1、North America Equity Research31 May 2019 Retail vs.AmazonCategory Penetration/Reach Continues to Expand;Cost to Compete Rising;Current Winners and LosersRetailing/Broadlines&HardlinesChristopher Horvers,CFA AC(1-212)622-Bloomberg JPMA HORVERS Tami Zakaria,CFA(1-212)622-C.Jerry Sullivan(1-212)622-Int
2、ernetDoug Anmuth AC(1-212)622-Bloomberg JPMA ANMUTH Cory A Carpenter(1-212)270-J.P.Morgan Securities LLCSee page 81 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that t
3、he firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment In our 7thannual Retail vs.AMZN deep dive,we have numerous observations.(1)A rising consumer led to a narrowing of the gro
4、wth gap between e-commerce and B&M,but this has reversed since Aug 18.The AMZN boogeyman could re-enter the narrative for highly exposed categories that benefitted from incremental store trips(e.g.,apparel and home furnishings)or when comps slow.(2)E-commerces 14%share highlights that we are still e
5、arly in the shift;we see a minimum 30%over time.(3)Amazons share of US e-commerce grew to 42%in 2018 and its share of adj.retail sales reached 6.4%.AMZN may surpass Walmart as the largest US retailer in 2022.(4)A high/rising cost to compete is widening the gap between well-capitalized,large players
6、andpeers.It is inherent in our recent TGT upgrade,and the long-term bull cases in AMZN,BBY,COST,HD,WMT,and TSCO.(5)Even home improvement!From a second derivative perspective,home improvement penetration grew the fastest at 27%driven by Tools and Equipments+62%YoY due to subcategories such as hand/po
7、wer tools and hardware leading(LOW risk).Furniture&Home Furnishings followed with 23%growth(vs.15%LY)with strength across all rooms in the home(WSM risk).(6)Given accelerating last-mile investments and growing mobile penetration,CPG is the battleground category,especially as AMZN seeks to drive wall
8、et given its high penetration in gen merch.Pet care has the highest penetration(16%)and one of the fastest growth rates(37%),suggesting long-term narrative risk to TSCO.(7)With AMZN and WMTs next-day announcements,and BBY,HD,TGT,and W racing to get there,the cost to compete is going up.This also put
9、s pressure on LOW and WSM,which significantly lag close peers.For TGT,the bigger strategic question is whether TGTs apparel/furnishings dominant assortment(39%of sales)necessitates a bigger endless aisle online,which would require more investment.We note that“being good merchants”is how TGT thrived
10、in a WMT world;management believes they can do it in a WMT+AMZN world.(8)Given WMTs two-day(several million SKUs)and next-day(220K SKUs)assortments are a small fraction of AMZNs,it begs two questions:(i)Does WMT need to build out a bigger DC network to create the power of 3P,and(ii)how long for more
11、 national brands to want to list on W?In our view,Team Retail sees the long-term bull case for WMT to be disruptive to Amazon,but we wonder if the market is celebrating too early.Rising/receding environment highlights B&M benefits during the good times/vice versa;AMZN narrative creep on apparel and
12、decorative home.Core retail sales growth started its acceleration in spring 2017.Since a strong 2Q18,however,growth has moderated(see Share of Wallet deep dive).During the stronger period,we saw a narrowing of the gap between core retail sales and e-commerce growth.Indeed,after peaking at 11.1%in 20
13、16,the gap contracted by 160 bps in 2017 and 270 bps in 2018(to 5.1%at its low point in July 2018)reflecting increasing competitiveness from retail,a flush environment that led to more store trips,and moderating AMZN growth.However,after the nadir,the gap has been creeping back(averaging 7.8%since A
