WAY then your smartphone would cost $57,000 per phone and it would take you on average 17 years to get one.  Would that make you happy?  That is precisely what you are asking for with SINGLE DUFUS. GO AHEAD AND SET UP A SYSTEM FOR YOURSELF AND ENJOY IT.  But you DO NOT get to make me use one.

In reply to by jeff montanye

yarpos Utopia Planitia Sun, 08/06/2017 - 00:40 Permalink

Thats how it works where I live.   A single payer system exists and it is pretty good except for waiting times.   Private options also exist that give you access to the private system and pay for the public system if you end up there after and accident or a sudden health incident.   Seems to work fine,  the single payer system isnt the great horror that many imagine it to be as long as it isnt the only mandatory system.  

In reply to by Utopia Planitia

roddy6667 yarpos Sun, 08/06/2017 - 02:50 Permalink

Waiting times are not necessarily bad. Canadians live longer with the waiting times than Americans do with quick service. Often the quick time is because the doctor wants your money in his pocket, and no other reason. A lot of medical procedures are risky and involve chance of death. Waiting actually allows you to live longer.Less than 1% of Canadians go outside the country for medical. A lot of this is for privacy, in cases of mental hospitals and alcohol/drug rehab. Also, with their cold weather, Canada has a lot of snowbirds. If they have a medical emergency while 1500 miles from home, they do not take an air ambulance back to their hometown. The whole red herring of Canadians going to America to avoid the wait is a health insurance company scare tactic. 

In reply to by yarpos

NoPension roddy6667 Sun, 08/06/2017 - 08:46 Permalink

Here is the problem...as I see it.

On the the rare occasions I go to a doctor's office or a hospital....it's crowded with people who seem to have not used the best judgement ( I'm being extremely polite) living their lives. They go to the doctor, generally, because for a lot of these folks...the payment for services is NOT being borne directly by THEM.
Someone else is picking up the tab. That is how OUR American healthcare system has evolved. People go to see a doctor...and whether they have private or workplace insurance..or they are on government programs such as Medicare or Medicaid...they don't see the final bill...or give a rat's shit.
Single payer is simply taking this concept to the extreme. Where everyone is entitled to the same level of care. ( That is, of course, unless you are wealthy or have a high level government position).

This is so simple to fix...a caveman could do it. Get the government and insurance companies out of healthcare. You want six kids...pay for the little shits. You want to waddle around weighing 400 lbs....fuck you, you fat fuck...pay for your own diabetes treatment and knee replacements.
I am no better. I smoke a pack a day. How many here think it's fine to pay for my cancer treatment, if I end up needing it? Thought so.
Aunt Nellie....(fictional)....78 years old...on life support at $5000 a day...and her family won't pull the plug. Because they don't pay the bill. Knee and hip surgeries...Hoverrounds.....for fat old fucks that never have taken care of themselves. $ Billions....NO $TRILLIONS!!!! spent keeping them breathing.
.....yeah, whatever. The whole thing is fucked up. And right in the middle...giant Insurance and "Health Management" companies.....not providing a single minute of actual care or medicine...and raking in $billions of the skim.

Doctor.Patient.Computerized diagnostic help. Patient pays the bill.

Same thing with education. The internet has the biggest wealth of knowledge, ever and beyond human imagination. And we are still required to pay tens of thousands of dolllars to sit in a classroom and listen to a single overpaid dumbass. The " Best " instructors should be available to everybody and anybody, via the Web....and compensated live athletes or movie stars. And then set up testing centers where anyone can go and take a test. Show enough knowledge and depth...get a degree.
Oh, but that would put a bunch of panties in a knot.

Suffer on we will. Can't change a thing. The only way something changes now, is if the existing blows up, and we rebuild from scratch. Kids still go to school 9 months out of the year...based on the agricultural system we had 120 years ago. Haha!
Rant off.

In reply to by roddy6667

Shift For Brains NoPension Sun, 08/06/2017 - 13:27 Permalink

+22,309.724In the America of bygone days, YOU were responsible for yourself and people often took on the voluntary care of those THEY deemed less fortunate through no fault of their own. The others were left to rot, as they obviously didn't care if they lived or died so why should someone else?Now, the government/AKA Camouflage Criminal Syndicate extracts a huge part of your sustenance, skims off a significant percent to go to the drone who do the administration and showers what is left on whoever shows up with their hand out.It COULD be fixed overnight. It will NEVER be fixed in our current system because those who get a free ride, and those who have made a career of administering the free rides, don't want to ever have YOU give up paying for it all. IF it does end, it will be because the system violently collapsed, either by imploding or through help from the outside.Let it come, Sweet Jesus, let it come. If the United States of America isn't Babylon I don't know what is. 

