Some Retail Chains Will Survive Amazon’s Onslaught

Amazon (AMZN) is spending $14 billion to put Whole Foods Markets (WFM) in its shopping cart — a surprising move that analysts so far have completely misunderstood.

Analysts claim the online retailer is likely to step up its assault on the grocery sector. That rationale explains why so many retail chain stocks were crushed Friday. The purchase appears to fit the Death by Amazon narrative.

Yet I think investors should disregard the idea.

I’m not suggesting they indiscriminately buy retail. Far from it. Amazon is shrinking margins on all goods sold.  Several established chains, like Macy’s (M) and Barnes & Noble (BKS), are stuck in a death spiral thanks to Amazon’s business model. For them, it is going to get uglier.

The opportunity is in the haphazard weakness for great stores.

Occasionally, investors throw the baby out with the bath water. They become so consumed by the simplicity of big-sector bets, they don’t consider the inherent quality of individual companies. Analysts often fuel the frenzy with hyperbole.

Analysts often become so consumed by the simplicity of big-sector bets, they don’t consider the inherent quality of individual companies.

I write a lot about Jesse Livermore, the legendary trader whose life was dramatized in the book Reminiscences of a Stock Operator.

Livermore could put all of these factors into context.  He understood that emotion ruined sound judgment and that analysts were not always on the side of retail investors.

Through the course of his lifetime, he earned hundreds of millions of dollars investing in stocks opportunistically.

Friday’s carnage in the retail sector would have caught his eye. News of the Amazon foray into food became a shockwave. From general merchandise to video games and discount apparel, retail stocks sank sharply. The selling was nonselective. It was emotional.

Business Insider reports Cowen and Co., a Wall Street firm, told clients Amazon/Whole Foods instantly creates the fifth-largest grocery retailer, and investors should expect further omni-channel benefits. The idea is that customers will have multiple ways to order, pick up or schedule delivery.

And the physical stores should help, too. Whole Foods operates 400 locations in mostly affluent neighborhoods. With Amazon’s logistics expertise, they become efficiency hubs for retailing all sorts of goods beyond food.  Or so the theory goes.

The problem is, it’s still no more than theory.

I’m not one to diminish Amazon’s accomplishments. It is among the most important forces in retail. It creates tremendous shareholder value.

However, there are many companies with that pedigree. The idea that their business models, which have thrived in the era of Amazon, are suddenly dead in the water, seems far-fetched.

Much of what I do for my members involves finding great stocks, largely undiscovered by the masses, or that have been misunderstood.

I have worked with data scientists to reverse engineer the investment tactics of Jesse Livermore. We sift through mounds of data, looking for nimble, thrifty and highly accountable managers.

Then we wait patiently for an opportunity to buy.

These opportunities don’t arise often. When they do, they are almost always the result of perceived game-changing shockwaves and hyperbolic analyst commentary. Having the foresight, and the discipline to buy when most people are selling is not easy. For investors, emotion is a killer.

To take advantage of the anti-Amazon.com fury that emotionally knocked billions of dollars of value off retailers’ stocks, I suggest investors take a look at chains with a real, persistent edge.  Consider retailers such as Costco (COST), Home Depot (HD), Ross Stores (ROST) and Nordstrom (JWN).

Best wishes,

Jon Markman

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Comments 4

  1. Ted F June 20, 2017

    The WF stores in Berkeley and Oakland do not carry the mundane everyday items in any great variety or not at all, It is more the high markup meat and fish, prepared foods or a burrito bar. If you want a seven to ten dollar jar of pasta sauce from some little village in the Italian Alps or a eight dollar can of sweet peas from France, WF is the place to go. The crab cakes are good.

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  2. jrj90620 June 20, 2017

    Hopefully Amazon can change Whole Foods prices.I have a lot of Whole Foods gift cards,got as incentives from stockbroker that I could use if Whole Foods prices become competitive.

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  3. Mike c June 20, 2017

    With the younger generation, the Amazon-WF merger could be a happy song, IF they want to pay higher prices for food, and wait for it to arrive. Instant gratification of a juicy steak off the grill to fruit or vegetable salads ready-to-eat still has appeals to many customers. How-much-does-it-cost will make the price conscious consumer look for value, caring not if it is cool.
    A study was conducted a few years back of a metropolitan area in my state. They found that most shoppers only travel only 2- 3 miles away from where they live to buy groceries. Why? My guess is that they don’t want to travel all over the place to find bargains. The nearby store was satisfactory for their busy lives.
    Will Amazon-WF have a niche? Yes, but not as big at this time as the hype suggests. It takes space for inventory and a willing consumer to switch loyalties. WF’s pricing and selection will turn off a vast number of consumers. We’ll have to see what happens.

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  4. terry June 22, 2017

    I have been to whole foods and know they make most of their profit seem to come from by allowing customers to
    buy several items by the scoop full rather than the set amount. From what I heard they weigh items > than what they actually weight. You would think that makes sense as items go bad and you have to throw them away and rich people generally have smaller families. If I wanted to compete the answer is simple. Sell smaller amounts that will go bad sooner by breaking up the big bags into the best of the big bags at a cheaper price for single people and families that have a small amount of people who like a select amount of food occasionally.
    It is that simple for Costco and Kroger and Tom Thumb to win most of the competition. Tom Thumb now delivers and Amazon has not ever started; or made the purchase complete. Want to hire a thinker hire me tquill5@hotmail.com part time, no promises but a very good history. Be grateful for what you have and the opportunity to make this country greater again. Think about the quality of life you give to others as well as your bonus.

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