Fund managers bet on the areas that Amazon can’t reach
AMAZON’S game-changing move to upend the grocery business with a surprise deal to buy Whole Foods Market compounds a problem already vexing fund managers: how to play US consumer spending when the Seattle-based e-commerce giant is threatening to take over retail.
Amazon’s relentless growth and destruction of value among traditional retail rivals is forcing active fund managers to look for bets in areas they think Amazon can’t or won’t reach.
Emerging options include theme restaurant chains, recreational vehicle makers and sellers of stuff that’s just too heavy to ship via Amazon’s network. Meanwhile, some fund managers are increasingly convinced the only way to play consumer spending is to move away from brands and retailers and into logistics and supply chain companies, essentially betting e-commerce will render most consumer companies obsolete.
The challenge of investing in consumer firms comes a time when the category would typically shine. Low US unemployment and a solid housing market boost consumer stocks, yet companies in the category — excluding Amazon — are up just 5.2pc for the year, or about 3 percentage points below the broad S&P 500 as a whole, according to Thomson Reuters data. Amazon shares, by comparison, are up about 30pc. Amazon now accounts for about 34pc of all US online sales and should see that number grow to about 50pc by 2021, according to a Needham research note.
Amazon’s growing dominance is in some ways akin to the rise of Wal-Mart in the early 2000s, when its rapid growth and move to branch out into groceries raised concerns it would put other retailers out of business. Yet Amazon’s greater online reach and purchase of a high end grocery store chain makes it far more formidable, said Barbara Miller, a portfolio manager at Federated Kaufmann funds. “I’ve been in this industry for 25 years and this is the biggest transformation we’ve seen in the consumer space,” she said.
While Wal-Mart put many small stores out of business, Amazon is dragging down national competitors like Target and Macy’s with low prices, broad range of inventory, and speed, she said.
Amazon is expanding its e-commerce dominance when more shoppers are online, suggesting more pain for competitors. E-commerce sales grew 14.7pc in 2016, nearly triple the 5.1pc growth rate of traditional retailers, according to US data.
Fund managers say Amazon’s growth is forcing them to shift long-held strategies, by either putting less money into consumer stocks overall or by focusing on companies that can compete alongside Amazon or may be attractive buyout targets.
The company’s outsized 15.4pc weighting, more than double the next-largest stock in the S&P 500 Consumer Discretionary index, is problematic for fund managers who typically will not hold any positions greater than 5pc of their portfolio in order to manage risk.
Josh Cummings, a portfolio manager at Janus Henderson funds, is avoiding shares of direct competitors of Amazon, such as Target, Kroger and Wal-Mart, and instead focusing on companies with “idiosyncratic” attributes, he said.
Starbucks, for instance, offers an experience that Amazon would find hard to match, he said, while Servicemaster Global Holdings, parent company of pest control company Terminix, is largely immune from e-commerce competition.