In reply to by NoPension

wall8ce yarpos Sun, 08/06/2017 - 17:46 Permalink

Spot on pal even here in ol blighty basic health care is very very good.I live in North Nottingham shire and can take my pick if I would prefer to use another hospital local care trust  thats out side of Doncaster,,Bassetlaw Health care trust,and where ever I am in Europe I am covered and this cover include many other things in health care including the medicine and after care all for the grand total of 10 percent of my paycheck

In reply to by yarpos

purdySun Utopia Planitia Sun, 08/06/2017 - 11:05 Permalink

Sorry this argument against single-payer rings hollow. Most US consumers are Not controling health care decisions, unless it's to decline treatment. The Death Cult/ Eugenics Society has the system at source (labs and medical schools) and dictates what treatment is allowable by your provider. Why are they punching away on computers, instead of actually discussing/ examining your symtoms?All those presciptions w/side-effects, just for you. Watch a little Eustace Mullins for historical context. Trust Big Pharma and AMA? Like Coke, or Pepsi? Not being overly cynical when you've lost family member.

In reply to by Utopia Planitia

cbxer55 Pollygotacracker Sat, 08/05/2017 - 22:53 Permalink

Don't wear hats. The coats I have I've had a long time and they're still good. Don't wear pjs since I sleep nude. Have more socks than I know what to do with, same as undies. Gloves? Only for motorcycle riding, otherwise that's what pockets are for. Belts? Have three, have had them forever. They're leather gun belts, so thick and still good to wear. ;-)

In reply to by Pollygotacracker

shimmy Sat, 08/05/2017 - 19:21 Permalink

Only people who hate Bozos/Amazon and love to find simplistic things to blame actually think Amazon is the #1 killer for retail which I gather means physical retail given last I checked, Amazon is a retail site. 

LastLegion Sat, 08/05/2017 - 20:22 Permalink

I actually don't mind shopping.  I don't like crowded places either, so I usually go to KMart.  Because KMart isn't crowded, they are closing the store.  So, now the only store in town is Walmart, which is the other reason KMart is closing.  I will not go to Walmart!  Instead, I will now drive an hour each way to go to the last KMart in the area.  If that closes, then it will be Amazon for me.

cbxer55 Silver Savior Sat, 08/05/2017 - 22:52 Permalink

While I do pay for health care, it's not obombo care. Last year was glad I had it, BIG problem with kidney stones. Had to have multiple "surgeries", non-invasive they said, to clear it up. Almost lost my right kidney. Otherwise, I jsut deal with it. Went to an optomitrist the other day to get my peepers checked, order new contact lenses and a pair of glasses for when the contacts are out. Spent $784 bucks out of pocket, and I have to pay for the contacts in about a month when they show up. That's okay, this stuff will last me two or three years. So I'm good with it. Haven't been to a dentist since June 1987. Still have all my teeth and no problem teeth. At the age of 56, if I ever sit in a dentist's chair again, it'll be too soon. ;-)My cell phone is a good old flip phone that I've had for 10 years now, still has the original battery. No internet or anything, just call and text. No, I don't walk around with my head stuck in my phone. I ignore it practically all the time. No one can call me except those who are on my Contact List. All other calls get shunted straight to voicemail. LOL

In reply to by Silver Savior

Zero-risk bias Sat, 08/05/2017 - 23:32 Permalink

It's pretty revealing that we call these mini computers we carry everwhere 'smart phones'. Dumb phones with smart systems? Well, it's the end user that I'd attach more importance to when it comes to IQ..I guess frictionless transactions, vapid language and puerile gameplay are now the hallmark of a generation lost in its own trivialities. 

