At the height of the tech bull market of the 1990s, there was much talk about technology’s role in the future. Many of the predictions from that decade have reached fruition. People said that the Internet would change everything. I guess that it has.
There was also talk of what was called ‘disintermediation’. Basically this means that the traditional distribution channels — such as shops, wholesalers and brokers — would be replaced by companies dealing direct with customers, via the Internet.
Amazon is a great company, but…
Take the example of retail. People thought that traditional “bricks and mortar” retailers would be disintermediated by online retailers. After all, Internet shops wouldn’t have to pay the costs of renting and stocking retail premises, and the costs of sales and checkout staff. These electronic transactions would be faster, easier and cheaper. Surely traditional department stores, shops and supermarkets wouldn’t stand a chance?
And who would be at the vanguard of this revolution? Well many people said it would be Amazon (NASDAQ: AMZN.US).
Now, I’m a great fan of Amazon. This company provides a wider range of products that any other in the world. If there is something I want to buy quickly and cheaply, I always check Amazon first. And if there is a product I cannot find anywhere else, Amazon probably sells it.
But there’s just one difficulty. Amazon makes no money. Let me say that again: Amazon makes no money. The current share price of Amazon is $290.74. Here is its earnings per share (EPS) progression over the past three years:
2011: $1.39
2012: -$0.09
2013: $0.60
Now, if this was a start-up company in its first few years, this would be understandable — after all, it is investing to grow its business. But Amazon is in its twenty-first year. All through this time, it has never been consistently profitable.
Internet shopping is actually more expensive
In fact, the UK’s leading Internet shop is Tesco (LSE: TSCO). It very successfully collects people’s orders from their computers, picks and packs the products from its superstores, and brings these goods to the customer’s door. And this business is profitable.
But, here’s the thing. In order to make money, it charges around a fiver to deliver its products to your home. It actually charges you more to make purchases via the Internet than you would have paid if you had taken your car over to the supermarket and shopped in the traditional way. You see, Internet shopping is more expensive than visiting the shop yourself.
Now, let’s look at an Internet-only retailer that people have talked about as the “next big thing” in shopping: ASOS (LSE: ASC). Its current share price is 2660p. Here is its recent and predicted EPS progression:
2012: 28p
2013: 49p
2014: 44p
2015: 41p
Rather like Amazon, ASOS — even after its recent share price falls — is on a very high P/E multiple (the 2015 P/E ratio is 64). You could give a similar start-up company argument, but ASOS was created some 15 years ago. Again, this is an admirable company which produces impressive products (and one of my wife’s favourite shops), but I see strong similarities with Amazon.
In fact, I think the nearest thing we have to the future of retail are firms like Next (LSE: NXT), Dixons Carphone and SuperGroup.
Take Next: this business has a retail website that is better than any other I have seen. And it has shops which are the envy of the industry. And the products it makes are well-nigh perfect – quite simply, this company covers every base. I guess the future of retail is nearer to its past than you might ever have expected.
