Investors should avoid the big-spending US disruptors like Amazon, says Bell Asset Management – as well as the Australian retailers in their cross-hairs.
Speaking in Sydney yesterday, Bell Asset Management chief investment officer Ned Bell said Amazon is preparing to enter the Australian market – something that could have dire consequences for Australia retailers.
Australian investors need only look at the damage Amazon has inflicted in the US on department stories, Mr Bell said.
“US department stores' margins have been crushed over a long period of time. They’ve been doing everything they can to retain sales,” he said.
Mr Bell pointed to the work Nordstrom, one of the “better department store companies”, has done to build an online retail sales channel to defend itself against Amazon.
“[Nordstrom’s] online sales growth has been about 20 per cent per annum so they’ve actually done pretty well,” Mr Bell said, “but they’ve spent so much money building this capability that return on capital at the company has halved."
The effect of disruptive forces like Amazon has not reached its full potential in Australia, Mr Bell warned.
“It seems like Australian department stores have got further margin compression to come,” he said.
“We’ve been collectively hearing from our research trips that Amazon is probably getting closer to the point where they will plant the flag in Australia and they will expand their presence here.
“And that has ramifications for the supermarkets, for department stores, and for specialty stores,” Mr Bell said.
In its 20 years of operation, Amazon has recorded very low (if any) profits, preferring to spend huge amounts of money securing “share of wallet”, he said.
“Jeff Bezos really likes beating up on companies. He loves spending money. He’s got a licence from his investors to disrupt. And that’s what they do. If you’re in his cross-hairs, you’re not in a good spot,” he said.
While that is good news for Amazon’s customers, the news is not so good for the company's shareholders, Mr Bell said.
The share price of the giant online retailer has done very well, but it comes with a valuation risk – with a price/earnings ratio of around 118, he said.
“Amazon either needs to generate a lot more profitability or the valuation has to retract somewhat,” Mr Bell said.
Investors should therefore avoid less profitable disruptors like Amazon as well as the companies they are looking to disrupt, he said.
The profitable disruptors – such as Apple, Visa, Mastercard and Softbank – are the global companies to own, Mr Bell said.
For the US-based chiefs of Citigroup, shuttering the underachieving Australian consumer business could not have come soon enough. ...