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Google Confidential and Proprietary
The Amazon Effect Matt Nemer
Senior Analyst, Wells Fargo Securities, LLC
1
The Amazon Effect A View From Wall Street
Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision. Please see page 36 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 9/18 unless otherwise stated.
Matt Nemer, Senior Analyst
Trisha Dill, Senior Analyst
Kate Wendt, Senior Analyst
(415) 396-3938
(312) 920-3594
(415) 396-3977
withthinkshopper
2
Agenda eCommerce Growth
Amazon’s Growth
Retail’s Response
Wells Fargo Securities Proprietary Research
3
Introduction: Who We Are and How We’re Different
The only team on Wall Street to follow traditional retail and online retail/ marketplaces, in our view
HOW W E A R E DIFFERENT
§ Only firm on the Street to combine coverage of mass merchants and other “traditional” retailers, with online retail and marketplaces.
§ Conduct proprietary analyses in price, search, and the shopping experience.
§ Cover 25 stocks, but our analysis covers hundreds of other public and private retailers
HOW A N A L Y S T S OPERATE
§ Strive to be “experts” on their sectors (retail, technology, healthcare, etc), conduct extensive research on companies, create models to predict performance.
§ Assign a Buy, Sell, Hold, or equivalent rating to stocks
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5
eCommerce Growth
5
-6%
16%
15%
24%26%27%
28%31%
25%
22%
3%2% 5%6%
2%
4%2%3%
7% 7%6%
3%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
eCommerce Adjusted Retail Sales
6 Source for chart: U.S Census Bureau. Adjusted retail sales exclude vehicles and parts. Source for image is © iStockphoto.com\image #2492027
eCommerce is Accelerating The spread between eCommerce and retail growth has widened
Over the past 5 years, eCommerce growth has outpaced total retail growth by an average of 9.1%. The spread narrowed during the recession, but widened to 10% in 2010 and 2011.
Annual U.S. Sales Growth (%)
Mobile and tablets accounted for 9% of online sales in 2Q12, up from 6% in 2Q11
But, more than 50%
of U.S. smartphone users turned to their phone
to perform retail-related activities while in a store.
Source: Comscore
Mobile is Exploding, and Smartphones Are Influencing Offline Sales
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8
Amazon’s Growth
8
TTM Revenue
$28,665
$40,278
$54,326
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
$55,000
2010 2011 2012
$MM
35% growth
41% growth
Source: Company Reports: TTM revenue for Amazon compared to the prior TTM periods, including both international and North America revenue. Retail revenue estimates for FY14 are from Thomson First Call.
Amazon Continues to Take Significant Share Amazon’s on pace to become 3rd largest retailer based in the U.S. by 2014
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TTM Capex
$576
$1,374
$2,122
$500
$750
$1,000
$1,250
$1,500
$1,750
$2,000
$2,250
2010 2011 2012
$MM
54% growth
139% growth
Source: Company reports
Amazon is Investing Heavily in Growth Amazon’s capex is greater than any other retailer except Walmart and Target
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Powering hundreds of thousands of
businesses including Netflix, Instagram,
Pinterest, and NASA, through Amazon Web
Services (AWS)
Created a new
Premium Delivery Experience team, focusing on even faster shipping
(same day)
Launch specialty sites in key retail verticals like toys, home, and soon to be sporting goods (through Quidsi)
Plans to open 18
fulfillment centers this year (including
2 in California), taking them to 87 at
year end
Expanded Physical Locker Delivery
Test from Seattle, London, and New
York to Silicon Valley and has opened several
small stores (Zappos,
BeautyBar)
Launched a new "Prime Expansion" team, tasked with driving awareness
of the Prime program and
expanding the scope of benefits
Amazon Has Been Busy What else has Amazon been up to?
Source: Company reports and company websites 11
Retail’s Response
12
“We've been focused on stepping up the intensity of
our global ecommerce opportunity. Our goal is to have a deeper relationship with our customers to drive
greater loyalty, and ecommerce is key to that strategy.” – Mike Duke,
Walmart, CEO (August, 2012)
“We’ve been thinking about where growth is going to
come from across all retail over the next 10 years. And
certainly square footage growth is not where that growth is coming from.” -
Jamie F. Nordstrom, the head of Nordstrom.com
(April, 2012)
Source: Company reports
A Wake Up Call For Retail C-Suite moves beyond a state of denial
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18%
2%
15%
27%
-10%
0%
10%
20%
30%
40%
50%
60%
Wal-Mart Stores Inc. CVS Caremark Corp. Home Depot Inc. Target Corp. Lowe's Cos.
