💰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.

Disruption is Afoot in the Auto Space (Short Syncreon)

Rod Lache, Managing Director of Wolfe Research and Institutional Investor’s #1 ranked auto analyst every year since 2012 puts it bluntly: “The automotive landscape will change dramatically over the next five or 10 years.” Recode’s Kara Swisher asks, will owning a car “[b]e as quaint as owning a horse” one day?

We’ve been talking about a coming wave of auto disruption and distress since our inception. Here we discussed the cascading effects of EVs (“Removing the engine and transmission destabilizes the car industry and its suppliers” h/t Benedict Evans); here, using the case of GST AutoLeather Inc., we declared, “Disruption, illustrated”; and here, in October 2017, we asked “Is Another Wave of Auto-Related Bankruptcy Around the Corner?” Ok, fine, “around the corner” is open to interpretation. ……

One company that garnered our attention provides services on both sides of the border: Auburn Hills-based Syncreon Group BV is a specialized contract logistics company focused specifically on tech and auto supply chains with locations scattered throughout the US and Canada, including Detroit and just over the border in Windsor. Major clients include FCAU, Ford Motor Company ($F), General Motors Inc. ($GM), Volkswagen Group ($VWAGY), and many others (e.g., Harley Davidson Inc. ($HOG), Audi AG ($AUDVF), BMW ($BMWYY), etc.). The company is at risk.

Exemplifying this risk are some recent events:

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🚗Will California Jumpstart Electric Vehicles?🚗

Electric Vehicles (Short Musk-Related Noise; Long Technology)

This is not a fangirl ode to Elon Musk. We’ll leave that to the Twittersphere. The trials and tribulations of everyone’s favorite Marvel-character-inspiring eccentric billionaire may be distracting from developments far bigger and far badder than Tesla’s ($TSLA) balance sheet: the advancement of electric vehicles.

Last week, California’s state legislature approved a bill that requires the state — subject to Governor Jerry Brown’s signature — to get 100% of its electricity from carbon-free sources by 2045. Yes, 2045 — 27 years from now. Sure, it might be hard for you to be impressed or to care. If PETITION is even still around by then it will likely be written by artificial intelligence bots. So, we get it.

Still, California ALREADY gets 29% of its electricity from zero-carbon wind, solar, biomass and geothermal energy — in part to dramatically reduce greenhouse gas emissions and in part, no doubt, to flick off the President of the United States. Indeed, greenhouse gas emission levels have decreased such that they now rival those of the 1990s.

Yet, emission levels related to transportation in California have barely moved. Nevertheless, consistent with what we wrote previously about advancements in the auto space, Nathanial Bullard notes that that appears primed to change. In a piece entitled “Electric Vehicles’ Day Will Come, and It Might Come Suddenly,” he wrote:

In the first half of the year, vehicles with a battery were more than 10 percent of new vehicle sales in California. The model mix includes hybrids like the Toyota Prius that have no electric charging plugs, as well as plug-in hybrids and pure electric cars with no combustion engine at all.

The data reveal three trends. The first is the steady erosion of hybrid market share, which is down from seven percent of new sales in 2013 to four percent in the first half of 2018. That’s noteworthy, and so is the fact that battery electric vehicles are now more popular than plug-in hybrids.

In 2017, the plug-in electric car market is now more than six percent of new car sales in California. It’s not a big number — but it will get bigger, and it’s worth asking, “how much bigger?”

Looking at Norway, Bullard posits that it can get substantially bigger. He notes that:

It took Norway about a decade to reach six percent electric vehicle sales but then only five years to go from 6 percent to 47 percent. 

Is 6% some sort of magical inflection point for electric vehicles? Debatable. Norway is super-progressive when it comes to the environment; it also offers extensive incentives to encourage EV adoption. But with a statewide push towards zero-carbon electricity, a push towards zero-emission electric cars may not be far behind. Californian car sales are pushing towards 2 million in 2018. And selection is about to improve: everyone from Audito BMW to Porsche are coming out with all-electric models in the next several years. Tremendous growth may not be too far off. The OEMs — Tesla’s competitors — are making sure of it.

*****

Speaking of technological advancement in auto (and auto distress), we find Andreesen Horowitz’s Benedict Evans’ musings on the topic to be thoughtful and thought-provoking. We previously wrote about him WAY back in January 2017 when he wrote about mobile eating the world. The piece is worth revisiting.

