E_K_S I don't know the details of M, but I will share my experience in investing in Retail and my general opinion about investing in Retail nowdays. At the end of last year I thought I found a few good names in retail trading at low multiples. At the time, it seemed to me a nice value play. Therefore, I started a few positions (probably around 20% of my portfolio). Since then I've lost, in a few of them, more than 50%. I would be fine with that if I've realized that the market was just overacting and the business were a healthy and prosperous business no matter what. Nevertheless, during the past year I've been doing additional due diligence and even changing my shopping habits. What I've found is that this is structural. Like previous changes in the retail space were structural has well and all incumbents will be negatively affected, even if they do the right thing.
So let me illustrate what I want to say, by sharing my shopping experience. For 8 years now I do almost all my Xmas shopping online. I started doing my shopping at Fnac. I am among the first among my circle of friends doing that here in Portugal. The reason? I hate crowded malls. But apart from that, I would buy everything else in a physical store. So, at the beginning of this year, I thought that there was room for traditional stores. So after the frenzy with the impact of the online, I decided to start experimenting to do all most of my daily shopping online and I am now addicted to it. I use continente.pt from Sonae SGPS to do most of my shopping and I have switched most of the shopping I did on Fnac to Amazon (they decreased the shipping costs to Portugal, they are now free from Amazon.es).
So why do I say that all incumbents will lose, no matter what. Take the example of Fnac. With regard to Xmas, Tech and Books shopping, before I would go to Fnac, which was the most competitive. But even though they have a great online platform and service (which I use regularly for 8 years now), they have been becoming less and less competitive in prices. So I end up finding Amazon much cheaper in Tech and foreign books and local online players also cheaper in books. The problem of Fnac is that, although they have a great online platform, they still have the cost of the physical platform of large stores. That physical platform has fewer and fewer people visiting the stores and buying stuff. So, they can't be competitive against lower cost structure competitors. Buyers will continue to become more aware of this and the turnover of physical and online stores will continue to decrease. Unless they take the tough decision of having lower selling prices in the online stores, competing with its own platform. Obviously, this may mitigate the problem of the turnover, but won't solve the problem of greater competition and future lower margins. Summing up, even an incumbent player that, in the past, was innovative is suffering dramatically.
Looking to Continente (our local Walmart), they have the best online platform in Portugal, but before I buy online, I would take a shopping list and choose between one or two close stores. Now, I easily compare the prices online. If most the prices are cheaper in one of the websites, I choose that one. Otherwise, I choose the other one. It is also easier for me to plan my shopping, when I find a product too expensive, I tend to delay its buy to take advantage of the frequent discounts campaigns or discount coupons that I am awarded. Since Continente has a well functioning CRM, they know that to keep me as a client, they have to give me regular discount coupons (they don't give the same discounts to everyone). You may argue that it is a very smart thing for them to do. That way they can maximize the profitability of each client. Nevertheless, it is very likely that other competitors will come up with similar well-functioning CRMs, and at a certain point I will provide very little profitability for them, in order for them to keep me as a client. Summing up, Continente, as an incumbent, is doing a great job and it is performing very well. But in the coming future, in a competitive environment where information flow so easily, even Continente is doomed to be somehow affected in its profitability.
That being said, I know admit my bets on Retail were a big mistake. My focus now is trying to get out of them minimizing the losses, taking advantage of the year-end technical swings. Nonetheless, I am proud that, despite this mistake, this year I am having an excess return over my benchmark of around 2% (last year it was 6.5%) |
