Market Health

The Ultimate Anti-Amazon Play

Jeff Bezos may have launched into space, but Amazon (Nasdaq: AMZN) is having a forgettable year.

Shares of the online retail giant have gained less than 2.5% so far in 2021.

That’s worse than the 18% run the S&P 500 has managed. And it ranks near the bottom of performances from the once and future kings, the FAANG stocks.

Though the FAANGs – Facebook (Nasdaq: FB), Amazon, Apple (Nasdaq: AAPL), Netflix (Nasdaq: NFLX) and Alphabet (Nasdaq: GOOG) – have largely underperformed the S&P 500 Index year to date.

FAANG Stocks YTD

It’s a rare sight to see the majority of these “Fab 5” stocks lag behind the major index. They’ve been the economy’s main engine of growth for years.

But Amazon’s performance shows there are some weak points in its armor… even when the market it dominates is booming.

Doubling the Pace of the “Return to Normal”

The pandemic provided a massive catalyst for a number of industries.

But few were affected more than online retail.

At the end of 2018, e-commerce accounted for 9.6% of total retail sales. In 2019, online retail sales grew to $578.5 billion, accounting for 10.7% of total retail sales.

Despite this fabulous growth, most analysts didn’t expect e-commerce to top 15% of total U.S. retail sales until 2025 or later.

But COVID-19 changed that outlook overnight…

E-Commerce as a Percentage of Total Retail Sales

In the second quarter of 2020, online sales spiked to nearly 16% of all retail sales in this country. That moved the adoption rate forward by five years.

With consumers adhering to quarantine measures, e-commerce was the only route for many to acquire essential items… as well as not-so-essential items… like a three-pound bag of their favorite caramels, a two-pound bag of Blow Pops or a case of Jujyfruits.

Not to mention all of the home gym and sourdough bread-baking equipment everyone splurged on last year.

Now, e-commerce sales have eased back as a percentage of total retail sales. But they remain at elevated levels. And more importantly, they are increasing year over year.

For instance, in the first quarter of 2021, online sales in the U.S. grew 39% from the first quarter of 2020. That was more than double the 16.2% increase we saw in total retail sales.

Of course, the pandemic isn’t over… at least not yet.

We are starting to see a return to normal. But this e-commerce trend is here to stay.

Variants in the “Amazon Effect”

Amazon disrupted the entire economy.

Its path from online bookseller to global retail, logistics and cloud computing powerhouse has helped erode the foundation of brick-and-mortar retailers.

In turn, every company has had to embrace e-commerce simply to try to stave off Amazon’s wave of destruction.

And for good reason. Amazon’s share of total e-commerce gross merchandise volume has been steadily on the rise.

Amazon's Share of Total Online Gross Merchandise Value

In 2021, the online retail giant will control 50% of total e-commerce gross merchandise volume in the U.S.

To give you some perspective, Amazon has almost 10 times the e-commerce volume of the largest retailer in the world, Walmart (NYSE: WMT).

Now, going toe-to-toe against Amazon in the e-commerce space is futile. That’s like Danny DeVito getting into the ring with Muhammed Ali. Sure, the smaller guy may get some good punches in, but ultimately, it’s a tragic mismatch.

But in a world of booming online retail, there’s one little guy that I believe can stand up against Amazon… and that’s Chewy (NYSE: CHWY).

The e-commerce pets product platform launched in 2011. Its site carries more than 45,000 items, ranging from food to toys to medications.

But, most importantly, it’s one of the few businesses on the planet that Amazon can’t dominate. And that’s because Chewy focuses on a single – but growing – niche market: pet care.

Believe me, I get the most out of my Amazon Prime membership each year. If Amazon could beat Chewy, I’d more than likely use it. Instead, I’ve been a loyal Chewy customer for my large menagerie of animals for years.

Matthew Carr Pets

Chewy’s best weapon against Amazon is auto-shipments.

These are scheduled deliveries for pet essentials like kitty litter and dog food. This has become an increasingly attractive option for consumers. In the first quarter, auto-ship sales increased 34.4% to $1.48 billion – accounting for 69% of total sales.

Year to date, this anti-Amazon play has seen its shares rise 18% – in line with the S&P and more than seven times the performance of Amazon.

I think there’s still a lot of upside ahead. The growth in online sales continues to double the pace of total retail sales. And this remains the long-term trend investors must focus on.

But there are companies, like Chewy, that have emerged as variants of the “Amazon Effect.” They’re able to survive and thrive by not only facing the retail giant head-on but also focusing on one niche market that it can’t seem to conquer.

Here’s to high returns,

Matthew

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