💰Quantifying “The Amazon Effect”💰

In Sunday’s Members’-only edition we noted how, unlike certain other retailers that have found themselves in bankruptcy of late, Pier 1 Imports Inc. ($PIR) is almost certainly a victim of Amazon Inc. ($AMZN). Given the relative lack of debt and no private equity overlord, it seems that pundits have as clear-cut an example of “The Amazon Effect” as you can get.

This — coupled with the last few year’s of retail carnage — naturally begs a question about Amazon’s reach and market share.

Luckily, shortly before Christmas, Benedict Evans did a deep dive into Amazon’s business (using 2018 numbers). We’ll summarize it here but it’s worth a read in its entirety.

Discussing sales, Evans writes that in the US:

Amazon sold $77.5bn of products itself,

And also sold another $106bn for third parties,

Giving a total US [Gross Market Value] in round numbers of roughly $184bn. 

…$184bn sounds like a big number, but how does that compare to the competition? What market share would that give Amazon? 

The simple answer is that the US government gives a number for total ecommerce sales as an economic statistic: in 2018 the number was $522bn. Hence:

Amazon’s first party business had about 15% market share of US ecommerce

The third party business had about 20%

And the total GMV had a 35% share. 

Note the distinction he’s making between direct online sales and “third-party seller services.” The latter is Amazon’s “Marketplace,” where Amazon simply serves as an agent handling the logistics for third-party sellers.

Splitting out GMV is important because Amazon isn’t setting the price or choosing the selection for the third party Marketplace. This is especially relevant for any conversation about predatory pricing: Amazon is setting the price directly for 15% of US ecommerce, not 35%. On the other hand, some of those third party products will be competing with products that are sold and priced by Amazon, and setting their own prices accordingly. Life is complicated.

But Amazon doesn’t merely compete with online businesses and so the share numbers above aren’t entirely accurate — particularly in the context of discussions about monopolies and regulation. Amazon does compete, for instance, against physical retailers like Walmart Inc. ($WMT), Target Inc ($TGT) and Barnes & Noble Inc. ($BKS), as just some examples (and increasingly so, it seems, given the improving performance by the former two, especially). For this, you need to add in the effect of Amazon’s limited physical consumer goods stores, i.e., AmazonGo (11 stores), Amazon Books (18 stores), Amazon 4-Star (3 stores), and most importantly, WholeFoods (~470 stores). In 2018, physical stores accounted for $17.2b of net sales (for the sake of comparison, Amazon’s cloud offering, AWS, was $25.6b). And then, he notes, we need to compare the figure against total US retail (excluding auto, gasoline stations, restaurants, bars).

That leaves ‘addressable retail’ (i.e. excluding cars, car parts, gasoline stations, restaurants and bars) of $3.6tr in 2018.

Hence, Amazon US retail revenue of $200bn was about 6% of US addressable retail. 

(Incidentally, this means that $522bn total US ecommerce is about 15% of US addressable retail.) (emphasis added)

These are interesting numbers and support, in many respects, PETITION’s long-held position refuting the simplistic view that the proliferation of bankrupted retailers is the result of “The Amazon Effect.” Said another way, The Amazon Effect likely gets way more air time than it deserves. Right now anyway. Indeed, “in the USA in 2018, Amazon was a little less than two thirds of the size of Walmart.”

But:

…of course, Amazon is growing. Its US ecommerce business probably grew 20% in the last year, and so its market share of total and of addressable retail is going up. Hence, you could argue that since ecommerce is clearly going to take over a much larger share of retail, and since Amazon has a large (35-40%) share of ecommerce, Amazon’s strength in ecommerce means it will swallow everything else, even if it’s only at 5-6% today.

And this is to say nothing about how it has used data to sideswipe third-party sellers and promote its own private label brands at their expense — among other shady behavior.

Evans concludes:

I don’t think one can just assume that Amazon’s market share of online sales will be maintained indefinitely in a straight line into the future. The more that ecommerce expands beyond the original commodity categories, the more that we see new and different models and experiences proliferating. Shopify, another platform for online retail, is now at an annual run-rate of $60bn of GMV, up from nothing five years ago.

Of course, people have bet against Amazon in the past and we know how that’s worked out.

Entertainment (Short Book Stores, Long Myopic Groupthink & Algorithms)

Barnes & Noble May Follow Book World into Obsolescence

Book store sales are down 39% from a decade ago. Why? Well, avid PETITION readers know we love to discount the "Amazon Effect," generally, as most failed retail is more complicated and nuanced than that. Just ask the private equity bros. But books: that's a different story. Amazon ($AMZN) owns that sh*t. And so Book World, the nation's fourth largest physical book seller, is liquidating. And Barnes & Noble Inc. ($BKS) is slowly unraveling before our eyes. The book retailer reported holidays sales for the 9-week period ending 12/30/17 and MAN O' MAN were they crappy. Total sales were down 6.4%. At least they nailed e-commerce, right? Wrong. Online sales declined 4.5%. Comp store sales declined too, "primarily due to lower traffic." The book business declined 4.5%. And the stock collapsed 14+%. Ouch. Luckily there's some in-demand non-controversial political book out there that people are literally lining up to purchase. You know, that little one about @realdonaldtrump. Hopefully they can capitalize on that. 

