The digital and physical world collided Monday. For once, brick and mortar won out.
The headline story was a Wall Street Journal report that Amazon.com (Nasdaq: AMZN, Rated “B”) and Simon Property Group (NYSE: SPG, Rated “D+”) are close to a deal to convert old Sears and J.C. Penney (OTCPK: JCPNQ, Rated “E+”) stores to distribution centers.
The arrangement is a twofer for Amazon.
It puts the e-commerce giant closer to customers, driving down same-day delivery costs. It also kills foot traffic at the local mall, making it even more difficult for retail chains to compete.
Amazon’s business secret is relatively simple: Offer the world’s largest selection of products at a fair price. Then, deliver those products quickly.
Since inception, Amazon has struggled with the second part of its business plan. Deals with intermediaries like United Parcel Services (NYSE: UPS, Rated “C+”) and the U.S. Postal Service have led to varying degrees of success.
Related post: The Secret to Amazon’s Success
Securing distribution centers on the edge of large urban centers all over the country would allow Amazon to vertically integrate delivery. It would mean freedom.
That freedom comes at the cost of smaller retail chain stores. They depend on so-called anchor tenants to pull in mall foot traffic. Without those big-name tenants pulling in the crowds, their very lifeblood would be cut off.
While Sears and J.C. Penney have struggled, the hope has always been Simon Property would find suitable replacements. In the past, there has even been talk of retooling shuttered store space as schools or medical arts facilities.
But Amazon.com fulfilment centers are black holes. There is no foot traffic.
Normally, investors would have immediately recognized the benefits to Amazon.com. Shares of the online giant would have risen. Smaller retail chain stocks would have collapsed in the latest phase of what Barron’s editors have termed the “Amazon Apocalypse.”
Related post: How Amazon Remains the Ruler of Retail
That didn’t happen Monday. Amazon.com shares faltered. For once, brick and mortar retail shares rallied in the face of encroachment by their mighty online foe.
Most of this is the result of the rolling sector rotation I wrote about last week. Big technology stocks have been mega winners this year. Traders are now in the process of consolidating those gains and selectively taking some profits. They are also deploying capital amongst lagging stock sectors. Coincidentally, some of those sectors operate in the retail apocalypse.
Longer-term, my work suggests that big technology platforms will perform exceptionally well.
Long-term investors should see Amazon stock sluggishness as an opportunity to get into position. This move will be huge for the e-commerce giant.
Best wishes,
Jon D. Markman
