WITHSTANDING THE AMAZON ONSLAUGHT
How some retailers are holding their own — and then some, Hollie Shaw explains.
TORONTO Amazon.com Inc.’s purchase of Whole Foods Market Inc. last month has pushed an already-nervous retail sector into a collective panic not seen since the Great Recession.
Old-guard retailers are furiously transforming their business models in an attempt to compete against the Seattle-based online giant, while analysts and investors are scouring quarterly sales figures, wondering if any retailers will be immune to Amazon’s corrosive impact on sales and profits.
“Is Anything Safe from Being Amazoned?” asked a BMO Capital Markets cross-sector analysis released in September, one of many exhaustive recent industry outlooks on the topic.
Others point ominously to the Death by Amazon index, a list of 54 largely underperforming retail stocks compiled by Bespoke Investment Group that the firm believes will be most hurt by the technology behemoth.
The upshot of these and other expert outlooks? No retailer is decisively insulated from losing sales to Amazon, but it appears that some are far more sheltered than others.
“Amazon isn’t really a retailer in the conventional sense — they are a data innovation and technology company that sells things,” says retail futurist Doug Stephens, president of Toronto-based Retail Prophet. “On the one hand, it makes them tremendously dangerous, but on the other hand, it leaves them vulnerable.”
Though Amazon has begun to penetrate the realm of bricks-andmortar through its Whole Foods purchase, there are a number of retailers who don’t seem to be particularly affected by its reach.
For example, retailers such as Costco Wholesale Corp and TJX Cos. Inc., operator of Winners, Home-Sense and Marshall’s, have massive outlets and a broad selection that would seem to compete directly with the so-called “endless aisle” of selection online. But both companies have been performing well, significantly outperforming traditional department stores.
Costco’s same-store sales in the first three quarters of its fiscal year were up five per cent in Canada and it doubled the pace of its store opening rate in Canada during the latest fiscal year.
TJX, which has 433 stores in Canada, had a same-store sales increase in this country of nine per cent in the second quarter ended July 29, and it raised its full-year guidance on bullish prospects.
What both have in common is a strong consumer perception of value: Costco charges a membership fee, but keeps its prices low on warehouse goods, while Winners and its corporate siblings offer 20 to 60 per cent off the typical retail prices of similar merchandise found elsewhere.
The TJX banners even lack a sales website. In order to see the deals, you are required to set foot inside a store. Though Costco sells goods through its website, only 20 per cent of what is available online is sold at Costco’s bricks-and-mortar warehouses. Both retailers also frequently change merchandise.
“TJX and Costco do a brilliant job, both of them, of creating that ‘treasure hunt’ environment: you don’t know what you’re going to find in the store when you go in,” Stephens said. “There’s always a feeling like if you don’t buy it today, it won’t be there later. There isn’t that sense of urgency with Amazon.”
Indigo Books & Music Inc. is another retailer that would have seemed to be obvious roadkill when Amazon began selling books online in Canada 15 years ago. But against all odds, Indigo has thrived and closed very few locations over the years.
Indigo’s decision to up the ante on toys, gifts and merchandise sold under its own name continues to pay off. In its latest fiscal year, Indigo had comparable sales growth of three per cent in its large superstores after growing a robust 13 per cent a year earlier.
Experts say Indigo has been able to create a different sort of treasure hunt from the kind you find at TJX and Costco by designing and redesigning visually inviting stores whose assortment appeals to consumers who love to browse.
Indigo still sells a fair amount of books in addition to general merchandise, and both categories would be seemingly vulnerable, but yet the stores are doing well.
“People go in there to be inspired and get gift ideas,” said Robert Gibson, an analyst at PI Financial Corp. who has been following Indigo for years. “For gift giving, discovery is important, as is store experience. People like to go in and read the books and look at the paper and smell the candles.”
Those two elements — a satisfying or enriching in-store experience and the element of finding good gift ideas — are not easily replicated online.
“Amazon is an unbeatable tool when you know exactly what you are looking for,” Stephens said. “It is not a great tool for discovery.”
Diane Brisebois, president of industry association Retail Council of Canada, elaborated on so-called “experiential retailing” when she attended the opening of a newmodel Roots boutique last month at Toronto’s Yorkdale shopping centre. Customers there can for the first time design their own jackets and bags.
“Retailers operating in bricks and mortar now realize that they have to provide an exceptional experience when customers walk into the store,” Brisebois said.
In addition, she noted, those who own, design and control the distribution of their own brands — Roots, Lululemon and Aritzia — appear to be better positioned to fight Amazon than those that don’t.
“Multibrand retailers are facing more competition from online sellers, and that is probably their biggest challenge right now,” Brisebois said. “Vendors are going on Amazon and Alibaba and other platforms, and they are selling directly to consumers.”
Private labels in particular can act as a good hedge to Amazon, analysts say.
If Lululemon’s range of apparel is only offered through its website and stores, customers have no choice but to to buy them there. The same could be said for Canadian Tire Corp. Ltd.’s Noma lights and Mastercraft tools, and the retailer’s private-label goods now account for a third of the company’s revenue, up from 20 per cent in 2012.
Montreal-based Dollarama Inc. is another retailer whose sales and profits have been powering along in a seemingly unstoppable manner.
Selling items at $4 or less and not having a website could be drawing in customers for the good value and the wide range of small items. This easily fits into Stephen’s “discovery” thesis, leading to a fair amount of impulse buying at the retailer.
By selling a high volume of lowcost items, Dollarama doesn’t really need to compete with Amazon either.
“At these price levels, we do not see e-commerce as a threat,” Sklar said.
Furthermore, Dollarama is actively looking at e-commerce, considering ways to sell goods online to customers who want to buy goods in bulk.
Another surprisingly resilient player whose offerings compete head-on with Amazon in electronics is Best Buy Co. Inc., which reported stronger-than-expected sales of video games, consoles and appliances in its latest quarter and whose shares are up 38.3 per cent in the past year.
Best Buy has likely made gains in some categories from the loss or sliding market share of rival stores, such as HMV and Sears Canada, and Circuit City and H.H. Gregg in the U.S.
Perhaps more critically, Best Buy has also cemented its online reputation by promising to match the prices of e-tailers including Amazon.
“Best Buy kind of went through some of the beating already years ago, cutting staff, cutting overhead, cutting stores, and they have come out the other end leaner and meaner,” said Bruce Winder, a partner at Toronto-based Retail Advisors Network.
“They do price-match, and also offer a range of services and installation and things that, right now, you can’t get from Amazon.”
Over the long haul, though, not everyone can be like Home Depot, heavy on in-store service and carrying high quantities of bulky items such as building materials, Winder said.
“Ultimately, there are not many retailers who will be Amazon proof,” he said. “Those that appeal to niche markets, or where there are specific services required will fare better, because they offer something Amazon doesn’t have.”
As a result, he added, there is suspicion that Amazon will buy another chain in the next couple of years.
Craig Patterson, director of applied research at the University of Alberta’s School of Retailing and president of Retail Insider Media, also has doubts that an Amazon safe retail niche exists.
“It’s tricky because Amazon has a lot of different categories, and the ‘treasure hunt’ is for those who can afford the time,” he said.
There are not many retailers who will be Amazon-proof. Those that appeal to niche markets, or where there are specific services ... will fare better, because they offer something Amazon doesn’t have.