Amazon: Hitting Where It Hurts, The Periphery

There are mixed views on whether Amazon (NASDAQ:AMZN) is really killing it in grocery retail. At first glance, it does seem like opinions on both sides have merits. And since these opinions are mutually exclusive, it is easy to wonder about this discrepancy. I gave it a lot of thought and finally arrived at the following two conclusions. One, in grocery retail, Amazon may not have a big figure to gloat about so far. Two, traditional grocery chains are probably taking a big hit, and this is unlikely to be ascertained anecdotally.

Location, Location, Location

The oft heard aphorism location, location, location goes as well for grocery retail chains as it does for real estate. After years of competing and exhausting many options to differentiate themselves, grocery retail chains, the new and the old, are back to square one incurring more costs than ever. If one grocery store offers free parking, the other does too. If one offers a money-back guarantee, the other does too. In effect if one grocery retail store offers something to the customer, a competitor nearby is willing to match that experience. Therefore, grocery retail chains are now left with just three attributes to differentiate themselves.

First is the format. A hard discounter will have less than 2,000 SKUs whereas a supermarket will have 40,000. Retailers are institutionalized in one format or the other. For instance, a Kroger (KR) is not going to turn itself into a warehouse club like Costco (COST). Since, the format of the store generally remains the same, it has no influence over the earnings result year after year.

Second is marketing an effective price perception strategy. Just to make it clear, price perception is different from price. As summed up exceptionally in this HBR article, Amazon uses price as a psychological weapon and uses it better than anyone else in the game. Apparently Amazon sells the top moving items at a lower price compared to other retailers. Since, these products have high velocity, the perception that Amazon is cheaper is stuck. The study consistently found that other products were priced expensive relative to competitors.

And third is the location. A Kroger store in Chapel Hill, North Carolina, is not going to compete with an Aldi in Medford, Massachusetts. At competitive locations, price perceptions can feed into the impact on store earnings. And of all the three attributes, none of them affects quarter-to-quarter fluctuations in earnings more than location.

Why anecdotal verification can mislead investors?

In the past, when I wrote two bearish articles on Kroger, readers gave me stick arguing that competitive threats are not borne out by anecdotal evidence at company stores. Indeed, but why does anecdotal evidence defy numbers reported by the company? I think I have an answer but would like to add a caveat that this explanation is theoretical at this stage and was inspired by my reading of Foxall’s Consumer Behavior Analysis. I have not independently verified it, but readers can let me know what they think about my analysis.

Most grocery stores are more or less certain that customers located nearby will visit their store instead of a competitor’s. Saving a dollar on groceries is often not worth the time and gas expended on a trip to a distant store. Especially when stores hardly offer any differentiation. But for people located relatively distant from two different retail chains, the incentive to defect is higher. This number could be minuscule. But we are not talking about a 10% dip in sales or traffic. In fact sales growth and traffic are dipping just marginally at traditional chains. If Whole Foods succeeds in snapping just these customers at the sideline, and who were previously shopping at a Kroger’s or Wal-Mart (NYSE:WMT), the impact could be substantial. Here’s how.

Importance of volumes and impact on stock

The table below highlights the importance of volumes for grocery retail chains. The return on equity of all companies is driven by asset turnover and leverage. But what has an outsized effect on annual changes in ROE and short-term movement in stock is the net income margin. Even a 50 basis point decrease or increase in net income margins results in approximately -+10% change in the return on equity figure. And because of the high fixed costs, small changes in sales often see net income growth going from green to red.

Stock Net Income Margin Asset Turnover Leverage Return on Equity
Costco 1.98% 3.56 2.75 20.71%
Wal-Mart 1.70% 3.28 5.45 28.98%
Sprouts (NASDAQ:SFM) 3.07% 2.82 2.14 16.62%
Kroger 2.81% 2.44 2.56 16.65%
Amazon 1.74% 1.83 4.32 14.52%
Target (NYSE:TGT) 3.94% 1.78 3.42 22.89%

Therefore, if people at the sideline show up at, say, a competitor of Kroger, the company’s decline in net income margin is quite severe relative to decline in both sales and gross margins. The company’s recent earnings were a case in point. And since this competitor could increasingly turn out to be Whole Foods, Kroger does deserve the decline in its market cap. At the same time as long as Whole Foods nibbles at just the periphery, it is unlikely to post a massive increase in its own top line. Therefore, the opinion of weaker results at traditional grocery chains without, say, a double-digit growth in Whole Foods seems coherent. In terms of the impact this could mean more pain for Kroger, Wal-Mart, Sprouts, and Costco. Amazon should rise once these players start capitulating.

Note: Company related data have been sourced from Morningstar.

