One of the fulcrums of the value investing as espoused by Warren Buffet is to buy business with a moat around it. Many businesses once thought a golden goose failed to produce gold when no one expected so. Recent example can be Best Buy. It can be accused of losing on its own turf- an electronic turf.
The culprit of the demise is Amazon. At the bottom of the fall is a classic war between an online and brick and mortar retailers. The obvious reasons are cost effectiveness of online retailers, lowest prices available at online retailers etc. But the brutal killer is the attack on the business model of Best Buy Co., Inc. (NYSE:BBY). If one can buy the same gadget at lower price online, why would one pay higher at Best Buy? You want to see the gadget physically? Smart buyers have found a way- showrooming which is try the device at the store and buy it online. It is like Best Buy Co., Inc. (NYSE:BBY) is bearing the cost of store for some of the customers of Amazon.com, Inc. (NASDAQ:AMZN). Not a great business to be in as far as value investor is concerned.
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How will Best Buy address this problem? They tried to match the price only if customer asks for it. It is like a band aid solution and not complete cure. One may argue that the percentage of such showroomers may be insignificant. Even if you conservatively assume it to be 5%, a 5% hole in revenue is disastrous. Amazon played a big role in killing of Best Buy which brings us to the question: who is next?
Walmart or Target Corporation (NYSE:TGT) may be. We will try to analyze the menace for these two retail giants from the perspective business model rather than by numbers as Amazon.com, Inc. (NASDAQ:AMZN) killed Best Buy Co., Inc. (NYSE:BBY) by attacking the business model.
Best Buy operates in the same segment as Amazon which is electronics gadgets. So Amazon came up with better business model in terms of lower prices, better service etc. On the contrary, Walmart operates in many more segments than the ones operated by Amazon. It is unfair to compare Amazon Vs Walmart through the same lens as Amazon Vs Best Buy. To beat Walmart, Amazon has to protect its edge in its current avatar but also find ways to take on Walmart in other segments.
Both Amazon.com, Inc. (NASDAQ:AMZN) and Wal-Mart Stores, Inc. (NYSE:WMT) are taking on each other. Amazon has come up with Amazon Fresh as its online grocery store. Walmart has also started similar online delivery store called Walmart To Go. But the viability of this business is still under question as many grocery items are perishable. Most people prefer to buy such items from a store rather than online. Also the profit margin on such items is very small making delivery system even more difficult. The shopping experience at Amazon Fresh is better than Walmart. As both stores are still in nascent stages, it is premature to write them off completely.
Based on the study of Kantar Retail, traditional store of Walmart offers products 20% cheaper than Amazon Fresh and 7% cheaper than Walmart To Go. The reason for this is the huge buying power of Walmart. Grocery shopping is still a weekly affair with much emphasis on savings on bulk purchases. Walmart continues to hold its bastion intact.
Walmart has introduced an online portal for its digital products. Its competitor is of course Amazon. But at the moment, there is no comparison. Amazon is way ahead of Walmart in this segment. The success of Walmart lies in the lowest price of the products. Ironically, you will get products cheaper on Amazon than on Walmart’s online store. Amazon will continue to beat Walmart in this particular segment.
But Wal-Mart Stores, Inc. (NYSE:WMT) is not just about this segment. This is where Walmart scores over Best Buy Co., Inc. (NYSE:BBY) when it comes to fight with Amazon.com, Inc. (NASDAQ:AMZN). Walmart boasts of over $460 billion in revenues worldwide compared with $57 billion of Amazon. Amazon will probably take many years to match these figures. But Walmart is playing smart here. It has sensed the threat from Amazon and is responding to the gauntlets thrown by Amazon. Wal-Mart Stores, Inc. (NYSE:WMT) is too big to fail in the retail sector. It may not be terribly wrong to conclude that Walmart will not see the same fate of Best Buy.