19 Feb 2021
December 21, 2020 | Randall Dishmon, Senior Portfolio Manager, Global Equities
E-commerce has been like a massive wave that has washed over much of the traditional retail footprint in the US and Europe. Globally, e-commerce retail sales are projected to hit $6.5 trillion in 2024, from $4.0 trillion in 2020.1
In the US, growth in e-commerce retail sales more than doubled in 2020 due to the COVID-19 outbreak and is projected to grow at 12% annually over the coming years.1
Amazon has established itself as a dominant player in the US and yet, virtually every general merchandise retailer has a website that looks every bit as good as Amazon’s.
So why is Amazon’s market capitalization three times Wal-Mart’s and 10 times Target Stores’?2
Getting to the bottom of this question is critical to the way we manage the Global Focus Equity strategy. Our team looks for structural, durable tailwinds that can drive sustainable growth, avoids commoditized industries and businesses, and seeks to identify companies that we believe can compound growth at attractive rates over the next several years.
Below we outline what attracted us to Amazon and why it fits in with our investment philosophy.
In our team’s view, Amazon was built for where we are now — and we have headed in this direction in the first place because Amazon and a few others have shown us what can be possible.
Amazon has invested in clever, thoughtful ways to make their business model massively scalable and efficient — including back-end infrastructure to scale delivery capacity, lower costs and manage inventory.
When they concluded that their last-mile delivery was not as efficient as it could be, via UPS and the like, they developed their own delivery capability. Over the last few years, they have deployed their own over-the-road truck fleet and invested heavily in automation.
All of this is a path devoted to efficiency, scale and optimization.
The difference between how Amazon has deployed capital, and how the retail incumbents have done it, is stark. Tellingly, Amazon first recorded research and development (R&D) expense in 2009. Since that time, they’ve spent a whopping $234 billion dollars, to scale and optimize.3
Wal-Mart, by contrast, has not spent a single cent on R&D, and we can’t find any evidence that, in their entire history, that they ever have spent anything on it. 3 Target, Costco, and Marks and Spencer also spent nothing.3 Who has been building the advantage over that time? Our answer: Amazon.
Although investing is not an exercise in accounting, there is something important to note about how different types of spending are captured in financial statements.
R&D is an everyday operating expense that flows right through the income statement. Due to this, it effectively understates current earnings and helps create future earnings, a not uncommon characteristic found in innovators.
In contrast, capital expenses (capex) are amortized over time — they don’t immediately impact the income statement. In this regard, they can, in some sense, overstate current earnings.
Wal-Mart spent $129 billion in capex over the last decade.3 Amazon has spent not that much less at $99 billion. 3 However, given the relatively newer asset base at Amazon, it’s likely that more of their capex is focused on growth and not the replacement of existing assets due to wear and tear.
Amazon has, in our opinion, built a business that is fit for purpose, while its traditional retail competitors have not shown the same inclination to invest in R&D and innovate — in our view, they are merely adapting what they already have, which is akin to taking a horse-drawn buggy and slapping an engine and wheels on it. Amazon just went ahead and built a car.
Some of the traditional retail incumbents will certainly survive, but we believe they are likely to be fighting over a smaller and smaller domain, lacking the margin structure and top-line growth necessary to compete, as the future comes towards them faster than ever.
As much as anything else, this is a narrative about the development and sustainability of competitive advantage, which is a critical element we look for in business that can sustain high economic returns.
We are reminded of a quote from the philosopher Eric Hoffer that seems especially fitting: “In a time of drastic change, it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.”
FOOTNOTES
Amazon represented 4.95% of the representative account for the Invesco Global Focus Equity strategy as of Sept. 30, 2020. Wal-Mart, Target, Costco and Marks and Spencer represented 0%.
1 Source: Activate Consulting, “Activate Technology and Media Outlook 2021,” October 2020
2 Source: Bloomberg, L.P. As of Dec. 10, 2020, Amazon’s market capitalization was $1.55 trillion, Wal-Mart’s was $416 billion, and Target’s was $86 billion.
3 Source: Bloomberg, L.P.
INVESTMENT RISKS
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
The strategy invests in a limited number of holdings and is less diversified, and therefore this may result in large fluctuations in value.
IMPORTANT INFORMATION
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
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