Ironically, of course, Amazon has launched 15 physical book stores and they're a sight to behold. We checked in on one for the first time over the holidays and several things struck us. One, the footprint of the place was dramatically smaller than the typical, say, BKS, with reduced inventory to match. Two, the signage/placards emphasized the online reviews in lieu of prices. Third, most of the displays emphasized best sellers and wish list selections. You know, that old data play. There isn't much discovery there. Just a small selection of "popular" books force fed to the populace so that everyone can come to the very same conclusions from the very same books. Awesome.

Toys R Us Plan to Pay Execs Makes Waves

Toys R Us' Execs Seek Hefty Bonuses, Piss People Off

Happy holidays, ya'll. You're fired. In what should be a surprise to no one, Toys R Us isn't immune to store closures. In the first instance, it plans to close 25 UK-based locations. If you think the US won't see closures and/or consolidation of Toys/Babies shops, you're smoking some serious crack (as we've said before). Indeed, the company recently filed a motion establishing procedures to extend the time to deal with its non-residential real property leases. Buckle your seat belts, landlords. 

Speaking of smoking crack, the U.S. Trustee for the Department of Justice (UST) apparently thinks the company and its advisors have been at it with the good stuff; it went full-on Demi Moore with its vigorous objection to the company's mid-November motion to pay executives up to $32mm in bonuses if "Stretch" EBITDA targets are met (and slightly less upon achievement of a "Target" EBITDA level). These numbers - on the heels of millions of dollars of pre-bankruptcy bonuses paid to the very same executives - made their way through the mainstream (and not so mainstream) media and garnered some well-deserved outrage. PETITION NOTE: All of the sudden everyone is an executive compensation expert, it seems. To be fair, it is awfully counter-intuitive that the very same professionals at the helm when the ship hit Iceberg #1 need incentives to avoid Iceberg #2. Like, "eff you, guys, good luck getting a job elsewhere after this dumpster fire of a hot mess" seems to be the general public sentiment. But therein lies the push-pull bankruptcy dynamic. Switch out management now - while credit terms are non-existent, vendor/supplier relationships are strained, customers are nonplussed, competitors are champing at the bit, etc. - and its possible that, with the absence of institutional knowledge, the company could end up in even WORSE shape and stumble towards liquidation. And so this is where the Kirkland & Ellis LLP attorneys - all SEVEN of the partners listed on their filed papers - really earn their billing rate (a point we're guessing they hammer home whilst pitching management teams); they need to convince the Judge, the UST and, here, the public, that the lofty amounts they seek approval for derive value in return. And "value," here, is unequivocally a "going concern" business that can continue to employ people and contribute to the tax base. 

But, first, the company (and Kirkland) had to deal with the Official Committee of Unsecured Creditors (UCC), a fiduciary body that represents all similarly-situated unsecured creditors in the bankruptcy process (read: most vendors, suppliers, customers, employees). Late Friday night the UCC filed its "Statement" in response to the company's motion. The statement expresses support for the company's proposed plan but ONLY after the UCC negotiated various changes to the extent and timing of the compensation sought. The UCC states, "[t]he Committee recognizes the importance of maintaining strong employee morale and ensuring that management and employees are collectively working towards the common goal of a successful holiday season and a strong and viable reorganized company." So, now, per the UCC's agreement with the company (and subject, still, to the UST and the Court), ONLY $16mm and $21mm will be payable to executives if "Target EBITDA" and "Stretch EBITDA" goals, respectively, are met. And the timing of payment has been altered as well, deferring and pinning greater amounts to the consummation of a reorganization. The UCC continues, "This feature...is particularly important to the Committee in the absence of a plan support agreement or defined business plan for the case, and in the face of the distinct business pressures imposed on retail companies in chapter 11." In other words, the UCC is worried about enriching execs only to see the company liquidate. And, given the state of retail today, they damn well should be - particularly since, we assume, the UCC has insight into how the business fared on Black Friday and Cyber Monday. Marinate on that.   

Lastly, permit us to issue you your weekly reminder that DIP Lenders justify the $3+b loan to Toys R Us on, what we now dub, a "there must be one" basis. In other words, "there must be one" bigbox toy retailer. Just like there is, you know, for sports (Dick's Sporting Goods ($DKS)) and books (Barnes & Noble ($BKS)). So, how IS the "one" doing in books? Well, BKS reported earnings this past week and it wasn't pretty. Sales were down 7.9%, comps were down 6.3% and earnings per share continued to trend deeper into the negative. But have no fear: the company has a creative and revolutionary go-forward strategy: "place a greater emphasis on books." Yup, you read that right.