Taking on Amazon

Jonathan Wright
Jonathan Wright
Fidelity Personal Investing16 August 2017

As the growth of the US economy is so dependent on the spending choices of its consumers, announcements from key US retailers this week will act as a useful barometer of the pace of the country’s ongoing recovery.

The retail sector shines a light on the health of the US economy but also its changing shape. The high street is at the epicentre of the disruption being wreaked by online giants such as Amazon.

Corporate bosses are becoming almost obsessed by the threat from Amazon. In a recent survey of results announcements, Bloomberg found that the company was mentioned 635 times over a 90 day period while President Trump came up just 162 times and wages were mentioned just 111 times.

This week’s results include Home Depot, which announced its figures yesterday and discount chain Target later today.  Walmart - the world’s largest retailer - and clothing chain Gap declare theirs tomorrow.

Home Depot - the country’s largest home improvement store - performed better than expected. Encouraged by a strong job market and rising house prices, Americans are splashing out on improving their homes, giving the US DIY chain its highest-ever quarterly sales and earnings.

The retailer also raised its sales forecast after the second-quarter performance outpaced expectations. Home Depot now expects its like-for-like sales to rise to 5.5% in the current fiscal year, up from its previous target of 4.6%.

This is in contrast to US department store chain Macy’s which last week announced falling sales of 2.8% in the second quarter - the 10th straight quarter of decline for the retailer.

Much has been said about the “Amazon effect” in retail and Macy’s is certainly feeling the pinch as more and more consumers are shopping online - especially for clothing which makes up a key part of its offering. This is forcing clothing retailers like Macy’s and Gap to heavily discount their ranges to match Amazon’s prices. Gap has also gone a step further, announcing earlier this month that it will be closing all its Australian stores by the end of January next year.

But with Home Depot, shoppers are still visiting the physical stores with investors reassuring themselves that some of the items they sell, such as lumber (i.e wooden decking and fencing) are less susceptible to online competition. Home Depot may be safe from major disruption - for now.

Looking ahead to tomorrow, Walmart’s quarterly earnings are expected to dip as the company continues to invest in its e-commerce operations to compete online with Amazon. In the last update it announced that US online sales had risen 63% over the same period in 2016 and that most of the increase was organic growth from Walmart.com. However, Amazon remains the leader in US e-commerce by a wide margin, with nearly $24bn in online sales in the first quarter of this year, compared with about $4bn for Walmart. Walmart certainly has a lot of catching up to do.

Other supermarkets are fighting back too. On Monday the German discounter Aldi announced a partnership with grocery delivery company Instacart to allow customers in three US cities to buy Aldi food online with delivery in as little as an hour. The move comes as grocers across the US prepare for the looming threat of Amazon’s takeover of US food retailer Whole Foods which is due to be completed in the second half of this year.

Closer to home, here in the UK retailers are finding novel ways to beat Amazon. The Pet superstore chain Pets at Home, which is struggling to beat Amazon’s prices on pet foods, is fighting back with in-store dog grooming services and vet practices which offer higher margins than pet food and toys.

You can’t neuter a dog on the internet, neither can you have your nails done online and department stores such as Debenhams are looking at new ways to generate revenues. The department store chain is now renting out retail space to nail bars and beauty salons to earn money and hopefully lure shoppers into spending more time browsing their stores and making impulse purchases.

Meanwhile the baby products retailer Mothercare has just launched ultrasound clinics in 20 of its 143 UK stores and plans to double this number during the next two years. These are aimed at women who want more than the two scans that are typically provided by the NHS. It is also training staff on how to fit baby seats in cars.

Similarly if you buy a car headlamp bulb or battery from Halfords you can pay a small charge to have someone fit it there and then for you, a service you wouldn’t get online.

Taking a step back, there’s one sector that’s benefiting from consumer spending irrespective of whether it’s made on or offline and that’s the credit card companies. What’s more the growth of contactless spending on debit cards - as shoppers replace more cash with plastic - means more profits for the likes of Visa and Mastercard.

Visa Inc, the world’s largest payments network operator reported a better-than-expected quarterly profit in July and raised its annual earnings forecast, as more shoppers across the United States and Europe used its payments network. Similarly over the same period Visa’s main rival Mastercard reported better-than-expected revenues, up 13% to $3.05 billion ahead of the 10% forecasted by analysts. With over two-thirds of its volume coming from outside the US, Mastercard is well placed to benefit from growth in global markets if the US consumer does start to slow down.

One way to easily access this ever-evolving consumer market is by letting an expert analyse and anticipate the latest developments by investing in funds. The BNY Mellon Long Term Global Equity Fund which features on our Select 50 list of recommended funds has Mastercard in its top 10 holdings. While the Rathbone Global Opportunities Fund, also on our Select 50 features both Amazon and Visa in its top 10. For those interested in the comeback-kid Walmart, you’ll find it within the top 10 holdings of the Old Mutual North American Fund, also on our Select 50.

As the internet continues to shape our shopping habits and market forces determine how much we can afford to spend, there will continue to be winners and losers in the retail space. As Amazon has proved over the last 20 years, no one is truly safe from disruption.

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