Ah, Amazon. It started with books, added apparel and now has disrupted supermarkets and even places that sell motor oil and windshield wiper blades.
Amazon makes none of the products it sells. But home delivery of goods ordered from its web site has made Amazon a high-tech success story, while regular merchants, who have invested in stores and distribution depots, have withered under Amazon bargain prices.
The latest sector facing disruption – auto parts stores.
Since Amazon pushed this year into the $48 billion-in-annual-sales sector, stock prices of the Big Four auto-parts merchants have skidded.
Falling share price
Before its meteoric rise stalled in December, Memphis-based AutoZone Inc.’s stock more than doubled in value between 2012 and 2016, reaching nearly $790 per share.
America’s aging car fleet powered the surge. Cars aren’t any younger, though the stock has shed a quarter of its value in a year. O’Reilly Automotive Inc. of Springfield, Mo., is down about 23 percent. Advance Auto Parts Inc. of Roanoke, Va., has given up 34 percent of its value.
Genuine Parts Co. of Atlanta has retreated only about 7 percent, holding on partly due to its market share in crowded East Coast states and the loyalty of professional mechanics to its NAPA brand.
Executives at the Big Four point to a mild winter and summer across North America as the reason many of their 17,000 stores have under-performed. But many stock traders point to a second reason.
There’s that 342,000-employee giant based in Seattle.
$5 billion slice
Amazon created a sensation last winter with disclosure of plans to sell products made by auto parts manufacturers including Federal-Mogul Corp., a Detroit mainstay whose brands include Anco wiper blades and Champion headlights.
Some analysts predicted Amazon could carve out a $5 billion slice of the retail parts business by 2018. One report cited a $216 car battery at AutoZone priced at $166 by Amazon.
Threatened by the prospect of Amazon capturing 10 percent of the business, the Big Four haven’t swooned. They’ve focused on faster delivery. For example, AutoZone, which employs 84,000 workers in North America, Latin America and the Caribbean region, has doubled down on megahubs.
These big depots can stock more strong-selling products than a regular warehouse and move them quickly to online customers picking up the goods at one of the 5,814 stores operated by AutoZone.
Caroline Jolly likes the strategy. A stock analyst who studies auto parts retailers for clients of the brokerage firm Gabelli & Co. of Rye, N.Y., Jolly recommends investors buy AutoZone stock, figuring the share price is bound to rise.
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“These guys have the opportunity to invest and make sure they are competitive on the economic side,” Jolly said.
Amazon’s prowess is built around a 2-day delivery promise centered on 258 distribution facilities throughout the United States. These centers are able to move everything from silk scarves to diesel generators from the manufacturer to the home of customers ordering online.
However, auto parts flowing through its system take as long as a week to reach customers. With the megahubs pioneered by O’Reilly, she said, the brick-and-mortar merchants are much better at getting parts into hand of customers when they need them — 2 hours for a professional mechanic, 30 minutes for someone trying to get their car on the road in time to reach their job.
Merchants have one other advantage. The number of parts used in front-wheel drive, stop-start engines, climate control and other systems has proliferated. O’Reilly, for example, now stocks more than 23,000 parts in a single distribution center, Jolly said, and can relatively easily find the right part for a customer’s model of car or truck.
“Further, the Big-4,” Jolly wrote in a recent report, “have accumulated more than twenty years of parts coverage data and car population demographics, including age and break down rates, to optimize the location and number of parts for any given five-mile radius of distribution.”
She doubts the big merchants — the four companies control more than half the auto parts market — are going away anytime soon.
Still, traders favor Amazon’s chances.
Amazon shares have climbed about 15 percent over the last year, matching the rise in the Standard & Poor’s 500, as investors buy into the promise of the Seattle company someday compiling big profits. That day is still in the distant future.
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Amazon in the latest quarter pocketed 0.5 cents on every dollar in sales. AutoZone earned about 13 cents on every dollar. O’Reilly held on to about 12 cents.
Rather than provide stockholders with big profits, Amazon is pouring money into expansions, a reason for the headlines on Sept. 7.
