Fund managers seek stocks that Amazon can’t conquer

Amazon.com Inc’s game-changing move to upend the grocery business with a surprise deal to buy Whole Foods Market Inc 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 companies comes a time when the category would typically shine.

Low unemployment and a solid housing market boost consumer stocks, yet companies in the category — excluding Amazon — are up just 5.2 per cent for the year, or about 3 percentage points below the broad S&P 500 as a whole, according to data. Amazon shares, by comparison, are up about 30 per cent. Amazon now accounts for about 34 per cent of all US online sales and should see that number grow to about 50 per cent by 2021, according to a Needham research note.

Amazon’s growing dominance is in some ways akin to the rise of Wal-Mart Stores Inc 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 top-shelf 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 twenty-five years and this is the biggest transformation we’ve seen in the consumer space,” she said.

While Wal-Mart put many small mom-and-pop stores out of business, Amazon is dragging down national competitors like Target and Macy’s with its combination of low prices, broad range of inventory, and speed, she said.

At the same time, Amazon is expanding its e-commerce dominance when more shoppers are online, suggesting more pain ahead for competitors. E-commerce sales grew 14.7 per cent in 2016, nearly triple the 5.1 per cent growth rate of traditional retailers, according to US Census Bureau data.

Fund managers say Amazon’s growing dominance 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.