Are Traditional Convenience Stores Threatened by Amazon Go?

Zacks Equity Research

Updated Tue, Dec 6, 2016, 2:08 PM

“If you want to make money in this market, follow the customer.” – Jim Cramer

If survival of the fittest is the bid, then the buzzword ‘no cashier convenience store’, is a serious threat to all traditional brick-and-mortar retail giants. While the concept takes us to the next level of retail shopping, it’s also time that investors wake up to this reality and cash in on its prospects.

All About Comfort Buying

This new line of convenience stores introduced by e-commerce giant Amazon AMZN through its ‘Project Como’ earlier this year has started to win attention.

And why not? Very subtly the concept addresses modern consumers’ changing pattern of behavior. We are talking about that growing set of customers who are in the vicious cycle of taking up professional challenges to earn more money and ending up exhausted with no time for comfort or family.

Amazon Go at a Glance

Termed as Amazon Go, this no-queue-checkout-counter grocery store is going to be a windfall for customers who are too worn-out to stand in long lines at physical cash counters or are baffled at complicated self-checking counters.

This convenience store will offer all kinds of perishable items and grocery essentials as well as drive-up destinations where subscribers can pick up their orders and have them brought to their cars. All that's needed is the installation of the Amazon Go app to one’s cell phone.

This ‘Just Walk Out technology’ will automatically detect products picked up. And when shopping is complete, one can just leave the store. After a while, money will be charged online from the Amazon account of the customer.

What Investors Should Do

While the public opening of Amazon Go is scheduled for early 2017, the entire retail fraternity is keeping an eye on Project Como which has the ability to completely shatter the traditional brick-and-mortar convenience stores.

While apparently the retail grocery chain industry is expected to be gloomy over the next few months, there’s a huge opportunity out there for the investors. So, instead of being myopic, you need to come out of your shell and bet on this trend changing consumer pattern, recognize stocks that will be affected the most and act ahead of the market. And it looks like a winning deal.

Once again coming to Jim Cramer’s version of investing, “I love behavior-change investing. It can be incredibly lucrative, and when you have a behavior-change theme you can use selloffs to pick stocks based on those changes.”

The introduction of Amazon Go will hit hard Amazon’s direct brick-and-mortar retail peer Wal-Mart Stores, Inc. WMT. A number of other convenient store stocksare also at stake.

According to a Seeking Alpha article, this store roll-out by Amazon will definitely impact convenience store chains such as Casey's General Stores, Inc. CASY, Murphy USA Inc. MUSA and CST Brands, Inc. CST as well as drug store chains like Walgreens Boots Alliance, Inc. WBA, Rite Aid Corporation RAD and pharmacy benefit manager CVS Health Corp. CVS.

It will also create pricing pressure on sensitive grocery store chains like The Kroger Co. KR, SUPERVALU Inc. SVU or Ingles Markets, Inc IMKTA.

So, for investors who vouch on success stories as well as fundamental strength and growth trends of the premium retail market mammoths, there is a caveat. The growth curve of these companies may radically change in the coming days unless there is a massive makeover in their business models.

In fact, if we take a few stocks and judge their share price movement, we will get a rough idea on how the announcement of Project Como in April has already started to affect them.

Kroger: Since the beginning of April, share price of Zacks Rank #3 (Hold) Kroger has declined. The stock is trading much below the Zacks categorized Food/Drug-Retail/Wholesale industry. Year to date, the stock has lost 21.3% as compared to the broader market’s loss of 0.7%. We expect this trend to continue with the official launch of Amazon Go.

Rite Aid: The story is the same for retail giant Rite Aid. This stock traded neck on neck with the Food/Drug-Retail/Wholesale industry till May 2016. However, it has underperformed the industry since then. With solid second-quarter fiscal 2017 performance the stock again started to gain.

However, we believe the company’s share price will take a beating once Amazon Go is introduced. Meanwhile we are on the sidelines on how beneficial Walgreens Boots' plan to acquire Rite Aid will prove for both the companies amid this doldrums. Rite Aid currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SUPERVALU: Grocery giant SUPERVALU which is already witnessing difficulties in producing revenue growth is expected to be hurt by Amazon Go . Since the announcement by Amazon, this Zacks Rank #3 stock has persistently underperformed the broader Zacks categorized Food industry having lost 11.48% compared to the 1.73% loss of the broader industry.

Walgreens Boots and CVS Health: While these two popular Retail - Pharmacies and Drug Stores companies' prescription drug business are expected to remain unscathed by Amazon Go, their over-the-counter (OTC) drug business is threatened. With Amazon’s facility to pick physically and pay online, customers will definitely go for its drug stores instead of these traditional drug retail chains until some special facilities are offered.

Conclusion

The scope of long-term growth is enormous for stocks that form an inherent part of lifestyle of new-age consumers and evolve accordingly. We suggest investors to keep a tab on those stocks. This of course does not call for a complete overhaul of the existing portfolio as we still do not know how the traditional retail giants are preparing to brace themselves against the odds.

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Are Traditional Convenience Stores Threatened by Amazon Go?