Who’s Safe From Amazon, the Suicide Bomber of Retail?

We already know Borders was doomed by Amazon (AMZN), and Barnes & Noble (BKS) is threatened mightily, as just about any book one might want, or find at a physical book store, is available at the online retailer and often more cheaply. Best Buy (BBY), too, seems doomed and the smart analysts at William Blair in Chicago help us understand why. In a research report, the firm’s Mark Miller estimated that 72% of merchandise available at best Buy is also available on Amazon. Uh-oh.

AMZN Profit Margin Quarterly Chart

AMZN Profit Margin Quarterly data by YCharts

Of course, as it runs other retailers into the ground, Amazon loses money on many sales (hence the suicide bomber comparison), with a profit margin gone negative in the third quarter, though one would ever know it when looking at a stock chart.

So, who’s safe from Amazon? Whole Foods (WFM) has only a 10% product overlap, Blair estimated, so no problem. But that’s an extreme. A William Blair follow-up report just out looks at two smaller retail chains in the so-called action sports sector, skateboard seller Zumiez (ZUMZ) and Tilly’s (TLYS). Their merchandise overlaps with Amazon by 27% and 25% respectively. Blair analyst Sharon Zackfia observes:

“In general, we view the Amazon risk as relatively muted in apparel relative to other categories such as hardlines or broadlines, given the importance of fit as well as the experiential nature of shopping at best-in-class apparel retailers. In addition, many apparel retailers focus largely or solely on proprietary, private-label merchandise, which greatly mitigates or eliminates any potential Amazon threat. As a result, we have consistently found in our surveys of Millennials that the vast majority of apparel purchases remain in the brick-and-mortar world.”

ZUMZ Chart

ZUMZ data by YCharts

Zackfia continues: “Within the low‐risk arena of apparel, however, we believe that Zumiez and Tilly’s have above‐average exposure to Amazon given the importance of third-party brands, which generate 82% of sales at Zumiez and 69% at Tilly’s. In addition, roughly 55% of sales at Zumiez and 35% of sales at Tilly’s stem from non-apparel items, such as footwear, accessories, and hardgoods, which fit more easily into the Amazon paradigm.” Uh-oh?

Zackfia then goes on to analyze price comparisons. Zumiez overall prices 5.6% above Amazon, Tilly’s 9.3%. The pricing premiums at the little chains (Zackfia got the data off their web sites), are much smaller on apparel items and larger on accessories, especially watches (even though on watches the chains have 80% and 70.6% overlap, respectively, with Amazon. Go figure.) And there’s almost no price premium to Amazon on shoes at the two chains. Zappos (now an Amazon unit) too much of a threat?

Zackfia seems less worried than we might be, viewing “the current risk to action sports retailers as relatively low when compared with the broader consumer landscape (albeit high when compared through the lens of teen retail). Teen consumers have time to spend at the mall and may lack credit cards for online buying, both positives for bricks-and-mortar retailers. Amazon, of course, is building more warehouses and adding new agreements with suppliers constantly.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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