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How Amazon wins Black Friday

25 November 2016 in

What you need to know

  • The economy is improving and consumers are getting ready to spend
  • Amazon is solidifying its no. 1 position as an e-commerce leader
  • Luxury retail is poised to advance and is safe from e-commerce threats

Read, set, go! The holiday shopping season is upon us. Not only is seasonal bargain-seeking something of an American-made competitive sport, but the-day-after-Thanksgiving is pivotal for retailers. This year is no exception. A pre-election consumer poll by the National Retail Federation (NRF) revealed that spending on holiday gifts is expected to reach an average of $936 per shopper this year, just about one Andrew Jackson short of last year’s record amount.1 Those same consumers, however, also admitted that they would happily part with an extra $25, if a bargain presented itself. If so, we’ll surpass 2015’s all-time high on holiday spend.

Favorable economic backdrop
Investors should be optimistic for increased consumer spending due to the steady growth in the economy. It’s showing up across a multitude of metrics. The unemployment rate stood at 4.9 percent in October, down 0.1 percent from a year earlier, according to data from the Department of Labor2, and wages are finally starting to see gains. Average hourly pay, which had stubbornly refused to budge while the markets gained, rose 2.8 percent year over year. The positive economic news is popping up in consumer mood surveys, too. The University of Michigan Index of Consumer Sentiment for November leaped 5 percent compared to the prior month, reaching a mid-year high.3 It’s an investing maxim that a happy consumer is a hungry shopper.

Why Amazon matters
Just because the average level of spending is projected to reach a near-record high, it doesn’t mean that all retailers will benefit equally. When the NRF says some 57 percent of consumers will spend time online making holiday season purchases, it should be clear that it’s Amazon (AMZN) who stands to benefit. Why? Amazon is synonymous with online shopping, and because each year the company has steadily increased its product offerings and optimized its bargain strategy. In addition, many vendors now use the company’s e-commerce platform to promote their products and manage their business operations, boosting Amazon’s bottom line with juicy software profit margins. Need proof? Last year, and much to the chagrin of Walmart (WMT), Amazon accounted for 60 percent of all online sales growth, according to a report from MarketWatch.5 That large chunk of the e-commerce pie meant $23 billion more in sales revenue to Amazon in 2015 than in 2014, in case you were wondering.

An interesting outlier: Luxury retail
One area safe (so far) from Amazon and who stands to also gain from the economic uptick this fall is the luxury category, where products are often best appraised in person. “Luxury shopping is not only a shared experience, it is one that thrives on feelings of status and esteem which cannot be felt in the online vacuum,” states a recent report from JLL.7 Or put another way, physical stores matter. So although luxury brands don’t usually discount their products for the holidays (certainly, Tiffany (TIF) doesn’t8) that doesn’t mean the holidays aren’t important for such retailers. Sales at Tiffany, for instance, are disproportionately heavier in the holiday season.9 That means that even if Black Friday itself doesn’t create a surge in sales, there will almost certainly be more sales in the run up to the holidays.Next steps to consider
Investors betting on a spending surge this Black Friday might want to consider the Vanity Flair motif which focuses on luxury products and/or the Couch Commerce motif, which holds Amazon as king.
Alternatively, simply buy Amazon (AMZN) and/or Tiffany (TIF) to create your own community motif.
Another approach is to seek gains from both ends of the retail spectrum by adding the income inequality motif to your diversified portfolio

1. National Retail Federation, “Retailers Prepared for Post-Election Holiday Shopping,” October 27, 2016
2. Department of Labor, “Press Release,” November 4, 2016
3. University of Michigan, “Consumer sentiment survey,” November 2016
4. National Retail Federation, “Retailers Prepared for Post-Election Holiday Shopping,” October 27, 2016
5. MarketWatch, “Amazon accounted for 60% of U.S. online sales growth in 2015,” May 3, 2016; Fortune, “The Silver Lining in Walmart’s Slowing E-commerce Growth,” May 20, 2016
6. Bain & Company, “Luxury Goods Worldwide Market Study,” Fall-Winter 2105
7. JLL, “How to predict the future of retail,” May 2016
8. BlackerFriday.com, “Tiffany”
9. Tiffany & Co., Financial Information