April 23, 2018 Consensus

The Weekly Consensus – April 23, 2018 (Volume 10, Number 17)

The Big Story
Who Needs Brick and Mortar?
Paul Alexander, CFA

Last week’s news that Best Buy and Amazon had struck a partnership for Best Buy to become the exclusive brick and mortar retailer of Amazon’s Fire-edition televisions raised some eyebrows. On the face of it, it seemed strange that a big box retailer that has long struggled against “showrooming” (the consumer behavior in which shoppers conduct research on products at a store, and then make their purchase online – often Amazon) would voluntarily enter into an agreement with Amazon to become an actual showroom. Best Buy seems to want to capitalize on the foot traffic that might be generated by consumer interest in Amazon products. However, Amazon’s motivations for entering into this partnership are also interesting. This move seems to be a signal that Amazon again realizes that there are certain situations in which ecommerce has limitations relative to brick and mortar retailing.

There are echoes of this new partnership in the agreement that Amazon and Kohl’s struck last year for Kohl’s to build shop in shops for Amazon products and to accept and process Amazon returns at certain Kohl’s stores. In that deal, Kohl’s wanted to draft off of Amazon-generated foot traffic, and Amazon wanted to take advantage of certain benefits of physical retailing, namely demonstration and trial of Amazon products such as Alexa, and convenient returns. And of course, Amazon’s acquisition of Whole Foods last year also points to Amazon’s recognition of the value of brick and mortar.

If Amazon’s partnerships with Kohl’s and Best Buy and its acquisition of Whole Foods are the beginning of a trend, and it goes on to strike more agreements with brick and mortar retailers to offer solutions for some of ecommerce’s other shortcomings, what might be next? Here are some ideas:

Target carries Amazon private label apparel. One common complaint about shopping online for apparel and footwear is that people can only try things on and see and feel fabrics once a product has already been bought and shipped, resulting in a high number of inconvenient returns. Amazon could look to speed consumer trial and adoption of its private label apparel if it made its products available in a national retailer. All the better if that retailer is known for having an elevated taste level. Target could fit the bill.

Tiffany opens a webstore on Amazon. Despite the fact that Amazon targets higher income cohorts with its Prime club, it has not been able to meaningfully penetrate the luxury sector. Designer brands and labels are concerned that partnering with Amazon could be brand-negative and/or decrease their exclusivitiy. If Amazon were to strike a deal with a well-known luxury brand such as Tiffany (Coach is another possibility) to host a webstore, and then bend over backwards to be a responsible steward of that brand and pass along desirable customers and traffic, it could begin to build trust with the luxury world that is not there today.

Burlington (formerly Burlington Coat Factory) becomes Amazon’s exclusive off-price partner. The off-price sector is currently one of the strongest in retail. Yet, Amazon doesn’t have an off-price, discount, or liquidation arm. And Amazon is somewhat hamstrung from entering the liquidation arena because many labels only want Amazon to carry their products if it can garuntee that it will not discount. At the same time, Burlington is trying to gain ground on off-price incumbents TJ Maxx and Ross Stores. Perhaps Amazon could break into this sector if it were to strike a deal with Burlington, sending traffic to Burlington’s website and liquidation product to Burlington stores. Burlington would gain access to more brands and oceans of traffic overnight.

These three ideas are clearly hypothetical, and may be completely impractical. But they underscore the fact that many sectors in retail have yet to be conquered by Amazon, and the ecommerce company may need brick and mortar partners if it wants to make inroads. Amazon’s amazing growth and bleeding-edge technologies at times seem to give way to an air of arrogance (such as the company’s invitation to cities across the U.S. to woo it to become the location of Amazon’s new headquarters). Yet, the company’s recent partnerships with brick and mortar retailers reveal a side of the company that we don’t often see – self awareness of ecommerce’s limitations.

 

Headlines of the Week

In Best Buy deal, Amazon acknowledges you sometimes need to touch things to buy

Amazon has built its brand as a digital marketplace, but it’s increasingly clear that it also needs a big physical presence to sell the devices that will further knit customers into the Amazon ecosystem. A deal announced last Wednesday that Best Buy will be the exclusive brick and mortar seller of Amazon Fire-edition smart televisions suggests that it can no longer achieve the scale it wants without access to physical stores.

Liquidation firms win bid for The Bon-Ton Stores

The Bon-Ton Stores, which operates 260 department stores in the U.S., is expected to go out of businesses after two liquidation firms became the highest bidders at an auction for the bankrupt company’s assets. A bankruptcy court hearing was scheduled to approve the sale and liquidation details, but a statement from the company’s CEO suggested the end for The Bon-Ton Stores Inc. is certain.

