Amazon Roundup: Walmart Challenge, India, UK, Germany, Ads, Drama

The last few weeks have seen big change in Amazon AMZN World, with a changing competitive landscape, strengthening of key rival Walmart WMT, new growth initiatives by the company and continued tightening of regulatory standards in Europe. Though it all, it remained a key innovator, pursuing opportunities like a very young company. Here are some of the high points-

Walmart Chapter

Walmart’s solid results point to the fact that the company is holding itself together rather well against Amazon, which has been destroying most other retailers and giving sleepless nights to executives pretty much in every field that it shows interest in.

In the last completed quarter, Walmart grew online sales 40% (accelerating from 33% in the previous quarter), an attractive number but keep in mind that it’s off a much smaller base than Amazon. So yes, its Jet.com acquisition and investments in an online platform and last mile delivery/pick up at store initiatives (grocery delivery expected to cover 40% of the U.S. by year-end) do appear to be paying off. It’s now getting more involved in shipping and returns through its enhanced Marketplace Returns Program but remains miles behind Amazon FBA.

One thing that seems to have helped though is its leadership position in the grocery segment (25.6% share of the U.S. market where the next player Kroger is at 9% and Amazon less than 2% according to Euromonitor). This is the most important segment for Walmart, accounting for 56% of its U.S. business and posting the fastest growth in nine years. Amazon is still getting its game together by buying Whole Foods, lowering its upscale image and cross selling to its loyal user base.

86% of Walmart buyers are also Amazon customers according to Cowen and many Amazon sellers also expect to get on Walmart’s online platform soon. That will help traffic to its site, which at 9.8% of total visits to online retailers trails by far Amazon’s 54.1% according to Statista.

In recent times, Walmart has also taken steps through acquisitions and deals to greatly expand its presence in fast-growing emerging markets China and India where Amazon is relatively less established than it is in the U.S. 

So the rivalry is on and there remains much to unfold.

Indian Opportunity

Amazon is one of the largest retailers in the country, in which the online retail landscape is changing rapidly. One of the biggest roadblocks for the company is the Indian government’s policy that foreign owned companies can only operate as marketplaces and not as retailers holding inventory. To date, companies like Amazon have used a workaround to facilitate deep discounts on products.

But the law is expected to change soon, making warehouse ownership more difficult, favoring local players. Moreover, foreign operators will also be required to restrict all customer data to Indian servers within 2 years, which will increase infrastructure cost.

In the meantime, the government has unconditionally approved Walmart’s acquisition of a 70%+ stake in the leading online retailer Flipkart. The company is now rolling out a loyalty program called Flipkart Plus, offering free and faster delivery, early access to major sales events and better customer support to counter Amazon’s Prime, which is already also selling entertainment content. Flipkart’s previous loyalty programs weren’t well received.

And India’s largest traditional retailer, Reliance Retail, is set to expand its presence in the online space through a JV will Alibaba BABA. Some reports indicate that Alibaba could acquire up to a 50% stake in the JV, bringing technology like AR and VR. But Alibaba’s stake could also be much lower to ensure that the JV makes the most of the Indian government’s initiatives to facilitate local players.

According to the latest news reports, Amazon is not sitting idle. After acquiring a 5% stake in another big traditional retailer Shoppers Stop, Amazon is in advanced talks to buy Aditya Birla Group’s loss-making food and grocery supermarket chain More through a special purpose vehicle, of which 49% will be owned by Amazon. This will bring 493 More branded supermarkets and 20 hypermarkets, covering more than 2 million square feet of retail space and help Amazon with a leg up in an area that Walmart knows a lot about.

UK Tax & More

Amazon is being criticized for successfully lowering its UK tax bill from £7.4 million in 2016 to £4.6 million last year despite generating revenue of just under £2bn and growing its pre-tax profits from around £24.3 million in 2016 to around £72.4 million in 2017. An Amazon spokesperson said the company had paid all its taxes (Amazon set up a taxable entity in the UK that can be charged a few years back).

The online retailer likely managed its taxes by paying out large amounts in stock based compensation -- deductible expense in the UK -- and made use of other techniques. The criticism may ultimately lead to a change in the way tax is charged (currently 19% on operating profits) to a tax on revenue. Amazon generates much lower margins than local players, so a tax on revenue will affect it worse than them.