2011 y/y growth in non-IT/eCommerce capex2011 y/y growth in IT/eCommerce capex 102%
110%
Source: Company reports: Note Target capex include the U.S. business only and exclude the company’s expansion into Canada
The top 5 largest retailers spent $5.2B on technology-related capital expenditures in 2011, which grew 21% over 2010, nearly 4x the growth rate in non-tech spending
IT/eCommerce Capex Growth (%)
eCommerce Investment Accelerates Growth in IT spending was 4x non-IT spending in 2011
14
Signs of Innovation Recent examples of innovation from top retailers
15 Source: Company reports and websites, © iStockphoto.com\image #20947075 and #20913095
Inst
acar
t Source for all images: Company websites
Signs of Innovation Options to Amazon Prime are emerging
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2Q eCommerce Growth Rate
Source: Company reports
14%
20%
24%
28%
40% 40%
35%
28%
22%
14%
39%
10%
15%
20%
25%
30%
35%
40%
45%N
ords
trom
Zum
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Fastest Growth Channel for Retail Multichannel retailers are enjoying double-digit eCommerce growth
17
Niche, vertically integrated brands
Celebrity endorsed products
Fashion/Luxury
Unique one-of-a-kind items
Consumer Services
Subscription eCommerce
Source for all logos: Company websites
New Retail Models Are Emerging Online only business models that can co-exist with Amazon, in our view
Etsy
18
Nordstrom invests $16.4MM in online
apparel retailer Bonobos
Walmart to launch
subscription eCommerce company,
Goodies, the “Birchbox
Approach” to artisanal food
products
QVC/Liberty Interactive
acquires Send The Trend, a members only ecommerce
site for accessories and beauty
Source for all images: Company website (Bonobos), and iStockphoto
New Retail Models Are Emerging Established retailers also experimenting with new models
19
Costco (2Q earnings call) – “In terms of Costco.com,
year-to-date sales are up over last year.
Target (2Q earnings call) – “Year-to-date online sales
Have been running about flat.
Limited Brands (2Q earnings call) – “In the direct
channel, second quarter sales were up 3%.”
Source: Company reports
But It’s Not All Good News Some large retailers are still growing below the market
20
Wal-Mart Stores Inc. ü ü üCVS Caremark Corp. ü** ü**Costco Wholesale Corp.Walgreen Co. ü* ü* üHome Depot Inc. ü* ü* üTarget Corp. üLowe's Cos. ü üBest Buy Co. Inc. ü ü ü*+Sears Holdings Corp. ü ü üMacy's Inc. ü+Rite Aid Corp. ü** ü**Staples Inc. ü ü+TJX Cos.Kohl's Corp.J.C. Penney Co. Inc. ü ü+Dollar General Corp.Gap Inc. ü*+Office Depot Inc. ü ü üNordstrom Inc. ü ü üLimited Brands (Victoria's Secret)GameStop Corp. Cl A ü ü üBed Bath & Beyond Inc. üFamily Dollar Stores Inc.Ross Stores Inc.AutoZone Inc. ü
Ship to
Store
Same Day Ship To Store
Store Inventory
Lookup (on website)
Source: Company websites; +New Feature, *Beta Testing, ** policies are for prescriptions and/or photos only
Still Room For Omnichannel Improvement Only a few retailers allow shoppers to move seamlessly across channels
21
§ 95% of retailers provide a store locator feature
§ 83% provide a general search function
§ 77% list a way to contact customer service
§ Only 31% provide an in-store inventory look-up feature
§ Only 16% allow customers to buy online and pick up in a store
§ Only 9% provide a deal of the day/flash sale.
. . . B U T
Source: Wells Fargo Securities, LLC
Mobile Features Still Have a Ways to Go Few retailers offer a truly integrated mobile experience, in our view
22
WFS Proprietary Research
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Category Analyses: Which Sectors Are Exposed to Amazon? Consumer electronics, books, and office supplies are structurally exposed, but what about other retail categories?
