Retail future makes for retrograde investing
FLarge, online-only retailers generally rate poorly as a responsible investment, writes John Berry.
or the responsible investor, ‘‘bricks and mortar’’ retailers trump rivals such as Amazon.com and Alibaba Group Holding.
These large online retailers appear to be the future of shopping. Neither is weighed down by costly rents or by geographic boundaries. Their shopfront is virtual.
Contrast this with The Warehouse Group, or any other large publicly listed retailer that built up its business before the emergence of online shopping.
They are saddled with large property costs and a customer base that can check out what they want inside these expensive stores and then buy from Amazon.
However, investing for the long term isn’t just a focus on shortterm cost structures. For a responsible investor it is also about the impact companies have on the wider world and the business ethics they apply in their operations.
And this is not just because taking these environmental, social and governance (ESG) factors into account when making investment decisions is the right thing to do. It is also because these factors can have long-term financial consequences.
An analysis of a company’s performance against these criteria reveals how customers, staff, shareholders, the broader community and indeed the planet interact with a company. It can show whether costs from current activities are being stored as future problems.
Large, online-only retailers generally rate very poorly when their ESG footprints are compared with those of traditional bricks and mortar retailers.
Amazon and Alibaba are challenged with vetting the quality and safety of the millions of products they sell. Yet they bear the brunt of reputational damage and liability triggered by quality and safety issues.
Amazon has been hauled over the coals a number of times for selling objectionable material such as Nazi memorabilia, Isis propaganda and stun guns. You’d expect this sort of gear to be found on the ‘‘dark web’’, where ethics are frequently cast aide, not via a mainstream global retailer.
Alibaba has also had huge issues with counterfeit goods. This reflects badly on supply chain management and the company’s view of social and legal obligations.
Amazon has a poor labour relations record. It and other internet retailers don’t run expensive physical shops, but they still need logistics centres and skilled IT staff. Amazon has a huge global workforce of 230,000 and has attracted controversy in the United States, the United Kingdom, Germany, Italy and Poland.
In one instance, reported in both The New York Times and The Guardian, an American woman was sent on a business trip the day after she miscarried. She says she was told ‘‘the work is still going to need to get done’’.
A second woman in the US was put on a ‘‘performance improvement plan’’ after suffering cancer, and told ‘‘difficulties’’ in her ‘‘personal life’’ were interfering with her work goals.
One of Amazon’s former human resources executives went as far as describing the company’s approach to labour relations as ‘‘purposeful Darwinism’’.
Meanwhile, too many internet-based global corporations, like Amazon, engage in ethically questionable taxplanning strategies, which give them an unfair advantage relative to bricks and mortar retailers.
‘‘Tax minimisation’’ is a kind way to describe how internet retailers can organise themselves with sophisticated cross-border strategies to pay as little tax as possible. In the short term this has worked well for the shareholders of Amazon, Google and other large multinationals.
But these actions have financial consequences.
Amazon, for example, has been investigated in at least five jurisdictions and was recently fined more than $400 million in Europe for its tax activities.
Side-stepping corporate tax damages a company’s reputation in the eyes of customers and will likely attract attention from tax authorities. It will also lead to political pressure for back taxes to be paid.
A responsible investor can look for alternatives to gain exposure to the transformation taking place in retail sales. One option is bricks and mortar retailers that can defend their position and are largely unaffected by online trends.
An example is UK home improvements retailer Kingfisher, which owns almost 1200 stores including the B&Q chain (a UK equivalent of Mitre 10 or Bunnings). It runs a business that effectively combines an online presence with bricks and mortar stores. It also scores highly on ESG metrics determined by ESG rating agencies and features in many share indexes for sustainable companies.
Like many other large bricks and mortar retailers, it is very open about its sustainability focus.
This touches all parts of Kingfisher’s business, including the aspiration for stores to produce as much energy as they consume, the logistics of sourcing nearly all wood and paper from responsible sources, and the removal of chemicals that affect bees from gardening products.
Kingfisher has also won a number of ‘‘best workplace’’ awards, including for executive diversity and employee engagement.
Such a company may not only be a safer long-term bet. It also feels better.
One of Amazon's former human resources executives went as far as describing the company's approach to labour relations as "purposeful Darwinism".
❚ John Berry is the chief executive of Pathfinder Asset Management, a responsible investment specialist. Pathfinder holds Kingfisher (but not Amazon) shares in its Global Responsibility Fund. Pathfinder’s views are not personalised financial advice.