Invesco Canada blog

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Jeff Hyrich | February 21, 2018

The death of retail has been exaggerated

For the past couple of years, I’ve been seeing the same headlines over and over, predicting the end of brick and mortar retail. The rationale is that Amazon will continue to expand its offering lineup and wipe out entire sectors shortly after it enters their space.

Frankly, I think this is a little tough to swallow. Don’t get me wrong, Amazon is a tough competitor for many retail chains. But I prefer the less glamourous companies that I believe fill the niches where I think Amazon will struggle – and that trade for a fraction of the price.

Let me give you a couple of examples.

Ross Stores, Inc.

If there’s one company I love to talk about, its Ross. It’s been a holding in Trimark Global Endeavour Fund since before I joined the Fund’s management team more than 16 years ago. Its current weight is 7.04% of the Fund (as at January 31, 2018).

I think Ross has a very unique model that they’re going to survive and prosper. They’re probably one of the retailers that are least-impacted by Amazon. Here’s why.

When you go into Ross, it’s like a treasure hunt. You’re buying clothes that are already probably 50% off the department store price. I think the average transaction amount is about $10. It’s hard to beat that online because you often have shipping costs.

Their customers tend to be lower income – these are not Amazon Prime customers. They aren’t going to go in and comparison-shop for a pair of jeans on their smartphone. These are people that are going into the store because they need something at that moment. No drone delivery is going to arrive soon enough.

AutoZone, Inc.

It’s a similar story at a more recent addition to the Fund: AutoZone (current weight 2.80% of the Fund, as at January 31, 2018). As the name suggests, this store sells auto parts. Again, there was a concern that Amazon was going to come in and cream these guys.

But most of their customers go in because they have a problem with the car, they don’t know what to do, they need help.

They don’t want to wait around for the UPS truck to drop off their oil filter, and hope they got the right one.

I can easily put myself in the shoes of their customers. I needed an air filter for my car. The mechanic at my dealer wanted $55, so I went on Amazon – and found virtually every air filter known to man. If I order the wrong one, I’ll have to pay the shipping back to Amazon and hope I get the right one the next time.

Instead, I can go to AutoZone, tell them the make and model of my car and they sell me the right air filter for $20. If I need special tools to install a part, AutoZone has those in stock.

Both of these companies – Ross Stores and AutoZone – have loyal customers who want to make a low-cost purchase, take immediate delivery and pay in cash.

Will Amazon continue to revolutionize retail? Very likely. Will it render all brick and mortar operations completely redundant? I don’t think so.

If you have any questions, don’t hesitate to reach out in the comments section below.

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The companies discussed in this blog were selected for informational purposes only and should not be construed as specific investment advice. Opinions expressed are subject to change without notice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed.

2 responses to “The death of retail has been exaggerated

  1. Jeff:

    Great explanation and I can confirm that you really do understand the customers of both of these outlets. I have frequented both of these franchises for purchases myself. I am a value guy at heart and have worked in the automotive sector in a previous life. I am pleased that they are both in the fund.

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