 

 

Apparel & Footwear

Gap Inc. launches another subscription box for kids

Gap Inc.’s newest subscription box, called BedtimeBox, features children’s sleepwear in sizes ranging between 6 months to 5T. The box is filled with three sleep sets, and is offered every three months. Customers create their subscription box account on a website separate from Gap and BabyGap. Each shipment costs $49, which is approximately 40% off the retail price. All returns are free and there are no styling fees, according to a blog on Gap’s website. The Bedtime Box is the third offering in Gap’s subscription box portfolio. Last fall, the company launched its BabyGap Outfit box, followed by the Old Navy Superbox, which targets kids ages 5 through 12.

Amazon Slapped with Lawsuit Over Look-Alike, Sound-Alike Private Label

Amazon has been hit with yet another strongly-worded lawsuit centering on fakes.  After being cut off by Birkenstock (twice!) and slapped with a trademark lawsuit by Mercedes Benz’s parent company Daimler AG, the American e-commerce giant is being sued by Seven For All Mankind International (“Seven”), which is calling attention to Amazon’s “egregious, willful and wanton activities” in connection with Seven’s Ella Moss label.  According to Seven’s lawsuit, Amazon is on the hook for trademark infringement in connection with its similarly-named private label, Ella Moon.  While Seven sells its contemporary Ella Moss brand on Amazon, the Seattle-based giant has taken to using an “infringing Ella Moon trademark.” In addition to sharing similar names, Seven alleges that Amazon’s mark, for which it filed a still-pending application for registration with the U.S. Patent and Trademark Office in January 2017 for use of garments and accessories, is similar to Ella Moss “in sound, appearance, connotation and commercial impression.”

Why a Cashmere Sweater Can Cost $2,000 or $30

A plain, yet meticulously crafted, sweater made of the world’s finest cashmere can cost $2,000 or more from premier fashion labels such as Loro Piana. You can also grab a simple sweater of 100 percent cashmere off a discount rack at Uniqlo for as little as $29.90. Made from the softest wool produced by a certain breeds of goats, such as the Zalaa Ginst white goat and Tibetan Plateau goat, cashmere was once reserved for the wealthiest fashionistas. Nearly $1.4 billion of cashmere garments were exported globally in 2016, up from $1.2 billion in 2010, according to United Nations trade data. Now it’s seemingly everywhere, at every price point. Ubiquity can spell trouble for a product as it becomes more of a commodity, especially one that’s been historically marketed as a luxury item. The price depends on the quality of the yarn, where the garment was manufactured, the number of units purchased by the brand, and the markup.

 

Athletic & Sporting Goods

Dick’s Sporting Goods will destroy assault-style rifles pulled from shelves

When Dick’s Sporting Goods said it would no longer sell modern sporting rifles at its Field & Stream stores following the Valentine’s Day shooting at a Parkland, Fla., high school, one question was what would happen to the unsold firearms in its inventory.  Typically, a retailer may return unsold merchandise to the manufacturer. But in this case, Dick’s Sporting Goods has decided to destroy them.  In addition to the decision on pulling assault-style rifles from its 35 specialty Field & Stream locations, the sporting goods chain said in February that it also would no longer sell high capacity magazines or sell firearms to anyone under 21 years old following the mass shooting at Marjory Stoneman Douglas High School.

Pure Hockey Acquires Bauer Hockey’s “Own The Moment” Retail Locations

Pure Hockey, the largest hockey retailer in the U.S., announced that it has acquired both of Bauer Hockey’s “Own The Moment” retail stores.  The new stores will operate as “Bauer Hockey Experience” locations.  With the acquisition, Pure Hockey will now operate 53 retail locations across the United States, as well as three ecommerce sites focused on hockey and goalie equipment.  Both stores will remain Bauer-exclusive locations, now owned and operated by Pure Hockey.  The Burlington, MA store will move to Pure Hockey’s existing store location in Burlington, and is expected to re-open to the public by the end of July.  The Bloomington, MN location will continue to operate in its current location.

Cosmetics & Pharmacy

Rodan & Fields Reaches $1.5 Billion in Sales

The growth spurt of skin-care brand Rodan & Fields continues. The company said it reached $1.5 billion in sales in 2017, up from $1.15 billion for 2016. For the second year in a row, Rodan & Fields is being named the number-one skin-care brand in the U.S., and for the first year, the number-one skin-care brand in North America. It is also being named the fastest-growing beauty and personal-care brand, by Euromonitor. Rodan & Fields has more than 200,000 independent consultants who sell products directly to consumers, and more than 700 employees. Rodan & Fields, which is primarily owned by founding dermatologists Katie Rodan and Kathy Fields, is projecting continued double-digit growth for the next several years, said chief executive officer Diane Dietz. Dietz credits the growth rate to a product offering “that truly has transformative results,” she said.

