Mad Hedge Technology Alerts!
Warren Buffett is right, retail is a tough game in the face of the Amazon (AMZN) threat.
I wouldn't want to face off with them either.
Technology has been the biggest catalyst fueling a tectonic shift in the retail climate with large cap technology players usurping market share decimating competition.
The rise of e-commerce platforms has been nothing short of spectacular.
Management has also used technology to modernize the global supply chain, in-house operations, and ramp up the hyper-targeting of prime customers.
The treasure trove of big data collected has been the key to pinpointing the weaknesses and finding solutions.
Amazon knew all of this before everybody else. And, Jeff Bezos has already annihilated a large swath of the retail community that will never return.
Walmart was one of the first retailers to wipe out the small brick-and-mortar shops, and Amazon is attempting to do what Walmart did to others in the past.
Luckily, the sleeping giant of Walmart (WMT) has awoken and is laying the groundwork to launch a full-frontal assault on Amazon.
Better late than never.
More than 90% of Walmart's customers live within a 15-minute drive of one of their stores, but why drive 15 minutes with exorbitant gas prices when Amazon says you don't have to?
Once a laggard, Walmart is now instilling its newfound e-commerce operation with a new sense of zeal and purpose, offering Amazon a real threat and copying its best ideas such as two-day free shipping.
Someone must stand up to Amazon. And Walmart with its massive embedded base of loyal and fervent customers and revenue is the ideal challenger.
Currently, Amazon has extracted more than 49% of the U.S. e-commerce market in 2018.
Walmart trails Amazon by a wide margin, and the investment into developing its e-commerce business will boost the 3.7% e-commerce market share.
If Walmart maintains the drive to enhance tech operations, its e-commerce division could double its market share to more than 7.5% from its low base.
This is entirely manageable as it would only need to convert a small percentage of current non-digital customers into using its digital portals whose quality has remarkedly improved the past few years.
Redesigning the official website was timely as the new interface is sleeker, more functional than past versions, and just plain better.
There is even a tinge of Amazon in the design borrowing the best parts of its foe's design and integrating it into a modern look.
The statement of intent is there, and Amazon won't have a frictionless pathway to profits anymore.
Walmart CEO Doug McMillon has been the main man to ramp up the tech side of the business and has injected a fresh batch of youth into the management style.
Online purchases only comprise less than 20% of sales and that runway is still long and wide for a company that has only barely scratched the surface of its tech strategy.
Most tech companies are in the first innings of a long game, but Walmart is even further behind meaning there is ample room to grow.
Even McMillon believes that Walmart will morph into a certain "kind of technology company" going forward.
Not only is it beefing up its digital commerce strategy, but physical stores are getting makeovers to extract additional marginal revenue from each customer.
Walk into your nearest Walmart and you might notice it looks completely different than your father's Walmart.
It is also dabbling a bit with augmented reality to boost the in-store customer experience.
Walmart has installed an avalanche of self-checkout kiosks at the front of the store to ease and quicken customer payment.
The use of big data analytics is now aiding decisions on how to best create the optimal shopping environment for its customers.
In-store pickup automated machines called towers help customers in picking up their goods if they choose to drive to the physical store, thereby enhancing the customer service quality.
Walmart is no longer playing defense and sticking to what it knows.
It is on the front foot and should be.
Walmart announced e-commerce sales spiked 40% YOY in Q, and the man responsible for this execution is Marc Lore.
Who is Marc Lore?
Marc Lore is the chief executive officer of Walmart eCommerce U.S., and the showdown against Amazon is a personal gripe for him.
Lore joined Walmart when his e-commerce company Jet.com was snapped up for $3.3 billion in 2016.
This was more of a talent and expertise grab that Walmart needed at the time to learn the ropes of the e-commerce business to better understand how to respond to Amazon.
Before Jet.com and Walmart, Lore was on the books at Bezos' Amazon.com where his feud began.
Lore joined Amazon by way of his e-commerce company Quidsi, which he cofounded and which was bought by Amazon for $545 million in 2011.
Following Amazon's purchase, Lore and Bezos did not always see eye to eye on how Quidsi would operate inside the confines of Amazon, creating long-lasting tension that has turning into bad blood.
Quidsi specialized in certain genres such as baby products and household goods. After Amazon sucked all the knowledge and life out of Quidsi, it fired the remaining 260 employees at its New Jersey headquarters and closed down the firm.
Bezos cited "unprofitability" for shuttering Quidsi, and the thinly veiled parting shot at Lore registered deeply inside the back of his mind.
