Amazon has forced Target’s online growth at the expense of its stores, and it can’t be stopped.
First off, from the 6-month chart below it appears that at least some investors were not that impressed that CEO Brian Cornell’s second quarter earnings call was dominated by the big idea of self-checkout lanes. You know, what 100% of consumers hate the most. Little was said of online growth or how he would make it happen. The stock continued to show weakness and for good reason. Then we had the Trump rally where pretty much everything went up that wasn’t named in the PEOTUS’s twitter feed.
Second, perhaps we now realize that people will gravitate to online no matter what the retail company wants us to do. This is a critical paradigm shift in how we think of online growth for specialty retailers. Let’s not go too far with retailers like Macy’s that won’t push people to online channels just because their stores are dirty and inefficient. The reality is simple. When you can buy online and return to the physical store more people will do just that. You think Nordstrom’s was missing the point when they opened a Rack discount store in Albuquerque? I can now buy regular Nordstrom’s goods online and return it to my local Rack. Then of course I pick up some cheap commodities like blue jeans and ski socks. They have me down to a science.
Third, the core problem is usually Amazon. Put simply, every time you and I order from a place like Target or any retailer, there is that nagging feeling to check out the same product on Amazon. If it’s cheaper and easier with Prime 2 day shipping, the specialty retailer loses business. Thus we enter the vicious circle of discounting, free shipping, in-store returns and erosion of profit margins. That is what investors are expressing right here, right now.
If there is only one takeaway today, let that be it. Target has absolutely no choice other than fight Amazon head on with the only advantage they have: physical store locations. If they lose sight of that profits will suffer. Push me to self-checkout lines? I will buy online and erode your margins. Keep a dirty store? I will forget you exist. Control my online versus in-store buying habits? You have no control.
Now we know the number one problem for investors. To put it mildly, the brave new world of maintaining market share or taking it from failed old-line retailers by way of online growth still hasn’t changed the way we value those stocks. In other words, we still treat retailers based on what they earn in profits, not a post-Amazon era of ignoring earnings for online growth. Only Jeff Bezos has a monopoly on that idea. Just ask Alexa.