News

Landmark Links August 22nd – Mortal Kombat

 

Lead Story… There is still plenty of time left but I think that it’s safe to say that Amazon is the lead business story of 2017.  Over the past few years, Apple has been the biggest business story out there as the world’s richest company continued the quest for domination through personal technology innovation.  However, the Cupertino behemoth has spent seemingly-little time on the proverbial front page this year as its Seattle tech cousin has taken center stage.  Amazon has been a massive growth story for years but it’s acquisition of Whole Foods earlier this year catapulted the online retailer to a different level.  The acquisition put the entire retail industry on notice (as if they didn’t already know) that the coming years are going to be a battle for consumer supremacy  between Amazon and Walmart.

As regular readers know, I was one vacation the past couple of weeks.  One of the realities of travelling with toddlers is that you need diapers – lots of diapers.  They don’t weigh much but take up a lot of space so they are better to pick up in your destination than take up valuable luggage space.  When we get diapers at home, it’s through Amazon Prime on a monthly subscription.  On our recently concluded east coast vacation, I found myself in a Walmart on a couple of occasions to stock up.  There isn’t a Walmart all that close to where we live in California so it’s not a store that I go to frequently.  While walking around the Walmart in Saratoga Springs, NY sans phone, I had a bit of an epiphany: Amazon will eventually win the battle with Walmart and they will win because of something that Walmart has done incredibly well: discount retailing and the legacy perception that it carries.

Perception is the important word here.  Despite it’s high tech nature, Amazon is as much of an idea as it is a retailer.  Do people consider Amazon to be a high or low end retailer?  If you asked a thousand people, you would probably get a wide range of answers.  It depends on what you are purchasing.  In other words, Amazon’s identity can shift from high to low end depending on what an individual consumer uses it for.  There is no legacy perception that can stick to Amazon as either a high end luxury store or a  discount retailer.  This is massively important since they are trying to sell everything from toilet paper to flat screen TVs to designer clothing and groceries (not to mention cloud hosting, streaming services and proprietary devices).  Walmart is the opposite.  If you were to ask one thousand people about how they perceive Walmart, I assume that the answer would pretty consistently come back as a bulk discount retailer.  This perception was enhanced by my recently visits to Walmart on vacation.  The stores are well-managed but no one is going to confuse them for a high end shopping experience.  That’s just the reality of conducting a bulk retailing business through big box stores rather than a website and Walmart has executed this business plan incredibly well which is why the Walton family is the richest in the US.

The advantage here is clearly to Amazon since they can easily move into Walmart’s discount retailer space without suffering from legacy perception bias but Walmart cannot move into the high end online sales without suffering from such bias.  What makes things worse for Walmart is that growing income inequality means that an increasing percentage of Americans’ disposable income is clustered at the high end.  Walmart understands this which is why they recently purchased Jet.com, Bonobos, ModCloth and Shoebuy.  Said differently, the only way for Walmart to make in roads with the high end, younger consumer is to hide the fact that they are Walmart.  However, Amazon can make inroads with lower end consumers by being exactly who they have always been and they can do this without sacrificing there cache at the high end.  This is not a trivial issue.  In fact, the LA Times recently ran an article by Nicolas Cheng entitled Wal-Mart is buying trendy e-commerce sites. The cool kids are not having it which detailed Walmart’s struggles with new eCommerce acquisitions (emphasis mine):

But even Wal-Mart e-commerce communications Vice President Dan Toporek acknowledges that Walmart.com and its massive inventory of 50 million distinct products will not attract the cool kids who are — or were — shopping at places such as ModCloth.

Analysts see a trend with Wal-Mart’s recent buys.

It snapped up online footwear shop Shoebuy.com at the end of 2016, and then bought Moosejaw, an upscale online outdoor gear site for $51 million in February. After paying an estimated $50 million to $75 million for Modcloth, Wal-Mart purchased Bonobos, a New York-based site selling offbeat but slick mens wear, for a cool $310 million in June.

