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OPINION

Don’t play down Amazon threat

Don’t play down Amazon threat
June 15, 2016
Don’t play down Amazon threat

The modest rate of growth in Amazon's food retail business, compared with the unprecedented rate of expansion in its core e-commerce business, has understandably drawn scepticism about how much of a threat it poses to the established UK grocers. Teething issues such as product shortages have been duly uncovered.

It is true that journalists and market-watchers do tend to get excited about market disruption, and they do not get much bigger than the e-commerce giant, which is currently valued at $333bn (£236bn). But I think our major retailers have cause to be nervous.

Compare Amazon's market cap with the $220bn ascribed to Walmart (US:WMT), a retail colossus in its own right serving 260m customers per week online and in 11,527 stores across 28 countries. The company is spending heavily to improve its e-commerce platform as its younger competitor increases its share of overall retail sales across the pond. Walmart's bosses hope this spending, plus its longer-term strategy of store expansion and price-cutting, can keep it healthy in the great shift towards convenience.

Traces of the 'Amazon effect' are everywhere. In fashion retail, bullish analysts expect the company to take the top spot in terms of market share from Macy's (US:M) as early as next year. The latter had to reduce profit forecasts for the current financial year after just one quarter. Lagging footfall at its stores have left the retailer under pressure to generate more value from its real estate, via joint ventures and selling unprofitable units.

Closer to home, consider Ocado (OCDO), whose share price is now down 46 per cent over the past year, compared with Amazon's 69 per cent rise. An unfair comparison, one might argue, but at a simplistic level it demonstrates a growth stock that is overdelivering on its strategy and another that is underdelivering. Ocado has had the double blow of its partner Morrison also tying up with Amazon Fresh, as well as receding hopes of a takeover by its bogeyman. It is no surprise that it is currently one of the most shorted stocks on the market (and a live IC sell tip).

Which brings us again to J Sainsbury (SBRY) and the residual Argos business of its acquisition target Home Retail (HOME). The grocer hopes the union will create a leading UK food and non-food retailer selling via multiple channels, and help protect its business against the likes of Amazon. Trading is good at Argos, with the strongest sales performance in eight quarters delivered in the 13 weeks to 28 May, and like-for-like sales fractionally positive. E-commerce turnover is also at its fastest rate of growth in three years, and accounted for almost half of all sales: mobile sales alone accounted for almost 30 per cent.

It is perhaps worth questioning why Sainsbury's has not poached a director from an online retailer to run Home Retail Group, as the board of Debenhams (DEB) has done for its own top post - indeed, hiring from Amazon. Sainsbury's has appointed its current chief financial officer John Rogers, who has built up digital experience in his current role. Having two minds united on strategy may well trump hiring an e-commerce whizz, given the leg work to be done uniting the businesses, and Mr Rogers has been front and centre in communicating the deal to the market. It does feel like a safe option, but at least the acquisition demonstrates that Sainsbury's has made its move. Your turn, Tesco (TSCO).