14、ugust)reflecting the slower environment.We believe this gap will widen further with categories like decorative home and apparel seeing the biggest impact as they benefitted the most from incremental trips.Figures 1-2.2North America Equity Research31 May 2019Christopher Horvers,CFA(1-212)622-Doug Anm
15、uth(1-212)622- Long term e-commerce share remains on track to reach 30%+penetration.US e-commerce spend grew+14%Y/Y in 2018,the 9thstraight year of mid-teens%growth.We project a modest decel to+13%growth in 2019,though this may prove conservative given strength in mobile(+26%Y/Y in 1Q19)and ongoing
16、store closures/bankruptcies(6k store closures announced through mid-April 5.9k in all of 2018).E-commerce penetration reached 14%of adjusted retail sales in 2018,up from 12.8%in 2017,which in our view highlights that we are still relatively early in the secular shift.We believe US e-commerce will co
17、ntinue to grow at a mid-teens%over the next 5+years,with the online mix reaching 30%+of adjusted retail sales as soon as 2026the number that has long been our view of minimum mature online penetration,and appears increasingly conservative.Figures 16-17.Even home improvement!Tools and Equipment onlin
18、e penetration growth accelerates sharply with furnishings not far behind.Online penetration for key categories include CE(49%vs.44%LY),apparel(19%vs.15%),sporting goods(15%vs.13%),and home furnishings(14%vs.11%).From a second derivative perspective,home improvement(ex-dcor)penetration grew the faste
19、st at 27%driven by Tools and Equipments+62%YoY,with subcategories such as hand and power tools and hardware leading(Home Appliances and Garden&Patio grew 9%and 11%,respectively).Furniture&Home Furnishings followed with 23%growth(vs.15%LY)with strength across all rooms in the home.Figures 8-9.CPG pen
20、etration small but growing quickly;the battleground category;pet remains a long term overhang for TSCO.comScores online category growth was+31%,and we estimate overall online penetration at 4.1%(up 80 bps YOY).Within subcategories,top online penetrations were Pet Care(16.4%),Consumer Health(11.7%)an
21、d Beauty&Personal Care(11.4%),while Soft Drinks and Packaged Food were low.From a pace perspective,the fastest growing categories were Fresh Food(60%)Pet Care(37%),and Packaged Food(34%).Given accelerating last mile investments across retailers and growing mobile penetration(29%vs.20%LY),CPG is the
22、battleground category,especially as AMZN seeks to drive frequency/wallet given its high penetration in gen merch.Lastly,pet clearly stands out as we think about TSCOs high exposure to the category,despite its more rural customer base.Notably,WMT(-15%)and TGT(-14%)continue to outprice AMZN driven by
23、CPG.Figures 10-12,15,42.Amazons share of US e-commerce grew to 42%in 2018.AMZN is the 2nd largest US retailerbehind Walmartand fastest growing at scale.We estimate Amazons share of US e-commerce grew from 27%in 2014 to 42%in 2018,and its share of adj.retail sales grew from 2.5%to 6.4%.We provide est
24、imates of AMZNs share of US e-commerce by category in Figure 20.We look for AMZN to continue to take share of adj.retail sales and likely surpass Walmart as the largest US retailer in 2022,though we project Amazons share of e-commerce to remain stable at 41-42%over the next few years.While this may
25、prove conservative,it reflects AMZNs share approaching half the market along with increasing competition from US retailers.Online share gains become tougher as e-commerce offerings from retailers such as WMT&TGT grow faster off lower bases and penetration levels(WMT=$21.5B in 2019,+37%Y/Y,6%of overa
