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How some retailers are taking on Amazon
Anne-Marie Peterson
Equity Portfolio Manager

Amazon’s disruptive influence on the retail sector is undeniable. But some retailers, investment analyst Anne-Marie Peterson points out, are relying on singular advantages to bring customers through their doors.


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Matt Miller: How are you thinking now about the rise of online shopping and Amazon? What's your outlook as we get into this?

Anne-Marie Peterson: Well, really, consumer habits have been shifting now for a decade. And that continues. There are fewer and fewer reasons to go to the store. Stores will exist, but Amazon has made not going to the store, with each passing year, a better and better option. So I don't try to find out what or figure out who's going to win in a given period. I try to think about it over the long term. But the trend that you've been seeing, that's been pretty persistent over the last decade, has been online. So online shopping has continued to take share from the brick-and-mortar retailers.

Matt Miller: And so, who can survive? Part of what you do in looking at retail is to understand who are the folks who have a trajectory, even given what Amazon is doing. What's the way you think about that?

Anne-Marie Peterson: Well, one way I think about it is the ecosystem in the category. For example, Home Depot has been relatively not only insulated, but has used their own online experience and melded it with the stores to their advantage. The category's pretty complicated: many SKUs, the service element matters —

Matt Miller: SKUs are stock-keeping units; that's the way that people —

Anne-Marie Peterson: Stock-keeping units. Yeah, yeah, many items. And they've got big, heavy items that are difficult to ship. But more importantly, they just have a big pro business, where the pro needs their help in putting together the assortment, delivering it to the site. So Home Depot is insulated.

There are categories where Costco, so far, has been pretty insulated, because you need to go to the store for food; you need to go to the store for gas. And more importantly, Costco offers extreme values. Their markups are half of what the average retailer is. They focus on quality. Even Amazon admits they can't match them on the markup. So, to the extent you need to go to the store, you're going to fewer and fewer places, but Costco's getting a greater share of declining retail traffic.

Matt Miller: Is it right — I think you've talked about — they have a membership model also?

Anne-Marie Peterson: Yes.

Matt Miller: How does that play into how we think about this?

Anne-Marie Peterson: Well, the membership model ensures you get cash back based on your spend, so it incentivizes you to shop at Costco — the more you spend, the more you get back. But it's also a way of supporting their low markups. So 70% of Costco's earnings come from membership fees, and that's a real advantage because you're basically not required to mark product up as much.

Amazon's copied the membership model with Prime, but that's an element of stickiness and habit-driving as well as helping the economic model.

Matt Miller: Are there other ways that you're seeing folks cope with the rise of online?

Anne-Marie Peterson: Well, so far the rise of online has hurt most retailers because their strategies of coping have been to try to copy Amazon. But that has made their businesses more complicated, more capital-intensive, and it's cannibalized traffic away from the stores. It's given reasons to not go to the stores. I think some of the more successful models — Ulta Beauty, for example, they have services in their stores. You can get a hair blowout, a manicure, a facial, a haircut. And so those are reasons to go to the store. Plus the category's just fun to shop.

Matt Miller: Is that part of a broader trendyou think we're going to see, that the in-store experience has to be more fun or theatrical or experiential, whatever the buzzword is?

Anne-Marie Peterson: Absolutely. Absolutely. There has to be a reason to go to the store. Right now, you could go to Target to pick up your diapers, or you could buy them on Amazon and go to yoga.

Matt Miller: Right.

Anne-Marie Peterson: I’ll go to yoga.

Matt Miller: Right, right, right.

Anne-Marie Peterson: But if you're going to a store for a sense of discovery, a sense of knowledge or service, or because you just can't get the entire package the way it's . . . Again, in home improvement, it's hard to put together if you're redoing your bathroom; you could buy an item or two, but you can't buy the entire package online and you need some help.

Matt Miller: Right.

Anne-Marie Peterson: You need some context, and you need to touch and feel. So the retailers that are doubling down on the store experience and the services within the store and reasons to go to the store are the ones that are winning.


Anne-Marie Peterson is an equity portfolio manager with 24 years of experience. She also covers U.S. retail as an investment analyst. She earned a bachelor's in economics from the University of California, Irvine, and is a CFA charterholder.


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