Target Expands Beauty Footprint, Adds Cosmetics Lines to Shelves

Target’s beauty aisle is about to get even larger. The retailer best known for selling everything from drugstore staples to K-beauty, to its own signature scent line and hair care products, will be introducing eight new cosmetics brands to its fold. “We know our guests have a wide range of beauty needs and preferences, and we want to make sure Target has the best assortment for all hair types or skin tones,” Christina Hennington, senior vice president of beauty and essentials at Target, said. “These eight new cosmetic brands will further our range of shade options — from foundation to lip — and are available at incredible prices. We’ll continue to listen to our guests to understand what beauty products they’re looking for at Target and look forward to seeing their response to these new cosmetic brands.”

CVS Keeps It Real and Unveils Biggest Beauty Campaign Ever

CVS is making good on plans to bring transparency to its beauty business. The chain is kicking off its Beauty in Real Life campaign, which will blitz the market via television, print, digital, social and billboard advertising. “It is the biggest beauty campaign ever done at CVS,” said Norman de Greve, senior vice president and chief marketing officer for CVS Health. Beauty in Real Life is designed to highlight the retailer’s commitment to creating new standards for beauty imagery with a goal to nurture an authentic and more realistic standard of beauty to its customers. It is also the debut of the first images featuring the CVS Beauty Mark, a watermark designed to highlight imagery than has not been materially altered.

 

Discounters & Department Stores

Walmart Is Testing Out a New Dress Code for Workers

Walmart sells more blue jeans than anyone, but its in-store employees couldn’t wear them while on the clock — until now. The nation’s biggest private employer is testing new dress codes in a small number of U.S. stores, hoping that more relaxed standards could help it attract and retain staff in a tight labor market. Employees in some of Walmart Inc.’s 4,700 stores will now be allowed to wear shirts of any solid color, rather than just blue or white, according to an employee manual obtained by Bloomberg News.

 

Grocery & Restaurants

Bertucci’s files for Chapter 11 bankruptcy protection

Bertucci’s Corp. filed for Chapter 11 bankruptcy protection last Monday and submitted a stalking horse deal to sell to an affiliate of Chicago-based investment firm Right Lane Capital LLC, the company said in court filings. The Northborough, Mass.-based company has 59 casual-dining units remaining open.

Home & Road

Home Depot is Launching Its Biggest Tech Hiring Spree Ever to Protect Its Lead over Amazon

With a stock price that has increased 135 percent over the last five years, Home Depot remains one of the few giant brick-and-mortar retailers to find success in the age of Amazon. Now, the $200 billion home improvement retailer is going on the biggest technology hiring spree in its history to try to maintain that edge. Home Depot plans to add more than 1,000 new hires to its technology teams in 2018 to support an $11 billion multi-year investment plan to extend its lead in brick-and-mortar retail over competitors like Lowe’s and fend off increased competition from Amazon and other online players. The company has approximately 2,800 employees in technology roles today.

Bed Bath Gears Up for Transformation

Bed Bath & Beyond sees itself as the “expert for the home and heartfelt life events,” and is on the path to transformation with initiatives that target a wide range of operations, including merchandise assortment, sourcing, store renovations and more. During a conference call to discuss its Q4 earnings, CEO Steve Temeres outlined the retailer’s initiatives. “In every area of the company, we are reimagining the way we do business,” he said, according to a transcript from Seeking Alpha. Last year “was the year we accelerated the pace of change across our company and our vision is clear for the work to be done throughout 2018 and 2019.”

Jewelry & Luxury

Leo Schachter, Rosy Blue, and the New Diamond ‘Middle’

The long-rumored news that Rosy Blue is taking a minority position in Leo Schachter Diamonds has caused a lot of speculation in the industry—and what it means for the future. The two are well-established prominent companies. Schachter is a company with Israeli roots that does a lot of business with Signet. Once Israel’s largest diamond exporter, in 2017 it ranked a still-significant number six. (Number nine: Rosy Blue Sales.) Rosy Blue is another prominent company with Indian roots. Getting involved with Schachter extends its reach significantly.

One-Third of Consumers Favor Engagement Rings That Cost Less Than $1,000

One in three respondents think engagement rings should cost less than $1,000, according to a new survey by conducted by Google Surveys on behalf of website CreditDonkey.com. The poll, which surveyed more than 1,000 Americans, also found that 26 percent of respondents think that an engagement ring should cost at least $1,000, 17.3 percent think it should cost at least $3,000, and 19 percent think it should cost more than $5,000. In addition, three out of five women don’t expect a ring of more than $3,000—though millennials, a group often considered frugal, have higher cost expectations than other groups.