26、ll salesTGT=$7B in 2019,+34%Y/Y,9%of overall sales).Figures 18,19&21.Advertising=bigger focal point for retailers(WMT/TGT/W),with Amazon leading.We believe the advertising opportunity for Amazon&retailers alike is 3North America Equity Research31 May 2019Christopher Horvers,CFA(1-212)622-Doug Anmuth
27、(1-212)622- significant,with the retail and CPG verticals expected to account for 30%of US online ad spend in 2019,or$39B.While Google&FB remain the clear leaders with 50%+share of global online ad dollars and 65%in the US,AMZNs ad business is scaling rapidly with a line of sight to$20B of revenue i
28、n 2021.Beyond revenue,we believe online advertising also represents a significant margin opportunity(GMs=80%+&OMs=40%+)as an assumed 40%operating margin implies AMZNs ad business could represent 30%of its overall operating income in 2019,or$4.5B.WMT recently highlighted online advertising as one of
29、the top potential alternative revenue streams(acquired adtech start-up Polymorph Labs in April 2019);TGT is leaning on monetizing customer data to drive online advertising revenue;and Wayfair and HDs unmatched web traffic in their categories should help their online advertising,in our view.Figures 3
30、5-38.Online grocery:WMT leading,but ultimately these will become tablestakes.WMT leads in click and collect,but same-day grocery is a very even landscape given third-party providers like Instacart.AMZN also ramping up efforts with the addition of Whole Foods delivery through Prime Now in 88 metros a
31、nd curbside pick-up in 30 metros.Last mile/next day:costs to compete remain high;LOW and WSM lagging;TGTs a strategic question.With AMZN and WMTs next-day announcements,and BBY,HD,TGT,and Ws race to get there,the cost to compete is going up.Aside from widening the gap to smaller competitors,this put
32、s pressure on LOW and WSM,which significantly lag close peers.For TGT,theyll get to next day in due time,but the bigger strategic question is whether TGTs apparel/furnishings dominant assortment(39%of sales)necessitates a bigger endless aisle online(perhaps 3P),which would,in turn,require more inves
33、tment.Said another way,can they be good enough merchants?Fulfilled by WMT a necessity?And,about those brands.WMT will offer free next-day shipping on$35+orders on 220K items expanding to 75%of the US by year-end.AMZNs Prime offering has 100M items available for free 2-day shipping,much of which we e
34、xpect to migrate to 1-day over the course of 2019(1-day is currently in 10k cities/towns).We also note WMT has 25%share in grocery but only 6%share in gen merch(see our deep dive).Taken together,this begs two questions:(1)Does WMT need to build out a bigger DC network to create either the power of 3
35、P(58%of AMZN sales)or stock the top 1MM SKUs(which WMT noted are 80%of searches),and(2)how long for more national brands(e.g.,Nespresso pods and Nike)to want to list on W?Team Retail sees the long-term bull case for WMT to disrupt Amazon,but we wonder if the market is celebrating too early.Capabilit
36、ies litmus test.Clicks to checkout(MIK,BBBY,DKS,and BBY,oh my!).For registered users on the mobile app enabled with mobile pay options,AMZN and W only takes two clicks to checkout followed by three clicks for WMT,TGT,ULTA,HD,COST and WSM.On the other hand,LOW still requires four clicks and BBY five,
37、followed by DKS and BBBY six each.MIK has the highest number of steps at 9!E-commerce growth kings(ULTA,WMT,TGT)and pawns(RH,WSM,and LOW).Online sales at ULTA,WMT,W and TGT significantly outpaced the growth in their respective markets(ranging from+11%to 16%).On the other side,RH,WSM,and LOW all sign
38、ificantly lagged.See the full note for the results of our latest pricing survey(Figures 41-49).4North America Equity Research31 May 2019Christopher Horvers,CFA(1-212)622-Doug Anmuth(1-212)622- Table of ContentsOnline Landscape&Category Penetration.5Tracking Online Encroachment.12The State of US E-co