Stan Smith Sat, 08/05/2017 - 23:33 Permalink

While the smartphone factor is certainly true,  I'd argue that the smartphone dollars are siphoned off the desktop and laptop dollars.    Let's face it,  a smart"phone" is a small personal computer at this point.    While I have an aging, creaking laptop to post on ZH,  my house has multiple desktops which are collecting dust,  or an occasional game machine for the kiddos.My wife has a laptop which she never uses either, she simply does what she needs (which isnt much) from her phone.I'd argue as well, that the level of time consumption on these devices simply takes away from where it was before -- much of which was consumption of retail products.    It's not that that doesnt exist,  but as the article points out,  it's simply not a priorty for more and more people.   Which is ironic since there's more and more useless retailers popping up -- and closing as well -- than I can ever recall previously.  Im all for choices, good luck chasing fewer and fewer dollars however.

keep the basta… Stan Smith Sun, 08/06/2017 - 06:50 Permalink

Youtube advertisers found that youtube watchers did not give a stuff about the ads which were made by presumably snowflakes of various vintages and unusual values which neither impress millennials or the majority of the rest of us. So a blow up on youtube and punishment all round. The old tricks to get people to buy and buy dont seem to work like they did.IN Aus for example we who live here have huge mortgage debt or are paying life blood in rent for a roof over our heads, then big tax and that about covers it all. Who gives a stuff about competitive dressing or furntiure or knicknacks  or eating if you dont have a home???

In reply to by Stan Smith

yarpos Sun, 08/06/2017 - 00:32 Permalink

I used to spend a lot of time in the US travelling, and living for short periods,  on business from 1995 to 2005.    When I went shopping I was amazed at the excess of "stuff" and ridiculous levels of choice, even for basic supermarket goods.    The thought kept going through my mind ,  who is buying all this crap?It was great for me and mine as I just bought loads of stuff at half price or less than home ,  as everything was overstocked and perpetually on sale.    Seems like reality has finally caught up.    My wife could never get over simple things like coffee or salad dressing becoming a convoluted discussion,  until she honed her ordering skills.

Pinche Caballero Sun, 08/06/2017 - 06:55 Permalink

Retail trends, and changing consumer habits, are interesting to follow. For decades now, I have watched each year at Christmas time as retail stores rolled out a newly minted Santa, all prepped for the upcoming holiday season's fashion. Sometimes Santa is garbed in more traditional clothing, sometimes his sleigh has chrome exhaust pipes, sometimes skinny, sometimes fat, short, tall, white, "dark-skinned" (?), jolly, stern, etc. Every year I have wondered, who is wasting their money on all this cheap, useless, shit?

The same applies to footwear, whether running shoes, tennis shoes, sandals, etc.

The same applies to pants, whether pleated, cuffed, loose-fitting, or tapered, I.e., skinny

The same applies to ball caps, to cars, trucks, computers, sun glasses, smart phones, purses, damn near anything offered by the retail sector. The base functions of items never really change, just the appearance of the items.

Everyone wants to be hip, and trendy, especially in their youth. As you get older, or as happened to me, I'll just keep my slacks hanging in the closet until pleats are fashionable again. And, at some point, what do you really need to buy when you finally have reached the point of saturation and have damn near everything? Maybe every couple of years I refresh the sock drawer... Otherwise, I'm not wasting money on more useless shit just for the distraction...

Could it be the deck was stacked against retailers in terms of cyclical demographics? As the population increased from the depression-era generation through to baby-boomers, then decreased to gen-X, and now scaled back down to millenials, retailers have been chasing spending habits of a diminishing population of consumers spending far less money on just so much more useless shit.

Maybe I am seeing it through my limited perspective, but I'm still waiting for penny loafers to make a comeback. In the meantime, I'll just keep wearing my 10 year old plus work boots. Chances are good I won't outgrow them...

