Put on your suits and hard bottoms. Traditional retail, as we know it, is dead at the hands of Amazon (AMZN). The Amazon business model is a harbinger for wealth destruction. Main Street U.S.A. must now grapple with a new normal. The sprawling commerce, traditional family atmosphere, quaint mom and pop stores, and even the Big Box emporiums are systematically being run out of town. In their place, abandoned streets, closed businesses, boarded up buildings, and escalating crime patterns remain.
Today, politicians and concerned citizens grandstand and pass the buck towards Wall Street, Washington, China, subprime loan officers, and immigration law as the ultimate lynch pins behind Main Street demise. One step further, I must highlight a quiet, but equally as sinister movement that continues to derail our retail economy. The Amazon Corporation, through no fault of its own, is effectively the enemy of Main Street. Amazon and its online commerce model capitalize upon tax breaks to dump goods on the market and steal share. As Americans, however, we cannot blame Amazon for exploiting our own culture that worships the Almighty Dollar. Rather than unproductive fear mongering, we must invest accordingly around this trend.
Amazon Business Model
Amazon is Virtual Wal-Mart. As an online business, Amazon continues to diversify its offerings away from simple multimedia and into electronics, clothing, food staples, gaming, and automotive parts. Amazon's user-friendly interface is unique for its level of participation and de facto communication between consumers and headquarters. With 24-7-365 operations, the Web 2.0 crowd can network through this social media outpost to review products, blog-for-pay as expert users, and hawk their own e-books. Amazon's popularity is due in large part to the fact that its consumer inmates effectively run the corporate asylum.
Amazon is all the more impressive beneath its sleek online interface. This corporation is legendary for its customer service and drive to fill orders. To fill orders in timely fashion, Amazon executives have masterminded a complex, yet finely tuned machine of warehouses, inventory control, responsive call centers, and customized shipping agreements for each purchase. Because of such impressive execution, Amazon is often acknowledged as one of the world's most admired companies.
Taxes and Dumping Goods
Amazon will compete and dominate upon price. Because this online business maintains no physical retail presence, its customers are largely able to bypass sales taxes on orders. A Federal sales tax does not exist and states are left to their own devices to collect sales tax. For now, the relationships between geographic shipping routes, corporate offices, and third-party vendors has created a Byzantine structure of lawsuits and legislation specific to Amazon. According to Robert Wood, tax attorney, The Main Street Fairness Act still remains on the table as means to enact a uniform tax code between online and brick and mortar retailers. Until the bill passes, loyal Amazon customers can expect to realize hundreds of dollars in savings annually in taxes, alone.
For desperate lawmakers, however, the eventual full implementation of The Main Street Fairness Act will represent yet another illusory fix to a middle class economy that is structurally damaged. The Main Street Fairness Act ignores the suburban sprawl, outrageous gasoline taxes, and restrictive energy policies that work in concert as a blockade against the brick and mortar establishment, in favor of the accommodative e-tailer. Logging on to your Amazon account is $0 in marginal costs, relative to a $50 SUV fill-up and $100 per hour worth of productive time lost in a freeway bottleneck to suburbia.
Already at a tax, fuel, and time savings advantage, Amazon still proves its willingness to dump goods on the marketplace. Amazon will offer product beneath cost as a strategy to bolster brand loyalty, drive complementary sales, and consequently, run even more people out of business. Research firm IHS iSuppli claims that Amazon is practically giving its Kindle Fire tablet away, as a Trojan Horse gateway for content. With a Kindle at the ready, Amazon can help consumers ring the register for magazines, books, movies, and assorted knick-knacks through its vertically integrated empire.
Amazon is destructive capitalism at work. Traditional retailers that refuse to innovate do not stand a chance.
The Bottom Line
We must now manage money beneath a New World Order of rapidly expanding Internet sales alongside a bifurcated inflation model. According to MarketResearch.com, global online sales will increase by 15-percent annually through 2016. For consumers, the Internet is a godsend for budgeting. Joe Six Pack saves money due to competitively priced online purchases, zero fuel costs amid a persistent commodity boom, and the time efficiencies available from pointing and clicking. For Big Business and Big Government, however, the Internet is deflationary and will exacerbate global recession. Today, we enter a new normal of high unemployment, ghost town commercial blocs, stalled corporate profits and vanishing sales tax revenue.
Best Buy (BBY) is one prominent example of Amazon's footprint. Once a story stock, this Minnesota big box retailer is now marred by a series of store closings, profit warnings, and crushing layoffs. Best Buy's profit outlook remains doomed, as labor costs and taxes for maintaining a brick and mortar presence far exceed Amazon's streamlined Internet operations. Best Buy investors must acknowledge the writing on the wall, as shares break down from their 2006 $60 high towards today's $20. Best Buy is but one canary in the coal mine for all retail beta stocks, such as Radio Shack (RSH), Wal-Mart (WMT), Barnes and Noble (BKS), and Gap (GPS).
Away from traditional retail, commercial Real Estate Investment Trusts (REITs) are also at risk. Throughout the country, retail space is being abandoned and once prominent shopping districts are going the way of Detroit. Today's commercial REITs that distribute rental income to their shareholders resemble bubble investments, where collapse is inevitable.
Desperate savers are buying into commercial REITs for yield, rather than underlying business performance. At $33, Tanger Factory Outlet (SKT) shares pay out a 2.6% dividend yield, while also trading at 69 times earnings. The 69 price-to-earnings ratio is quite speculative, considering the fact that Tanger has averaged only 24-percent annual income growth over the past four years. Shopping mall REIT Simon Property Group (SPG) features a similar chart, as evidence that investors are balking at negative real return fixed income, in favor of cash dividend income from any source. Commercial REIT stock values will deteriorate significantly amid any uptick in prevailing interest rates.
Going forward, Amazon may serve as proof that successful business plans do not always translate into profitable investment returns. At present, Amazon shares price for $225 each and trade for 185 times earnings. To justify this valuation, Amazon profits should more than double every year into the near future. Amazon, however, is only averaging 14 percent annual profit growth over the past four years. Amazon shareholders are banking that the company's rapid top-line growth will eventually trickle down towards the bottom line. The problem for investors remains that Amazon cost of goods sold and selling, general, and administrative expenses are expanding just as rapidly as revenue.
Amazon is cannibalizing its own profit growth as it kills off traditional retail.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.