Investment firm RZC Investments, which is independent of Wal-Mart but is owned by late founder Sam Walton’s heirs Steuart and Tom Walton, bought premium cycling clothier Rapha for $260 million last week.

Online cosmetics retailer Birchbox is also reportedly in talks with Wal-Mart. Birchbox and Wal-Mart declined to comment.

Wal-Mart hopes to leverage the popularity of these niche, trendy sites with subsets of consumers who wouldn’t be caught dead in a Wal-Mart store. And the kids are not having it.

ModCloth and Bonobos are being cyberbullied by their fans online, who are making fun of the brands for what they see as selling out to the corporate machine.

“The thing I loved about Modcloth is that I knew the clothes I bought there couldn’t be found at Macy’s and weren’t worn by the masses,” said Connie Warner, who started a Boycott ModCloth page on Facebook. “No more. I’ve unsubscribed from their emails. I refuse to shop at a store owned by Walmart.”

That is a problem that can’t be taken lightly.  When Amazon buys Whole Foods to get into the grocery business, they do not need to hide the fact that Whole Foods is now a wholly owned subsidiary.  Walmart does not have such a luxury and they know this which is why all of the above-referenced acquisitions are effectively bending over backwards to not appear to be a part of Walmart.  Ironically, Walmart is acting like a disruptor here and Amazon is acting like an incumbent.  However, Walmart lacks both the “cool” factor and the ability to appeal to the high end that disruptors like Uber (up until recently, perhaps) or Lyft have.  Despite having a much lower market cap, Walmart actually makes a whole lot more money than Amazon does.  It’s actually not all that close with Walmart pulling in nearly 4x the annual revenue that Amazon does.  However, over time I believe that Amazon’s ability to appeal to both the low and high end simultaneously without legacy perception issues will allow it to compete on Walmart’s turf.  At the same time, Walmart’s legacy perception of being a discount retailer will make it very difficult to capture more market share at the high end.

Economy

Frugal: Young adults in the US are spending less than they did in the past.

Disruption: Self driving cars could transform jobs held by 1 in 9 US workers.  But See: Everybody Chill: Robots Wont’ Take All Our Jobs.

Root of the Problem: The real driver of regional inequality in America is that people can no longer afford to move to opportunity.

Commercial

Shake Up: The resignation of commercial real estate head Dan Thomas from Bank of the Ozarks raises questions about one of the most aggressive construction and development lenders in the US.  (h/t Tom Farrell)

Crackdown: The Chinese government is moving to curb domestic companies’ investments abroad in real estate following a series of high-profile acquisitions by Chinese firms.  See Also: Asian buyers vibrant in global real estate outlay.

Residential

Vanishing Act: Why Libor going away creates a compliance trap for ARM lenders.

Heard this Story Before: Baby Boomers are dominating the Sacramento housing market and they aren’t planning on selling anytime soon.

The Construction Industry is Hiring: Why it’s been hard for coal miners to get fracking jobs.

Profiles

Upgrade: Tech titans in San Francisco are swearing off boring golf in favor of kite foiling on San Francisco Bay.

Doomed from the Start: Why the Chargers will fail spectacularly in Los Angeles.

End of An Era: Why season tickets are becoming more difficult than ever to sell.

Chart of the Day

Battery technology is taking off.

Source: The Economist

WTF

Sometimes You Eat the Bear….  A drunk man had his arm bitten off after jumping into a cage to feed some bears because, Russia.

Landed a Big One: An intoxicated woman bit a man’s fishing line and then swam away with his rigging because, Florida.

Sign of the Times: Vegas strippers are now accepting bitcoin tips.

Damn: A woman blew a .200 on a breathalyzer after swerving on a road with her unbuckled 3-year old in the back seat because, Florida. The mug shot is epic.  (h/t Stone James)

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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