11b40 Pinche Caballero Sun, 08/06/2017 - 13:13 Permalink

She stood in the showroom staring at a wall of products.  The latest fashions for the dining room table were on display, but she did not move to pick anything up.  I was busy with another customer, but acknowledged her presence and told her someone would be with her soon.  When I approached her a few minutes later, she still had not moved, and when I asked how I could help, I thought she was going to start crying.  "I don't know what to buy", was her opening sentence.  She had been in business for 25 successful years on Main Street USA, but now she was at a trade show about to spend her money to stock her store for the critical 2nd half sales, and she no longer understood what her customers wanted.  This took place around 2002 or 03.I started working for a Department Store in College, and was offered a job to their corporate office upon graduation as a Buyer.  I later left and started a sales agency representing multiple vendors to the retail trade in the early 80's.  This was just as China was really starting to open up as a viable supplier of more and more products, especially the kind I was selling - Housewares, Tabletop, Gifts, and Decorative Accessories.  After merging with another agency and expanding the geographical reach, we opened a showroom in America's Mart in Atlanta, which we kept for over 20 years.  Life was very good all through the 90's, and at the high point, we had almost 2500 accounts across the South.But, in reality, change had been in the air since the 80's, as importers were replacing the goods that American factories produced.  I had 2 major ceramic lines produced in CA that went out in the mid 80's, then the domestic glass producer, who a few years before had heavily invested in state of the art high speed machinery, shut down production and sold the equipment to China.  Soon after, my plastics factory in Texas (Texasware) had to fold.  This was in the early stages of hollowing out America, and I watched the Furniture Factories and Textile Mills across the South stumble and fall one by one.  Other industries struggled and died, too, of course.  Retail was changing too.  The local Department Stores and the regional Mas Merchants were facing new competition from Catalog Showrooms...and from another menace creeping across the land - WalMart.  The next big change was happening, too.  The category killer Super Stores were cranking up, as were Warehouse Clubs.  The death bells were ringing for most Department Stores and Regional Discounters by now, and after them, the Catalog Showroom industry completely disappeared.  Computerization was driving efficiencies for the big guys, and the smaller, or more cumbersome business models, were no longer able to keep up and stay competitive, and retail consolidation was off to the races.  I hate to think of all the bankruptcies I went through with my account base as the insanity played out.  Many of these retailers filed Chapter 11 twice, something that made me start scratching my head over banking and bankruptcy rules. Of course, we shifted our mix of lines to go with the times, and I made my first trip to the Orient in 1990.  No mater how much I hated replacing domestic production with imported goods, there was no viable choice if you wanted to stay in business.  So, by the turn of the Century retail was a hodgepodge of slowly dying industry segments.  The country was seriously over-stored, and had been for more than 20 years, and now a totally new way of shopping was on the horizon - the Internet.  It was computers that allowed the efficiencies that enabled the expansion of new retail channels and the grow of giant retailers.  It was also computers that sucked out the billions and billions of dollars once going to other products, just as the author correctly identifies.  It is hard to deny that changing demographics and tastes drove many retailers out of business, but it is also undeniable that tech drove many of the shifts.  When you get a computer, it is kind of like getting a pet.  The purchase prices is just the beginning.  It has to be tended and fed a steady stream of dollars - printer, ink, paper, software & upgrades, Internet connectivity, routers, cables, cameras, etc.  Then there is the Smart Phone with it's own monthly bill.Do people's tastes change due to economic circumstances?  Of course they do.  Today's youth have no interest in fine china, crystal, or silver for the dining room.  They don't even want a dining room.  Everything has gone casual.  So, why is that?  I say it is simply that most can no longer afford life's simple luxuries and keep up with their electronic gizmos as well.  The gizmos have clearly won.  The question is, is society losing?  We have become ever more self-absorbed and course.  Kind of hypnotized as we stumble through life by a constant barrage of entertainment, advertising, and government propaganda.Sorry to ramble on.  I could write a book about retail, but it's time to get on with the day.  I'll soon be 70, and still at it, but instead of over 2K accounts, 2 showrooms, and offices in 4 states, I now work from home and only with about 25 accounts.  Guess what one of my strongest categories is?  "As Seen On TV" products.  Cheap shit for suckers.  That is America today.

In reply to by Pinche Caballero

Centerist 11b40 Sun, 08/06/2017 - 15:57 Permalink

Thanks for the insider's perspective on retail.  It does reinforce what the article discusses by covering other aspects.It begs the question, though.  If Main Street is in such rough shape, then why does Main Street blow so much money on crap?  Maybe much of Main Street America's trouble is self inflicted.  If they didn't buy all of that "as seen on TV" junk and used things until they fell apart, maybe they'd have more money to save to buy houses and not live on credit for everything else.

In reply to by 11b40

shadow54 Sun, 08/06/2017 - 08:13 Permalink

The cell phone is a dog of a computer that pales in comparison to a high end laptop or desktop. I tend to view cell-phone-only people as the ignorant tech-challenged plebs. How do you write a book, or do graphics or business work on a cell phone????As the cell market becomes saturated people will more and more buy used or keep their old phone longer. Saturation will mean the amount spent in those markets will decrease.Laptop sellers now refurbish and sell laptops somewhat dated as they moved in to steal the used market and this should also happen to cell phones to a degree. Laptop sellers were the smartest as they expanded to take in every niche when cell phones took sales. There are all sorts of high end laptops you can draw on or tablets with keyboard cases and tons of mid range and refurbished machines. Even old gaming laptops can be refurbished for standard use. New gaming laptops drive the high end as do things like xps, mac and surface pro.It is in desktop computers where there has been no market sense in areas other than gaming. It costs more for a medium range desktop now than for a laptop. If they want to keep the desk top market alive more price cuts are needed.