As I alluded to in my July dividend update, I have recently been spending a lot of time studying Amazon.com. This has mainly been from reading two excellent books, the everything store by Brad Stone, and Amazon.com Get Big Fast by Robert Spector. I have also been going through the annual shareholder letters from 1997 up to the present day, written by Jeff Bezos, the Amazon.com founder and CEO.
As an investor, one needs to look around you, and think about what the threats to your investments may be, or the opportunities. I believe Amazon.com more than any other company poses greater threats to established businesses than any other, and you certainly ignore Jeff Bezos at your peril.
As a Dividend Tycoon you need to find stocks that will grow profits for many years, and pay dividends as a result. This has traditionally been fairly easy to predict with the large blue chips such as Proctor & Gamble, Johnson & Johnson, Coca-Cola, McDonald’s and Wal-Mart. However, the more I read and learn about Amazon.com, the more I realize that one cannot afford to be complacent and assume that the future will be as predictable as the past.
Disruption, via Amazon.com
What got me really thinking about Amazon.com was an article I read about a company bought by Unilever for $1bn, called Dollar Shave Club. The premise of Dollar Shave Club is that you can order, and have delivered to your home, a month of good quality razor blades, for $1. I wish I could get this service where I live, I am also tired of being ripped off when I buy expensive razor blades! Proctor & Gamble on the other hand paid $57bn in 2005 to buy Gillette.
How has it been so easy and quick for Dollar Shave Club to gain market share? They have bypassed traditional advertising, using YouTube etc, they have outsourced production to South Korea, and they are using, yes you guessed it, Amazon Web Services as their online portal. It is possible for companies to now use the Amazon infrastructure to sell their products. Having use of the technology of the worlds most efficient retailer means you do not have to beg for shelf space at the physical retailers. It would have been almost impossible to get your new product on the shelf of these retailers before, owing to the muscle of the large brands like Proctor & Gamble.
Who will win, who will lose?
I do believe that companies like Proctor & Gamble are going to find it much tougher going forward. This is why I prefer a companies like Coca-Cola or Pepsico where it is less easy for an upstart to disrupt them thanks to their brand loyalty being extremely high, although not impossible of course. I for one do not really mind the brand of razor I use as long as it works and is affordable. I like to drink either Coca-Cola or Pepsi-Cola though, and would not switch to Zip-Cola in order to save a few cents.
Of course the really big winner here is Amazon.com. They will profit from each and every sale, and as other categories of merchandise realize they can emulate Dollar Shave Club, more traditional brands will suffer and newer brands, along with Amazon.com, will prosper.
My preliminary reading on Amazon.com has led me to look at my portfolio with close scrutiny, to see where the weak links are, and to reassess future capital allocation decisions. I would not for example invest in Proctor & Gamble until I feel I have a solid grasp on the implications of the Dollar Shave Club story.
At this point you may say to me “Well why do you not just invest in Amazon.com if it is so great!” Well, it is in fact a possibility I am looking at, but it is not so easy. I have stressed in prior posts that a great business does not always make for a great investment. At the moment much of the good news may already be priced into Amazon.com, but alternatively nobody can quite yet comprehend how far Amazon.com will grow and how big it will be in 10 or 20 years. The title of the book “the everything store” does leave one pondering this question..
I am running out of time to write more as it is my girlfriends birthday today, so I will pick up next week on some more aspects to the Amazon.com story. Let me know if your investing strategy has been influenced by your views on Amazon.com and how you are Amazon proofing (I wonder if there is a word for this?) your portfolio.