Lore reinvented himself and launched a new e-commerce business called Jet.com.
After being absorbed by Walmart, Lore was repositioned to the top of Walmart's e-commerce division leading the helm.
Lore understands how to take on Amazon after working inside its Seattle headquarters for years after the Quidsi integration and knows how to beat the company at its own game.
He is the perfect person to help Walmart infuse success into its e-commerce division. Walmart is the optimal platform for Lore to get revenge against Jeff Bezos.
A win-win proposition.
Walmart e-commerce business is on track to rise 40% in 2018.
A few changes he set off right away were the expansion of Walmart's online selection adding more than 1,100 brands, setting up a creative discount program attracting more shoppers into physical stores, cooperating with Google to integrate voice-activated shopping mechanisms, and signing up a new in-house brand called Bonobos to design an exclusive portfolio of brands mirroring Amazon's 76 private labels on its platform.
Lore even took a page out of Amazon's playbook and made two-day free shipping possible for millions of products through its website.
Warren Buffett has said in the past that not investing in Amazon and not investing more in Walmart when he had the chance were two of his most regrettable mistakes.
It could be true that this time around Buffett jumped the gun in unloading his Walmart shares. I agree that retail can be scary, but not all retail is created equal.
For some particular retailers such as Walmart, the future doesn't look so bad.
I agree with Buffett that Walmart has more than tough competitors, but if Walmart emphasizes its digital first strategy via mobile and desktop, there is a lot of wiggle room to harvest gains from these positive changes.
Walmart has been used to growing 1% to 2% in U.S. same-store sales per year, and it was habitually assumed as a constant.
The growth of 4.5% proves that tech investments are paying dividends and even though margins are pressured, it's a must to stay competitive.
If Walmart can lure in growth investors who believe in the evolving tech narrative, it would expand the variety of investors interested in Walmart.
Walmart has a lot going for them and sometimes that gets lost around all the hoopla about the Amazon threat.
Walmart has the mind-boggling scale retailers dream of and migrating its own customers online is the key to unlocking new value.
Certainly, these customers will purchase more products after algorithms identify the products customers desire to buy.
Margins will suffer somewhat from this new strategy, but growing pains and reinvestment are sorely needed to turn around the ship.
Luckily, this legacy retailer is on the right path and has hit on the right strategy.
Once the technology is running efficiently, the average revenue per user will start to rise as with for all top-tier technology companies because of leveraged scale making it possible to boost profits.
In addition, there is potential digital ad business to nurture along if Walmart can shift a decent number of legacy customers to mobile or desktop platforms.
The future doesn't look so bleak for Walmart, neither does its share price.
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Quote of the Day
"We will compete with technology, but win with people." - said CEO of Walmart Doug McMillon.
Mad Hedge Technology Letter
August 16, 2018
Fiat Lux
Featured Trade:
(WILL AMAZON EAT GOOGLE'S LUNCH),
(AMZN), (FB), (GOOGL)
And then there were three.
That's right, Amazon (AMZN) will join Facebook (FB) and Alphabet (GOOGL) as the last member of the triumvirate dominating the global digital ad industry.
That is what all signs are pointing to.
In a survey conducted by PricewaterhouseCoopers (PwC), the global digital ad industry increased by 21% YOY to $88 billion in 2017.
Of that growth, Facebook and Alphabet commanded 90% of it.
Mobile ad growth exploded last year because of the migration to smartphones increasing by 36.2% YOY in 2017.
Mobile ad revenue accounted for 56.7% of the digital ad dollars.
Search ad growth decelerated from 48% to 46% market share, but overall revenue climbed 18% to $40.6 billion reflecting the preference for older generations to use desktop search as their go-to platform.
Younger generations prefer dynamic video advertising, which suits mobile devices and tablets.
This segment grew 33% to $11.9 billion and is set to eat into search ad market share going forward.
This all bodes well for Amazon, which can take advantage of these various channels to pump through more ads that companies are clamoring to buy on Amazon's e-commerce platform.
Video ads would be ripe for Amazon Prime Video too, Amazon's on-demand media content service.
By 2021, Amazon's digital ad profits will eclipse its cloud profits solidifying Amazon as the best American tech company because of its multitude of premium profit drivers.
As time goes by, the quality of Amazon's company ascends with no restraints.
The Mad Hedge Technology Letter rates Amazon as the best publicly traded tech stock and that will not change anytime soon.
Amazon's digital ad revenue shot up 129% YOY to $2.2 billion.
This growth rate would make any investor drool.
Amazon might want to shift this business over from the "other" line item on its earnings report because it is blossoming into a main engine of growth and profit.