Amazon that day disclosed it is hunting for a second office center to work in conjunction with the booming headquarters in Seattle.
Labeling Seattle “America’s biggest company town,” the Seattle Times reports Amazon now employs 40,000 in the city, up from 5,000 in 2010, and accounts for 19 percent of the city’s prime office space.
That’s the largest share of prime real estate held by any company in any major city in the country, the paper reported.
New offices outside Seattle would employ 50,000 workers averaging about $100,000 per year in salaries. U.S. cities are clamoring to land the jobs.
Analysts say public incentives could easily top the $45 million provided in Tennessee for the five Amazon distribution centers clustered along Interstate 24 and Interstate 75 and perhaps surpass the $3 billion Wisconsin marshaled this summer for Taiwan-based Foxconn’s electronics plant.
Abundant as dollar stores
No one predicts a spate of store closings soon on the heels of Amazon’s push into auto parts retailing.
But if closings ever occur they would be noticeable. Auto parts stores are almost as abundant as dollar stores in U.S. cities.
In metropolitan Knoxville alone, home to about 880,000 residents, Google Maps shows more than 30 Advance, AutoZone, Carquest (a separate Advance brand), NAPA and O’Reilly stores open for business.
Their new online rival isn’t actually an upstart.
Amazon was founded in 1994 by Jeff Bezos, who was then age 30.
The offspring of a teenage mom and a former circus performer, Bezos was considered a brilliant kid when he landed at Princeton. He found his way to the New York hedge fund DE Shaw & Co.
He was admonished by David E. Shaw himself to keep his high-pay job when Bezos, then a senior vice president, raised the idea of leaving. He wanted to sell books on something known as the World Wide Web.
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Bezos didn’t listen to Shaw.
Today, Bezos’ personal net worth is estimated to exceed $80 billion. That’s enough wealth for him to afford every share of stock of both AutoZone and Memphis-based FedEx, an international carrier with nearly 300,000 employees.
After buying both Memphis companies, Bezos would still have $4 billion left over.
Break it up?
Amazon has grown so fast in the last decade that some critics have raised the question: Is it too big?
Digital economy professor Douglas Rushkoff of the City University of New York weighed in this summer in the business magazine Fast Company under the headline, “It’s time to break up Amazon.” Rushkoff contends:
“Amazon treated the book industry the same way companies like Walmart once treated the territories into which they expanded: Use a war chest of capital to undercut prices, put competitors out of business, become the sole employer in the community, turn employees into part-time shift workers, lobby for deregulation, and effectively extract all the value from a given region before closing up shop and moving to the next one.”
Rushkoff drew his own critics, including Tim Worstall, a fellow at the Adam Smith Institute, a libertarian think tank in London.
Worstall’s online piece in the business magazine Forbes argues Bezos forces “all the other market players to lower their own prices and profit margins — to the obvious and great benefit of us, the consumers.”
No antitrust action
President Donald Trump on the campaign trail last year criticized Amazon, contending it causes job losses in sectors it entered.
But the U.S. government has not launched an antitrust probe since the Seattle retailer reclaimed the spotlight this summer with the $13.7 billion buyout of grocer Whole Foods.
Announcing the second-city headquarters search shortly after disclosing the Whole Foods purchase may have warded off congressional anti-trust concerns.
“It would create a very favorable political environment wherever they located, such that the congressmen and senators where they locate would be supportive of the company if issues came up in Congress with antitrust,” University of Maryland finance professor David Kass told the Washington Post.
While Amazon’s expansion continues, auto parts retailers are scrapping for market share. AutoZone, for example, will open two megahubs this quarter at Ocala, Fla., and Pasco, Wash., and 10 more in 2018. It has 16 in place nationwide now. Each 30,000-square-foot hub cost about $60 million.
AutoZone chairman William Rhodes recently told stock analysts the megahub strategy and superior customer service can aid the retailer.
“While some portions of our industry have migrated in small part to online,” Rhodes said, “we believe that the trustworthy advice elements combined with the sense of immediacy insulates us much more than most sectors of retail and to-date that certainly has proven to be the case.”