(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
March 23 That retail stocks face an ever-dimmer
future is now something of an investing truism.
That the internet retailers which are displacing them are
also vulnerable to many of the same forces is also true, but
much less well understood.
Shares in Sears Holding Corp tumbled as much as 15
percent on Wednesday after the once-ubiquitous retailer said
that "substantial doubt exists related to the company's ability
to continue as a going concern."
While some of Sears, and indeed any company’s, problems are
idiosyncratic, the simple narrative of internet displacement is
both substantially true and gaining velocity.
Clothing retailer Gap Inc is down more than 23
percent since November, outdoor specialist Cabela’s is
down about 30 percent and many others have been similarly hit.
Companies that own or invest in malls are also on the slide.
HHGregg Inc and RadioShack have filed for bankruptcy
in recent months.
All trace their problems, in significant part, to pressures
brought on by internet retailing, which makes price competition
more intense, requires new systems and processes which
traditional retailers have been slow in implementing, and which
make physical stores a heavier relative cost and declining
source of sales.
All this is true, and retail does face a diminished, and
diminishing, future, but it is not safe to extrapolate that once
the Amazons of the world have displaced retail that history will
end. These internet-oriented companies, to varying degrees, are
vulnerable to the very forces which allowed them to gain market
share from brick-and-mortar retailers.
The very fact that customers are acquired, and retained,
digitally, and that a company need not rely simply on those in
its geographic area means that internet retailers, having seen
off those which principally sell through stores, will face a
state of constant and heightened competition unprecedented in
There is a case that Amazon and certain other very
large internet retailers will have an effective defensive moat
through the sheer application of scale and technology to their
distribution and fulfillment functions. That process of
investment to stay ahead may never slow, much less end, thus
precluding the expected massive profits down the road.
This implies lower margins, not the big increase in profits
some expect once the bricks-and-mortar types have been cut down
OVERPRICED NEW-AGE STOCKS?
None of this is to say that internet retailers such as
Amazon or eBay are over-priced at levels they currently
trade, only that applying the kinds of assumptions about client
stickiness to them that we would have to Sears in 1990 would be
Steef Bergakker, a portfolio manager at Dutch asset manager
Robeco, has done a study which finds that high multiples for
stocks are justified in the “vast majority of cases.” (here)
He makes the good point that comparing an individual stock’s
price-earnings multiple to the market as a whole is meaningless,
because stock p/e ratios follow a life cycle, starting high
during periods of strong growth and settling into a more tepid
But paying a high multiple only makes sense when returns on
incremental investments are particularly high, the market it can
serve is particularly big, or its competitive advantage will
last an unusually long time.
“The longer a competitive advantage lasts, the higher the
justified multiple,” Bergakker writes. “The competitive
advantage period is a function of the nature of the competitive
advantage; industry characteristics; and management’s agility to
create and capture strategic options for new growth
This is exactly what worries me about internet-based
retailers, indeed about the future of investing in a more
digitized world generally. Our sense of proportion about how
long the income stream from a given competitive advantage may
last has been conditioned by decades of stable growth and
displacement in many industries, and not just retail.
There are two aspects to this:
One, that the world may just have become more competitive
now that geography matters less in retail and other
distribution. That may allow for new competitors to spring up,
or more likely, to pin incumbents like Amazon down towards
forever plowing the lion’s share of its profits into defensive
investment in better technology and processes. Shareholder
payouts may be thin on the ground, and multiples ultimately
Second, the pace of technological change may have sped up,
or may increase further, which would make existing franchises of
less value and more vulnerable.
In the brave new world all companies may be Sears and Radio
(Editing by James Dalgleish)