Grocery and Dollar Stores Consumer Electronics, Books, Office Supplies
MORE EXPOSED LESS EXPOSED
Amazon Exposure Spectrum
24 Source for all images: © iStockphoto.com\image #20365230 and image #19668860
4.8%
2.2%
6.8% 6.1%
0.0%2.0%4.0%6.0%8.0%
Dick's vs. Amazon Cabela's vs. AmazonExcl. Shipping Incl. Shipping
Average prices vs. Amazon, by retailer
§ Partially driven by the prevalence of MAP pricing, but the differential wasn’t much different including shipping
Amazon had only slightly better prices…
…and sporting goods retailers are also benefiting from: § Better content and availability of sizes and colors vs. Amazon § Lack of product on Amazon from key vendors (Nike, The North Face) § Good search term relevance, with Dick’s and Cabela’s ranking well in natural search for many
of their key categories
Source: Company websites and Wells Fargo Securities, LLC
Sporting Goods vs. Amazon: Deep Dive Investors perceive sporting goods retailers as exposed to Amazon; our analysis showed they are surprisingly well positioned
25
36% 37%
63% 67%73% 74% 76%
96%
0%10%20%30%40%50%60%70%80%90%
100%
Hunting Camping Outdoor Fishing Golf TeamSports
ExerciseEquipment
AthleticClothing &Footwear
Percent of search terms with paid search results
Source: Google and Wells Fargo Securities, LLC
Sporting Goods vs. Amazon: Deep Dive Sub-categories within sporting goods vary widely in their degree of competition
26
§ Less MAP pricing or adherence to MAP creates more opportunity to lower prices
Amazon’s core product prices vs. each retailer
(28%)
(15%) (14%)
(1%) (1%)
(30%)
(25%)
(20%)
(15%)
(10%)
(5%)
0%AMZN vs gnc.com
AMZN vs gnc.comw/Gold Card
AMZN vsvitaminshoppe.com
AMZN vsluckyvitamin.com
AMZN vsvitacost.com
Amazon had significantly better core product prices
Source: Company websites and Wells Fargo Securities, LLC
Vitamins & Supplements vs. Amazon: Deep Dive Excellent category for eCommerce, but Amazon getting more aggressive
27
Percent of paid search terms with a top 3 result 33%
27%
11% 10%
4%
0%
5%
10%
15%
20%
25%
30%
35%
amazon.com vitacost.com luckyvitamin.com vitaminshoppe.com gnc.com
And most surprisingly, appears to be getting very aggressive in paid search
Source: Company websites and Wells Fargo Securities, LLC
Vitamins & Supplements vs. Amazon: Deep Dive Excellent category for eCommerce, but Amazon getting more aggressive
28
Source: Company websites and Wells Fargo Securities, LLC For WSM this analysis includes similar products
Key categories at Bed Bath & Beyond and Williams-Sonoma have high product overlap with Amazon…
Bed Bath overlap with Amazon
89%83% 83%
69%61%
0%
20%
40%
60%
80%
100%
KitchenElectrics
Cookware Cutlery Cleaning Bakeware
Williams-Sonoma overlap with Amazon
74% 71%
57% 54% 53%
0%10%20%30%40%
50%60%70%80%
Cooks Tools Electrics Bakeware Cutlery Cookware
Home Furnishings vs. Amazon: Deep Dive Slowing growth in sales and margins could be related to Amazon
29
Tracking the Churn to Amazon from 100 Retail Sites Exit traffic for the top 100 retailers shows which sites are losing the most (and least) traffic to Amazon
Dollar stores/discounters Sporting goods Furniture/home
Consumer electronics Fashion footwear
Office supplies
Categories and companies that are handing over traffic to Amazon
(>4% traffic loss):
Categories and companies that are less susceptible to Amazon
(<0.2% traffic loss):
30 Source for all images: © iStockphoto.com\image #19772721, #18673956, #19668860, #13674022, #18640096, and image #15824457
Source: comScore
6.3%
5.9%
4.6%
4.5%
4.3%
0.2%
0.2%
0.1%
0.1%
0.1%
Fossil
Barnes & Noble
Systemax (Tiger Direct, CompUSA)
Brown Shoe (Famous Footwear)
Steve Madden
Shoe Carnival
Big 5 Sporting Goods
lululemon athletica
Talbots
Family Dollar
Tracking the Churn to Amazon from 100 Retail Sites Companies with most and least traffic loss to Amazon
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0%
5%
10%
15%
20%
25%
30%
Less than 10% Between 10%and 20%
Between 20%and 30%
Between 30-50% More than 50%
JuneSeptember
Source: Wells Fargo Securities, LLC and Survey Monkey
Online Tax Survey Texas survey suggests online tax poses limited risk to Amazon or eCommerce
How much of your spending do you do online?
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Do you buy more or less online than you did a year ago?
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Significantly more More About the same Less Significantly less
JuneSeptember
Source: Wells Fargo Securities, LLC and Survey Monkey
Online Tax Survey Texas survey suggests online tax poses limited risk to Amazon or eCommerce
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Convenience Lower prices Selection No sales tax
JuneSeptember
Source: Wells Fargo Securities, LLC and Survey Monkey
Online Tax Survey Texas survey suggests online tax poses limited risk to Amazon or eCommerce
What are the reasons you shop online? (1 = least important and 4 = most important)
34
Questions? Email us: [email protected]
[email protected] [email protected]
You’re invited! Wells Fargo Retail and Restaurants
Summit, Oct. 2, 2012 at the Four Seasons Hotel, Boston
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Disclosures
36
Dis
clos
ures
37