Last week, he released a new piece with questions right up our alley. He asked:

…what happens when ‘software eats the world’ in general, and when tech moves into new industries. How do we think about whether something is disruptive? If it is, who exactly gets disrupted? And does that disruption…mean one company wins in the new world? Which one?

He seems to conclude the following: not Tesla.

One narrative surrounding Tesla in the post-Solar City acquisition world is that it more than just a car company: it’s a battery play. Musk’s powerwall feeds this narrative. SolarCity, to some degree, feeds this narrative. But Evans begs to differ; he thinks the battery — as well as EV components, generally — will become commodities. Commodities that spawn victims along the way. He notes:

It’s probably useful here to compare batteries in particular with the capacitive multitouch screens in a smartphone. Apple was the first to popularise these screens, and arguably still implements them best, and these screens fundamentally changed how you made a phone, but the whole industry adopted them. There are better and worse versions, but everyone can buy these screens now, and making a multitouch phone by itself is not a competitive advantage.

It’s pretty clear that electric disrupts the internal combustion engine, and everything associated with it. It’s not just that you replace the internal combustion engine with electric motors and the fuel tank with batteries - rather, you remove the whole drive train and replace it with sometime with 5 to 10 times fewer moving or breakable parts. You rip the spine out of the car. This is very disruptive to anyone in the engine business - it disrupts machine tools, and many of the suppliers of these components to the OEMs. A lot of the supplier base will change. 

This is not the same as disrupting the OEMs themselves. If the OEMs can buy the components of an electric car as easily as anyone else, then the advantage in efficient scale manufacturing goes to the people who already have a lead in efficient scale manufacturing, since they’re doing essentially the same thing. In other words, it’s the same business, with some different suppliers, and electric per se looks a lot more like sustaining innovation. (emphasis added) 

Likewise, he highlights how Tesla’s (i) software, (ii) data aggregation and (iii) efforts with autonomous driving may be leading now but they may not be as disruptive, in the truest sense of the term, to competitor OEMs as some might believe. That is, many OEMs are making progress of their own in those areas. The lead is not that wide. Tesla’s moat is not vast. Read the piece: he raises some interesting points — too many to note here.

He concludes:

…the history of the tech industry is full of companies where having a lovely product, or being the first to see or build the future, were not enough. Indeed, the car industry is the same - a great, innovative car and a great car company are not the same thing. Tesla owners love their cars. I loved my Palm V, and my Nokia Lumia, and my father loved his Saab 9000. But being first isn’t enough and having a great product isn’t enough - you have to try to think about how this fits into all the broader systems. 

Indeed. Many companies — many of which seem wildly successful today — will falter as that system develops.

Automotive (Short the B2B Business Model)

More Signs of Upcoming Auto-Related Distress

Assuming Uber Technologies Inc. can survive its latest self-imposed issues, e.g., an unreported data breach, increased regulatory scrutiny, skittish investors in Softbank and Benchmark Capital, etc.,, it appears to be positioning itself and the automobile industry towards a brand new business model. This week Uber announced its (non-binding) agreement to purchase 24k sport utility vehicles from Volvo Cars to seed a fleet of autonomous cars. Deployment date: 2019. Yes, 2019. Anyway, in addition to the obvious and previously discussed implications for labor, this move might have bigger ramifications: a forced pivot of the automotive business model in the direction of the airline model.

What do we mean by that? Assuming a great many things (including Uber's ability to successfully deploy its sensors and software with Volvo's hardware, regulatory hurdles, etc.), this could be another blow to the model of individual car ownership, the B2C formula deployed by the OEMs for years. Hyperbole? Maybe, but if people stop buying cars (and borrow money to do so), auto companies will see significant revenue effects. And they'd have to sell more to fleet operators, i.e., Uber, Lyft, etc., much like Boeing ($BA) and Airbus ($AIR) sell to Delta ($DAL), United Airlines ($UA), etc. This could mean fewer cars on the road, all told. Which, as we've previously discussed here and here, could lead to increased pain in the auto supply chain. 

Elsewhere in auto, the Faraday Future dumpster fire is turning into a full-fledged conflagration and looks like a ripe candidate to be voluntaried into bankruptcy.

And, finally, we noted back in February that 3D-printing could have a big impact on a number of industries. Now, apparently, 3D printing is projected to have a spike in activity in 2018. Businesses sourcing it most? Manufacturing, telecom, defense, and, of course, auto. To point, Divergent 3D just raised $65mm Series B financing round to build its car frame business. Curious.

