Global Market Commentary

Is brick-and-mortar retail doomed?

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Is Pure E-Commerce Really An Unstoppable Juggernaut?  Why the Future May Be Different Than You Expect

The narrative of the total and relentless dominance of e-commerce over brick-and-mortar retail is beginning to break down.

Above, we wrote about the big Chinese tech firms, and how they’re leveraging consumer data to build out holistic ecosystems where those consumers will want to spend more and more of their time.  One of the most interesting recent developments has been Alibaba’s [NYSE:  BABA] embrace of brick and mortar.  BABA founder and chief Jack Ma said it directly: “With new retail satisfying increasing consumer expectations… you will have to disrupt e-commerce… and embrace the physical world.”

BABA is making good on this insight, having opened 13 hybrid online/offline Hema supermarkets in Shanghai and Beijing.  BABA CEO Daniel Zhang says: “We believe the future of new retail will be a harmonious integration of online and offline, and Hema is a prime example of this evolution that’s taking place…  Hema is a showcase of the new business opportunities that emerge from online-offline integration.”

BABA is in a particularly strong position to leverage their deep understanding of their consumer base in determining the physical locations they’ll develop and the services they’ll offer there.

It isn’t only in China that this integration — so-called O2O, online to offline — is occurring.  In the U.S., with Amazon’s [NASDAQ:  AMZN] launch of experimental physical locations and purchase of Whole Foods Market, and Walmart’s [NYSE:  WMT] aggressive expansion into e-commerce, the two retail behemoths are clearly converging strategically as they compete.  And in this strategic convergence, in spite of the relentless media pounding on brick-and-mortar retail, it would be profoundly foolish to count WMT out, as we have observed before.

Amazon Embraces Physical Space

In fact, in this regard, AMZN is a laggard playing catch-up.  After all, WMT has physical locations within 10 miles of 90% of the U.S. population.  If the future is a hybrid of online and offline retail, the incumbent in this case has significant advantages to leverage from their huge infrastructure base.

Our basic caution is simply this: don’t believe that the future will be a straight-line manifestation of current expectations — it never works that way.  The world of retail, as expressed in the strategic moves of the world’s biggest retailers, seems to be developing dynamically into what Jack Ma calls “the integration of online, offline, logistics, and data across a single value chain.”  Brick and mortar is dead — long live brick and mortar!

Investment implications:  The orthodox narrative about retail — that physical locations are doomed and that pure e-commerce will devour everything — is probably wrong.  The emerging strategies of the world’s biggest retailers is beginning to show a convergence in which physical space has a critical role to play, and some brick-and-mortar incumbents — particularly WMT — could leverage their huge infrastructure to take advantage of this trend.  With potential public relations and regulatory clouds appearing on the horizon for AMZN, we would keep a close eye on WMT.  Please note that principals of Guild Investment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time.  Currently, Guild’s principals and clients own AMZN and BABA.  In addition, for investment advisory clients of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.

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