As Facebook and Alphabet have demonstrated, the digital ad game is a high profit, zero sum game, and Amazon is in perfect position to capitalize going forward.
Amazon's e-commerce business is the foolproof platform that can attract digital ad dollars in droves.
Not only are customers already buying products on Amazon.com, but they are usually purchasing numerous items highlighting the suitability of Amazon populating relevant ads to its customers.
Amazon's strategy to sell high-volume, good value for money products fits nicely into the digital ad strategy with plenty of opportunity for ad buyers to roll out ad campaigns to the masses.
Amazon continues to augment its digital ad tech team creating new tools and has now started directly approaching brands directly racking up digital ad sales.
Amazon's gain is Facebook and Alphabet's loss.
If Amazon goes full steam into the ad tech game, it could do what it has done to brick-and-mortar retail - deflate prices.
This is a worrying sign for Facebook, which is already on the ropes after realizing its business model has some major holes.
Alphabet's strategic position is superior to Facebook's, but it is very much still a one-trick ad tech pony.
The attempt to reintegrate a censored version of its Google search into China makes sense when other FANGs are coming for their lunch stateside.
This epitomizes the current tech climate - evolve now or die.
Amazon is working on a new video ad product that it will place in its search results.
This new product is currently in beta testing mode.
These video ads will be 90 seconds or less and will direct customers to a custom landing page or directly to an official website where they can purchase the item.
The video ad will only be shown for users of iPhones and iPads initially.
Amazon is requiring companies to pay a minimum of $35,000 for this new type of ad campaign. Some of its prominent ad buyers such as Procter and Gamble are already testing out this service to curate the perfect video ads to place inside Amazon search.
At first, the inventory for these video ads will be restricted.
Amazon Media Group is the in-house sales team responsible for selling these new products.
For example, in Germany, the habitual Amazon customer carries out a systematic routine to buy Amazon products.
First, customers will perform astute research on potential products and analyze different price points to gain a comprehensive picture of the market using their smartphone.
The customer later adds the desired items into the shopping cart.
At a later date, the customer purchases the item on a different device, and in many instances, mobile is used just to research products when the customer is out and about.
This multi-leg buying process gives Amazon multiple chances where it can fit in some video ads for the customers.
It is true that the minimum $35,000 will make it harder for small businesses to compete, but this is tailor-made for larger companies to offer a compelling case to customers while leveraging their brand awareness.
It is entirely possible that Amazon will surpass $8 billion in digital ad revenue in 2018 and then blow by $16 billion by 2020.
Of that $16 billion in revenue, $12 billion could be booked as operating profit showing off the juicy margins that make this industry so attractive for the neutral observer.
Yes, Amazon has the largest and best product search engine in the world, and it's time to start leveraging this asset to drive monetization growth.
Specifically, the ability for customers to click on an ad and be shuttled over to Amazon.com for final purchase.
This is the x-factor missing out on Facebook and Google search models.
Amazon has the capability to cherry-pick revenue from each part of the process up until the delivery to the door.
This opens a slew of extra revenue down the road as it enhances the shopping experience because Amazon has full control over the whole process.
This runs parallel with Amazon changing how its ad tech operates to accommodate the emphasis on generating huge growth numbers in ad volume and sales.
Small ad buyers usually work through an agency to integrate with Amazon while larger ad buyers work with Amazon's in-house team.
In the next few weeks, sponsored websites outside of Amazon's ecosystem will start advertising to shoppers who are able to click a link directly moving the buyer back to Amazon.com.
The sponsored ad route is a direct shot at Google search and Facebook.
Unsurprisingly, Amazon converts sales at a 350% higher rate than Google, underscoring the effectiveness of digital ads for Amazon.
When customers are already on the Internet to shop, shoppers could do a lot worse than clicking on a direct link funneling them to Amazon.com.
Posting baby photos on Facebook is not likely to convert users into product buyers.
Neither is checking your Gmail account, translating foreign language on Google Translate, or using Google Search to populate results usually not related to shopping.
These methods fail to convert an Internet surfer to product buyers to the detriment of Facebook and Google search.
Amazon has the perfect business model for selling digital ads.
This robust ad business will spur Amazon shares more than $2,000, and the quality of the sum of the parts keeps rising.
Execution is the only roadblock. And as most of us know, Amazon is one of the most innovative and cleanly executed companies in the world with visionary strategists.
That is why it is Amazon.
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Quote of the Day
"What's dangerous is not to evolve." - said Amazon founder and CEO Jeff Bezos.
