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The “Amazon Effect”: Will the Death of US Retail be the Next Big Short?

The “Amazon Effect”: Will the Death of US Retail be the Next Big Short?In a recent article the Financial Times assesses how damaging the ‘Amazon effect’ could be for traditional retailers:

· 10 Bankruptcies in the US retail sector so far this year

· 90m sq. ft. PwC’s estimate of US retail floor space that could be closed this year.

· Credit Suisse says it could hit 147m sq. ft.

· 9,000 Average number of jobs lost each month this year in the retail industry

The “Amazon Effect”: Will the Death of US Retail be the Next Big Short?

Following the great financial crisis some investors think they have now found the next “big short” in the retail industry. The reshaping of how Americans shop by the internet is accelerating.

The US retail industry faces a growing headache, with 10 companies already pushed into bankruptcy in 2017, according to Standard & Poor’s. Even Sears, a once mighty department store chain founded in 1886, is now tottering. “We think the magnitude of this short selling could be bigger than subprime,” says Stephen Ketchum, the head of Sound Point Capital, a hedge fund that manages more than $13bn in assets. “Go to the Amazon website and type in ‘batteries’. What you see is just the tip of the future iceberg. And retail is the Titanic.”

The relentless rise of online shopping is posing a huge challenge for US shopping malls, developers and investors who own shares and bonds in household names. The core problem is a dramatic overbuilding of stores, coupled with the rise of ecommerce, Richard Hayne, Urban Outfitters’ chief executive, told analysts on a conference call earlier this year. “This created a bubble, and like housing, that bubble has now burst,” Mr Hayne said. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

The impact is far-reaching. Credit Suisse estimates that as many as 8,640 stores with 147m square feet of retailing space could close down just this year — surpassing the level of closures after the financial crisis and dotcom bust.

The downturn is hitting the largely healthy US labor market — the retail industry has lost an average of 9,000 jobs a month this year, according to the Bureau of Labor Statistics, compared with average monthly job gains of 17,000 last year. Amazon's fulfilment centers employ far fewer people than the equivalent retail space © Getty $477bn Amazon’s market capitalization. Its shares make up a third of the S&P 500 retail index 0.9 Employees required for every $1m of sales for online stores, compared with 3.5 for a physical store.

Shuttered shopping malls and struggling department stores are the most visible example of what analysts have termed “the Amazon effect”, as spending migrates from bricks-and-mortar shops to the online realm dominated by the likes of Jeff Bezos’s internet retailing giant. But it is also likely just the first stage, with some investors predicting that every corner of commerce is about to experience a painful burst of creative destruction as shoppers migrate online

“There’s a big shakeout in how people consume goods,” says another big hedge fund manager. “It will have a massive economic impact.  It is already a bad year, and it feels like it has the momentum to become something bigger.” When Amazon swooped for the Whole Foods grocery chain this summer, it sent shivers down the spines of many investors. Traditional supermarket chains like Walmart and Kroger in the US, Tesco and Sainsbury in the UK and Carrefour and Metro in Europe were long thought to be relatively insulated from the online retailing wave, but their shares all slumped as investors reappraised that assessment in the wake of Amazon’s acquisition. “Buying patterns are permanently changing,” says Wayne Wicker, chief investment officer of ICMA-RC, a pension fund for US public sector workers. “These things creep up on you, and suddenly you realize there’s trouble. That’s when people panic and run for the exit.”

Source: BIIA Newsletter September II - 2017 Issue

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