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.

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The best deals from Amazon Prime Day

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Amazon Prime Day is less than 12 hours away. This year, Amazon’s big savings event for Prime members will be bigger than ever, with more than 100,000 deals—which will come as frequently as every five minutes. 

So what are the best deals for Prime Day? Mashable is rounding up the best picks and will be updating throughout Prime Day.

Be sure to check back frequently to see where you should spend your coin. 

Alexa Exclusive Deals 

If you’ve got an Alexa-powered device (like the Echo, Echo Dot or Echo Tap), you can save even more money by ordering certain items through them on Amazon. 

Your first purchase with Alexa will take $ 10 off your total of $ 20 or more. But there are big deals, too.  Read more…

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Apple will open Siri to developers and launch Amazon Echo-like smart speaker, report says

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Apple has big plans for Siri that will make the company’s famous assistant a lot more useful, according to a new report.

The company will soon open up Siri to developers with new software tools that will allow Siri to tap into more third-party services, according to a new report in The Information. Apple is also working on a new pice of a hardware, an Amazon Echo rival that will work with Apple’s smart home platform.

Apple plans to put Siri in the hands of developers with a new software development kit (SDK) that will reportedly be called the Siri SDK. The Siri SDK could launch at next months’s World Wide Developer Conference, where Apple typically previews the newest version of IOS and its latest developer tools. Read more…

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Amazon rolls out cold cloud storage option

Amazon Web Services launched a new, less-expensive flavor of its cloud-based object storage service meant for data that is infrequently accessed (IA).

+ MORE AT NETWORK WORLD: All aboard the SS Dreamforce +

Amazon’s Simple Storage Service (S3) IA is an alternative to the company’s standard S3 offering and its Glacier service. Amazon’s three storage offerings now include: S3 for fast access to data; S3 IA, which is less expensive than S3 with a slight tradeoff in availability; and Glacier, which offers even less expensive prices, with high availability but the tradeoff of long latency for retrievals.

To read this article in full or to leave a comment, please click here

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Amazon Pop-Up Loft Programme to Give Start Ups Free Web Service Training

amazon awsThe Amazon Web Services (AWS) Pop-up Loft programme has extended to London, with the opening of dedicated office space where start ups can get free support from cloud computing experts.

The Fore Street offices, close to the city of London, will be open until the end of October with the intention of bringing together developers, engineers, entrepreneurs and tech enthusiasts. AWS is offering personal help and guidance from a range of experts from both AWS and its partners, with the intention of encouraging entrepreneurs to build new systems on AWS or create their own startups. Once registered, visitors can participate in training courses, boot camps, self-paced labs, seminars or networking events.

The programme will feature a number of educational strands for would-be developers. Under the Ask an Architect initiative, AWS users can book appointment for a one to one meeting with an AWS systems expert to discuss technical questions about their AWS architecture, AWS features and cost optimization. The AWS Technical Bootcamps will be free one day training sessions run by experienced AWS instructors and systems designers, with the aim of giving delegates hands-on experience using a live environment with the AWS Management Console.

The free technical sessions are designed to cover development areas in which experienced instructors are rare in the cloud industry, such as mobile and gaming, databases, big data, compute and networking, architecture, operations, and security. AWS customers, partners and industrialists will also host evening sessions to share their experiences.

Startups will also get the chance to hear from customers, venture capitalists and incubators. Experts in venture capital, from Seedcamp and Techstars, will be on had to offer funding and business development guidance.

Intel, a supporter of the programme, will host talks and demonstrate new advances in Xeon processors and the Internet of Things. IT automation company Chef will advise on development operations.

Pop-up Loft London is the third initiative in the programme after previous events in San Francisco and New York as AWS aims to help local startups to grow their businesses using its cloud services.  Two thirds of the UK’s startups with valuations of over a billion dollars, including Skyscanner, JustEat, Powa, Fanduel and Shazam, now use AWS to run their services, Amazon claims.

“We’re bringing some of the brightest and most creative minds in the industry to help startups across the UK,” said Amazon CTO Werner Vogels.

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Cloud Hosting Service Provider Amazon AWS Launches Cloud Storage Named Glacier Archive

Cloud Hosting Service Provider Amazon AWS Launches Cloud Storage Named Glacier Archive
Cloud Hosting Service Provider Amazon AWS Launches Cloud Storage Named Glacier Archive

 Cloudhostingtech.com on August 22, 2012 : Cloud hosting service provider Amazon AWS is on the way to regular enhancement and progress in its infrastructures and software services. In the pursuit of regular enhancements it has announced on Tuesday August 22, 2012 that it has launched new cloud storage solution named as Glacier Archive for it valuable customers. This would be used in place of earlier archive technology of tape storages.

It was further informed it the statement by the company that this service would also be billed at very low rates and be based on pay as you go plan of charging. The price of this service is as low as just $ 0.01 per Giga byte per month, which is much less than Amazon S3 service too.
In a statement at blog post Mr. Jeff Barr senior evangelist at Amazon AWS said, “Retrieval requests are priced differently, too. You can retrieve up to 5 percent of your average monthly storage, pro-rated daily, for free each month. Beyond that, you are charged a retrieval fee starting at $0.01 per Gigabyte (see the pricing page for details). So for data that you’ll need to retrieve in greater volume more frequently, S3 may be a more cost-effective service.”
Mr. Barr further explained on his blog about this new service of Amazon AWS and said, “With Glacier, archives will be available for downloading in 3 to 5 hours. The other major difference between S3 and Glacier is S3 allows users to assign names to each object, while Glacier assigns a unique id to each archive at upload time in order to keep costs as low as possible.”
This amazing data storage and archive service of Amazon AWS is available for almost all regions of the globes and can be accessed through normal management console of Amazon.