Gearing Up for Auto Distress

Is Another Wave of Auto-Related Bankruptcy Around the Corner?

We take this break from your regularly scheduled dosage of retail failure-porn to introduce a topic we haven't addressed yet in detail: auto-related distress.

The auto narrative appears to change by the week depending on, uh, well, generally whatever Elon Musk says/tweets, so let's take a look at what's really been happening recently and filter out the hype (note: Tesla recently failed to deliver on production, lost key execs, and fired hundreds of people on Friday...draw your own conclusions...p.s. stock still going bananas): 

• Short Interest in Auto Parts Stocks. It has increased. This piece attributes this to Amazon's new foray into the car parts business. Is that really the reason why? 
• Sales. Car and light truck sales are trending downward. Auto loans that maybe - just maybe - jacked up sales are also on the decline. Mostly because default rates are going up. Here's a chart showing auto debt climbing as a share of household liability.
• Supply Chain Distress. Last year we saw DACCO Transmission Parts Inc. file for bankruptcy. During the Summer, Takata Inc. filed for bankruptcy (on account of a massive liability, but still) and Jack Cooper Enterprises Inc., a finished-vehicle logistics/transportation provider, reached a consensual agreement with its noteholders that kept the company out of bankruptcy court. For now. Then, a little over a week ago, GST Autoleather Inc. filed for bankruptcy, citing declining auto output. Is this the canary in the coal mine? Hard to say. Literally on the same day that GST filed for bankruptcy - again,citing declining auto output - General Motors, Ford and other OEMs reported the first YOY sales increase (10%), surprising to the upside. It seems, however, that the (sales) uptick may be artificial: in part, it's attributable to (a) Hurricane Harvey damage and mass vehicle replacement; and (b) heavy vehicle discounting. On a less positive note, Ford announced that it will beslashing billions in costs to shore up its financial condition; it also announced back in September that it would slash production at five of its plants. And General Motors Co. announced earlier this week that it would be idling a Detroit factory and cutting production. Production levels, generally, are projected to decline through 2021. Obviously, reduced production levels and idled plants portend poorly for a lot of players in the auto supply chain. 
• EV Manufacturing. There is increasing interest in investing in and developing the (electric) car of the future. And that includes major luxury car manufacturers like Mercedes-Benz and Audi. These manufacturers may just be putting the nail in the coffin for upstarts like Faraday Future, which barely seems like it can get off the ground.
• EV Manufacturing - Second Order Effects. Earlier this year we covered Benedict Evans' (now famous) piece on the second-order effects of the rise of electric and autonomous cars. Others, more recently, have been raising questions about what this electric-car future will look like. While others, still, are saying chill the eff out. We, rightfully questioned what would happen once electric cars gained greater traction given the relatively small number of components therein relative to the combustion engine vehicle. To point, Bloomberg writes, "After disassembling General Motors’s Chevrolet Bolt, UBS Group AG concluded it required almost no maintenance, with the electric motor having just three moving parts compared with 133 in a four-cylinder internal combustion engine." Whoa. That's a lot of dis-intermediated parts manufacturing. UBS also projects that electric vehicles will overtake gas and diesel cars by 2038 - with a rapid ramp up succeeding a slow build. 
• Charging Points. They've doubled in Germany and a plan is in place to get more super-chargers in place by 2020. Royal Dutch Shell announced on Thursday that it agreed to buy NewMotion, one of Europe's largest EV charging companies; it plans to deploy them at existing gas stations. All of this points to bullish views about EV adoption - worldwide. And we didn't even mention China, which is voraciously trying to curb emissions/pollution and go electric. 
• Increases. Range and prices. Anything that combats "range anxiety" will help adoption. Prices, however, still have to come down for electric cars to be competitive. 
• Derivative Distress. This was interesting: folks are concerned that autonomous cars may also mean the end of public radio. Will other players that benefit from captive car audiences, e.g., iHeartMedia Inc. and Sirius, also see effects? In all of iHeartMedia's discussions (see below), what are analysts assuming about the future of car ownership? About the rise of podcasts? 

To put the cherry on top, The Washington Post had a piece just this week asking whether 2017 will mark the end of the internal combustion engine. Once you add up all of the above? Well, it becomes clearer that restructuring professionals may have to re-acquaint themselves with auto distress strategies. Maybe that dude who was once the "gaming guy" who is now the "oil and gas guy" will have enough time to become the "auto guy."