Separately, Amazon is looking to start an insurance comparison shopping site in the UK, where people are more accustomed to use the service than in other parts of Europe or the U.S.  Rival Alphabet GOOGL hasn’t had much success in the area and low traffic forced it to shut down its service soon after it launched in 2016. This may have been because Google knows less about retail or because it focused more on other markets.

Amazon is clearly not making those mistakes: its goal is to try to help insurers increase their sales. There was mixed reaction to the news with existing comparison shopping sites seeing their share prices fall, while some insurers, especially for motor cars welcoming the retail giant. Somewhere in between were those insurers that feared the entry of Amazon because it could lower prices and because it would definitely lead to lower profitability as fees are shared with the company for driving traffic to them.

German Taxes

The German government has approved a bill (still needs to be passed in parliament) that will help it collect sales taxes from overseas vendors selling through online platforms like Amazon and eBay EBAY. Customers generally already pay the value added tax, but sellers don’t pass it on to the government.

The law will help the government proceed against sellers or make the online platforms liable for collection of the taxes. The government says it loses 500 million euros ($580 million) a year in unpaid sales taxes. If passed, the German law will go into effect in 2019, 2 years before a similar law covering other EU member nations goes into effect.

Employee Woes

Lorraine Colby of Bellevue, a former paralegal at Amazon, has sued the company in the King County Superior Court for willfully misclassifying its paralegals “to save on overtime and avoid the requirements of meal and rest breaks under Washington state law.”

The lawsuit says that the practice continued “despite being advised on multiple occasions that these employees were misclassified based on their job duties.” This allowed Amazon to pay them the regular rate for 50 hours of work per week instead of 1.5X the rate for the hours in excess of 40 hours, as required by state law. The suit is seeking class action status and says that around 40 affected paralegals could join.

Ad Power

Analyst Michael Olson of Piper Jaffray expects Amazon’s ad business to generate more profits ($16 billion) than its AWS business ($15 billion) by 2021. Reiterating his Overweight rating on the shares, he said that “Investors should be focused on Amazon advertising now; this is a major driver to results and valuation today and continuing in the coming quarters & years."

Also that "Advertising will be a driver to watch, as the retail industry continues to live or die by the shift to direct-to-consumer & digital channels and real estate on Amazon, more than any other digital company, may have a direct line of sight on the multi-billion dollar 'trade promotion / merchandising' budgets of many marketers."

eMarketer agrees that Amazon’s ad business will grow very strongly. The firm says that Amazon will be the third-largest digital ad seller in the U.S. by 2020 behind Google and Facebook that together account for 48% market share.

According to Digiday, Amazon is testing “video in search,” which features 90-second long video ads that will be part of the search results on the platform though ad load remains low. And of course, it is also selling its ad inventory on third-party sites.

The only drawback, if we can call it that is that for now, Amazon ads mostly drive buyers back to Amazon, so anyone viewing the company as competition won’t be advertising with it. That shuts out a large section that would prefer another platform like Google’s. So it isn’t surprising that big retailers are going that way.

More Drama

Bloomberg reports that Amazon is in the running to acquire brick and mortar movie theater chain Landmark. The chain generally screens independent and foreign films in more than 50 theaters across 27 markets like New York, Philadelphia, Chicago, Los Angeles and San Francisco.

Some of the locations are in coffee bars or lounges, making them good for content distribution. That’s probably why Amazon, which is getting deeper into the content business, may be interested (movie theaters on their own are a declining market, not one Amazon would pursue).

Also, Amazon insiders say that the company’s Lab 126 R&D center is working on a video recording device called Frank that can then be plugged into its Fire TVs, escalating rivalry with smaller player TiVo. The plans may not fructify but the news was enough to send TiVo shares crashing.

And Amazon Prime Video us finally joining Netflix and YouTube in Comcast’s next-generation X1 set top box, facilitating easy content selection from the home screen without switching between apps or inputs through the X1 voice remote.

Recommendation

Amazon shares carry a Zacks Rank #1 (Strong Buy). For other Rank #1 stocks see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

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