39、mmerce&Amazon.19Current Standings:Omni-channel Winners and Losers.23The BBY Case Study:How a Retailer Can Win.25Online Grocery,Next Day,and the Last Mile.27W and WSM Brands Lead in Social Media Engagement.37Be Like Jeff:Online Advertising Revenue Gaining Steam.39The Margin Challenge.44Pricing Gap to
40、 AMZN Narrowed.46Online Dislocation:Product Basics.53Consumer Electronics(BBY).56Discounters(BJ,COST,TGT,WMT).60Home Furnishings:The Battle Intensifies as Category Growth Online Accelerates.66Home Improvement(HD,LOW).73Sporting Goods(DKS).775North America Equity Research31 May 2019Christopher Horver
41、s,CFA(1-212)622-Doug Anmuth(1-212)622- Online Landscape&Category Penetration2018:E-commerce Growth Ticks Down to 14.2%;Penetration Edges Up 80 Bps in Line with LYE-commerce sales growth posted a 14.2%gain in 2018,down from 15.6%last year and 15.1%average growth rate since 2010.E-commerce penetration
42、 moved up to 9.6%from 8.8%LY,again capturing 80 bps of market share.Excluding auto,gas and food,e-commerce represented 14.3%of spend,up from 13%in 2017.Figure 1:Annual E-commerce Sales as%of Total,2000-2018Source:U.S.Census Bureau,using adjusted retail&e-commerce sales.Importantly,per Census Bureaus
43、 definition,“E-commerce is the sale of goods and services where the buyer places an order,or the price and terms of the sale are negotiated over an Internet,mobile device(M-Commerce),extranet,EDI network,electronic mail,or other comparable online system.Payment may or may not be made online.”Hence,w
44、e believe the e-commerce numbers generated by the Census Bureau quarterly e-commerce report should include BOPIS(whereas some companies such as COST consider it part of store sales).It is also worth mentioning that the surveyed retailers self-report these figures,which leaves room for discretion ove
45、r what a retailer considers as e-commerce sales.Online and Core Retail Sales Growth Gap Bottomed in Mid-2018;But Creeping Back Up in Favor of OnlineAs we have discussed in our 7th Share of Wallet analysis(we also hosted a conference call,contact us for the slides and transcript),after peaking at 11.
46、1%in 2016,brick and mortar stores helped narrow the growth gap between core retail sales and the pace of e-commerce sales by 160 bps in 2017 and 270 bps in 2018(to 5.1%at its low point in July 2018).We believe this reflects brick&mortars E-commerceE-commerce vsYearas a Percenttotal retail salesTotal
47、E-commerceof Total TotalE-commerce growth rates20002,979,38527,4150.9%-20013,062,15334,1201.1%2.8%24.5%21.7%20023,129,61744,4201.4%2.2%30.2%28.0%20033,261,61456,9321.7%4.2%28.2%23.9%20043,460,88472,3532.1%6.1%27.1%21.0%20053,686,58091,0512.5%6.5%25.8%19.3%20063,876,561112,7642.9%5.2%23.8%18.7%20073,
48、997,356135,8773.4%3.1%20.5%17.4%20083,927,636141,8953.6%-1.7%4.4%6.2%20093,612,988144,9004.0%-8.0%2.1%10.1%20103,816,741169,1104.4%5.6%16.7%11.1%20114,102,013198,5564.8%7.5%17.4%9.9%20124,296,769229,2955.3%4.7%15.5%10.7%20134,458,523259,8175.8%3.8%13.3%9.5%20144,634,031297,4066.4%3.9%14.5%10.5%20154
49、,721,328339,0627.2%1.9%14.0%12.1%20164,841,549388,0498.0%2.5%14.4%11.9%20175,081,862448,7488.8%5.0%15.6%10.7%20185,320,799512,5659.6%4.7%14.2%9.5%Retail SalesPercent Change(millions of dollars)From a Year AgoBoth B&M and E-commerce Growth Moderates in 20186North America Equity Research31 May 2019Chr
50、istopher Horvers,CFA(1-212)622-Doug Anmuth(1-212)622- increasing competitiveness with online and a flush environment that led to more store trips.However,similar to the trend noted above,after narrowing since early 2017,this gap reached a low point in July 2018 and has since been creeping back in th