Note: If you find the article interesting, kindly hit the follow button to be updated about my latest insights.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


Amazon now has its own Prime Air cargo planes for quicker delivery

Amazon is leasing 40 cargo planes to shuttle its own shipments through the air, with a view to improve its delivery times. And today, it’s launching its first branded aircraft, the Amazon One at the SeaFair Air Show in Seattle, where the company has its headquarters. The branded Boeing 767-300 has a prime number as its tail number (get it?) and will join 10 other planes that have initially been designated as exclusive cargo carriers for the company. More planes will be added to the fleet over time. In addition to speeding up deliveries, the introduction of these planes also…

This story continues at The Next Web

All articles

Red Hat Extends Cloud Offerings For Amazon Web Services

Red Hat Extends Cloud Offerings For Amazon Web Services
He said Red Hat is extending its cloud platform, called Red Hat Enterprise MRG Grid, to Amazon Web Services via Red Hat Cloud Access. Red Hat Cloud Access enables customers to move their subscriptions between traditional on-premise servers and …
Read more on CRN

Start-Up Encrypts Data in the Cloud
It supports Amazon's Virtual Private Cloud (VPC), where Porticor's virtual appliance would logically go alongside the user's application servers so the data never leaves the VPC unencrypted. Users can also snapshot their EBS disks, which are also …
Read more on SYS-CON Media (press release) (blog)

Related Q&A:

Amazon Cloud Connecting to More Data Centers

Laughing Squid Cloud Hosting Launch Party – 04

Image by Cirne

Amazon Cloud Connecting to More Data Centers
The addition of One Wilshire offers major cloud customers in Los Angeles the ability to connect more effectively to Amazon EC2 and other Amazon Web Services offerings. of Sales at CoreSite. “CoreSite's cloud computing data center ecosystems continue to …
Read more on Data Center Knowledge

Bermuda realtor moves onto the cloud
By moving to cloud hosting, we have made the conscious decision to focus our resources on the real estate services at the heart of our business, and to outsource the underlying technology platforms to IT specialists like CCS and QuoVadis. …
Read more on Royal Gazette

Related Q&A:

Why Amazon can hold its head in the Clouds

Why Amazon can hold its head in the Clouds
So it decided to help these companies and offer its hosting platform and numerous services – the most popular ones being EC2 (Elastic Compute Cloud) for virtual servers) and S3 (Simple Storage Service) for Web based storage. Many of these businesses …
Read more on InformationWeek India

Iomart has its head in the clouds but its feet firmly on the ground
By Peter Ranscombe A SURGE in demand for “cloud” computing has helped profits at Glasgow-based IT company Iomart to more than double during the first half of the year. Rather than storing programs and data on an individual machine, cloud computing …
Read more on Scotsman

CollabNet Launches CollabNet Connect™ for Federated Application Delivery
Our solutions include TeamForge®, the industry-leading Agile ALM platform for distributed developers, the Codesion cloud hosting and integration platform, ScrumWorks® Pro Agile project management, Subversion Edge for managed SCM, and Agile training and …
Read more on PR Newswire (press release)

Related Q&A:

Amazon Free Special Offers

The globe of the present day has become quite expensive owing to the increased cost of commodities and services. Under such circumstances, folks appear for alternatives wherein they can save their cash and time by the use of the very best services in town. Also, owing to the increased impact of the use of internet, individuals have been a lot more inclined towards shopping on the web.

The globe of the present day has become quite expensive owing to the increased cost of commodities and services. Under such circumstances, folks appear for alternatives wherein they can save their cash and time by the use of the very best services in town. Also, owing to the increased impact of the use of internet, individuals have been a lot more inclined towards shopping on the web. is one among those sites that have created a fantastic impact when it is the question of on-line shopping. Thus, folks have began opting for shopping through Amazon on a bigger scale. Hence, in this write-up we have tried to focus on the benefit of making use of Amazon promo so as to avail rewards and discounts when you shop on the web.

To start with, for the people who are not conscious as to what an Amazon coupon is here is a brief explanation. Amazon has been pivotal in helping folks get to their dream accessories and other items at really inexpensive costs. Thus, with an intention of expanding their market and as a component of the promotional campaign, Amazon has introduced Amazon coupons making use of which 1 might avail discounted rates on all his purchases via Amazon. This is a development that is unknown to many.

You might be surprised to know that properly over 30 percent discount on certain products can be got by generating use of the proper Amazon coupon for purchase. There are websites like that have been of fantastic guidance and proved advantageous to the individuals when it is the question of on-line buy.

This website follows an orderly arrangement of numerous products so that 1 might be able to figure out the product of his choice and use the Amazon coupon codes to have discounts on rates.

Here are two books I brought from Amazon using the coupons from the sites above: holiday gift ideas and getting rid of jealousy. Amazon coupons for books are rare but if you check the site above regularly you will find them.

Online Grocery Shopping: Helping the future hermit in us all.

Online shopping for groceries is one of the promoting venue’s that always appears to be on the cusp of succeeding or failing. You may start hearing radio commercials, or the wierd television or radio ad, maybe you will even see one of the evasive Shop & Stop PeaPod delivery trucks, but unless you’re employed consistently, you are deeply sick or an invalid with no other way of buying yourself food ( but you thankfully have an internet connection ) -it appeared so terribly lazy. Not to mention wasteful considering they would tack on the extra dear for delivery. Continue reading “Online Grocery Shopping: Helping the future hermit in us all.”