Earlier this month, Target (TGT) confirmed a report by The Verge that it would cease marketing Amazon.com (AMZN) Kindle branded products this spring. Upon hearing the news, it struck me as a no-brainer for Target, given that Amazon.com is a leader among non-store retailers, stealing market share from brick-and-mortar shops like Target, Wal-Mart (WMT) and others. Also in May, Best Buy (BBY) indicated tough online competition and its need to find a way around being the showroom for Amazon.com customers.
Still, besides the ample competitive reason for Target to refrain from marketing Amazon's goods, there's a wildcard that may also be playing a role in Target's decision. Target is nurturing a new relationship with Apple (AAPL), whose iPad goes head to head with Amazon's Kindle branded e-reader/ computer tablet. It is unclear which company gave birth to the idea or whether it is in fact an allied action in a retail war against Amazon.
While Apple should clearly benefit from the move, there are both positives and negatives in play for Target. More importantly, this begs a question whether other retailers might follow Target's lead. Could Best Buy stop selling the Kindle branded gear, and what repercussions would there be for Amazon.com if the action became an allied effort?
Monthly retail sales data have consistently shown trending market share gains for the non-store retail segment. On paper, that stands for online sales channels and also catalog sales, but clearly the prominence of the old Sears (SHLD) catalog and the like are fading. One of the most important sellers on the Internet today is of course Amazon.com, which started with books and music and spread to just about everything Target sells and more.
eBay (EBAY) offers another major online marketplace and competition to many brick-and-mortar stores. And just like in the mall, specialty retailers exist in the ether-world as well, whether it's Zappo's selling shoes (an Amazon company), 1-800-Flowers (FLWS) pushing tulips or Blue Nile (NILE) pawning jewelry, they're in the game.
Until recently, discount stores haven't had as much issue with online retailers as, say, department stores. That's because the discounters have also been stealing market share from department stores and other brick-and-mortar legends during our country's latest economic struggle. And yet, as shoppers have continued to look for less expensive options, they've increasingly turned to the web. As a result, even the same-store sales of Wal-Mart and Target have been challenged lately.
A look at Wal-Mart or Costco's (COST) long-term chart indicates subtle signs of the industry dynamics, but a look at the deep discounters like Dollar Tree (DLTR) and Family Dollar (FDO) is pure proof that shoppers are looking even further down the value ladder. Despite its efforts to be more of a one-stop shop, Target has not been as successful as some thought it could be, including activist investor Bill Ackman a couple years ago. Thus, perhaps the catalyst for facing up to the competitive threat posed by Amazon.com. Or was it something else…
Apple has perhaps never had more influence with retailers. Imagine if Apple were to discuss pulling its goods from either Target or Wal-Mart. Not having Apple products, while your top competitor does, might actually harm your brand. It certainly would be scary enough to drive a retailer to sacrifice some more floor space to Apple. Given the popularity of Apple gear these days, it would not be inconceivable for Apple or any company with such popular pull to persuade retailers to act in its favor, and maybe in many varied ways. But, influencing the stocking decision regarding a top competitor's product would probably be unprecedented, or at least rare amongst the big players. Of course, this is just theory, but worth thinking about within the intensely competitive landscape of today's environment.
Target and Wal-Mart both rolled out test programs in April, adding mini Apple shops within stores. Wal-Mart will test the Apple draw in 25 stores, while Target gives it a go in 20 locations. Perhaps this is a sign of the top for Apple's great ride, as retailers increasingly use its popular products to try and draw shoppers in. Apple is it these days, and the brand has never been hotter, so retailers want to exploit its popular pull. Of course, everybody who sells electronics sells Apple goods already, but these retailers are seeking to sort of copy what Apple does in its own stores. It's created a sort of playground for grownups. Target will let consumers play as well in an expanded display area, basically creating an Apple store within its own stores. Neither Target nor Wal-Mart will sell Apple's relatively expensive computers to their frugal customers though.
Still, my question remains, does this latest strategy have anything to do with Target's decision to stop selling the also hot Kindle eReaders and computing tablets, which compete with Apple's iPad? One point argues against that possibility. As part of its strategy, Target has been seeking hot brands to market as a pull for customer traffic. It's a popular game plan among retailers these days, as evidenced by J.C. Penney's (JCP) work in the same direction. Though J.C. Penney's aggressive and extensive effort, which included other major changes, proved too much too soon and hurt customer traffic this past quarter.
I think Apple played no role in Target's decision to drop the Kindle gear, but who is to say? Rather, I believe someone in a brainstorming session somewhere asked the Target team to think of another hot customer draw in electronics. That probably led someone else to suggest Amazon's Kindle branded gear, which perhaps led another MBA or consultant to realize that Amazon does not complement Target, as well as it competes against it. And so, the war was kindled. Ironically, the Kindle Fire, priced at $200 seems a better fit for the big box discounters than pricier Apple computing tablets.
In any event, why should Target sell the products of its most dangerous competitor? It would never sell Wal-Mart branded gear. Its only cost of cutting Amazon off would be if it lost traffic due to Kindle specific seekers leaving for another store. In that case, it still has a decent shot at selling that same shopper an iPad before he leaves through the lure of its new and enticing Apple playground. I can envision the salesman's pitch already, as he says to the man walking away, "Everybody knows Apple has the hottest tablet with all its awesome apps."
It seems counter-intuitive for the discounters to carry the relatively pricey Apple gear. Yet, Wal-Mart indicates 53% of its customers own a smart phone, 32% own a tablet, and 75% own a laptop. Whether they own an Apple product or cheaper gear, like Acer's (ACEIF.PK) line for instance, is another question. I was recently surprised to learn that a supposedly struggling relative of my own has several Apple products that I thought I could not afford. So maybe there is a fit.
One thing is for sure, if brick-and-mortar retailers turn against Amazon's Kindle products because of the company's competitive retail position, it could have a yet unincorporated effect upon AMZN's share performance. So, I suggest portfolio managers, analysts and investors keep an eye on the actions of sellers like Best Buy and others. If Target's action turns into an industry trend, well then the game will have changed for all, and in that case, AMZN's valuation should be penalized.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.