Gemfields Sued Over Alleged Human Rights Abuses

A group of Mozambicans have filed a lawsuit against London-based colored gemstone miner Gemfields over alleged human rights abuses at the company’s ruby mine.

According to a post on the website of Leigh Day, the law firm that filed the suit, more than 100 Mozambicans say they suffered a number of abuses at the hands of the security forces at the Montepuez mining site, which is 75 percent owned by Gemfields.

The claims made in the lawsuit include allegations of being “shot, beaten, subjected to humiliating treatment and sexual abuse, unlawfully detained, and/or forced to carry out menial labor.”

 

Office & Leisure

Mattel CEO to step down after being at helm for 14 months

Mattel Inc. announced that its CEO Margo Georgiadis is stepping down and is being succeeded by a company director and former studio executive. The toy giant, based in El Segundo, California, said the board has named Ynon Kreiz, a Mattel director since June 2017, as her replacement, effective April 26. Mattel, the maker of the iconic Barbie and Fisher-Price brands, said that Georgiadis will serve in an advisory role through May 10 to ensure a smooth transition. Georgiadis, a former Google executive who took the top spot in February 2017, informed the board of her decision and said she plans to pursue a new opportunity in the technology sector, Mattel said in a statement. Kreiz, who brings more than two decades of experience in the media and entertainment industries, will become chairman of the board, effective upon his election by shareholders at the company’s annual meeting set for May 17. During her tenure, Georgiadis sought to cut costs and suspended Mattel’s dividend but she was unable to turn around the company’s business.

 

Former DreamWorks exec Shawn Dennis joins GoldieBlox as president

GoldieBlox, a startup looking to get girls hooked on engineering and other STEM fields, has hired Shawn Dennis as its first president. Dennis was most recently the head of brand and franchise development at DreamWorks Animation and also worked as the chief marketing officer at Mattel’s American Girl. She’s also been on the GoldieBlox board of directors since 2016 — founder and CEO Debbie Sterling told me she’s been “not-so-secretly hoping all along that one day Shawn would come and help me run this thing.”

Sterling said that while GoldieBlox is usually described as a toy company, she’s always had a vision for the Goldie character to become someone who would “inspire girls around the world.” Part of Dennis’ role at GoldieBlox will be to lead licensing and partnerships (apparently there’s an animated show in the works, as well) and to create what she described as “an ecosystem with girls at the center.”

Technology & Internet

Jeff Bezos reveals Amazon has 100 million Prime members in letter to shareholders

Amazon CEO Jeff Bezos has released his latest annual shareholder letter. Bezos disclosed for the first time that Prime now exceeds 100 million members worldwide. In 2017 alone, Amazon added more Prime members than any prior year, and shipped over five billion items through the paid membership service worldwide.

 

Like Alibaba and Amazon before it, Wayfair makes up a sales holiday

Wayfair Inc. will launch a new sales holiday, Way Day, that it pledges will feature “the lowest prices of the year” and free shipping on all orders. The event, which will feature discounts on roughly 70,000 of the retailer’s more than 10 million SKUs, will take place on April 25 at 12 a.m. with new deals launching every six hours. The retailer aims for Way Day to bolster sales at a time that’s traditionally a prime time for consumers to shop for home goods.

 

Finance & Economy

Fed: US economic growth on track despite tariff concerns

“Robust” business borrowing, rising consumer spending, and tight labor markets indicate the U.S. economy remains on track for continued growth, the Federal Reserve reported, with the risks of a global trade war the one big outlier.  In its periodic “Beige Book” summary of contacts with businesses in its 12 regional districts, the Fed said the overall outlook among businesses “remained positive,” but that many were worried about the Trump administration’s use of tariffs.  But otherwise the economy appeared to be motoring along, with some evidence that the tax cuts approved in December may have begun filtering through to business spending and investment.

Pricey U.S. home sales soar as buyers ignore new tax code

A housing shortage, strong economy and robust demand have pushed many homes in major U.S. cities over $1 million, offsetting buyers’ concerns about the reduced benefits of owning a pricey property under President Donald Trump’s tax reform, data show.  Home sales at $750,000 and above have surged by double digits annually in the past three years, closings data from realtor.com show for 30 counties on the east and west coasts.  Sales below $750,000 are down in the past two years due to a scarcity of homes priced around $500,000 and below and the lower end’s larger market size has pulled down overall sales, the data show. While the Trump tax plan affects homes for sale above $750,000, the fact that overall sales fell suggests the new tax law is not the main culprit for the decline.