The “Amazon Effect” to Drive ASX Players for Years

The “Amazon Effect” to Drive ASX Players for Years

Hold on to your seat, the lift off is happening!

The Dow Jones went over 22,000 points overnight. Things are looking very hot over in the US right now.

But it’s not really the Dow getting me revved up. It’s the US financial stocks. These hit a ten year high on Tuesday, US time.

You might remember back in May I wrote that the outlook for US banks was looking extremely compelling.

I also said this looked bullish in general for the USA overall too. If history’s anything to go by, this is bullish for Australia in the near future too.

Of course, the market might make me look like a fool tomorrow, but we’re on track so far.

The Financial Times says the banks were the best performing sector for the month of June. These could run a long time yet. More lending will heat up the US economy.

You can’t feel the same confidence for some of the Aussie retailers, though…

One such company is Australia Pharmaceutical Industries Ltd [ASX:API]. It’s one of Australia’s largest distributers under the Priceline and Soul Pattinson brands.

Yesterday API cut its full year profit guidance growth from 10% to 5%. Management said customers were putting less in their shopping baskets, and lower value items to boot. The stock was down over 10% at one point yesterday.

I actually had my eye on API for a potential buy a while back. But nothing about it ever felt that compelling, so in the end I lost interest. Sometimes the one you don’t buy is the best decision!

Having said that, I am beginning to worry there’s a bit of groupthink going on here. All the guns are all coming out to shoot down the Australian retail sector completely now.

There seems to be endless stories about pinched consumers and debt strapped householders. That’s an easy conclusion to leap too if you take your cue off the mainstream press.


Two stocks defying the bears

The results from outdoor clothing specialist Kathmandu Holdings Ltd [ASX:KMD] just threw out the opposite signal. Its full year profit is up 13%.

You might remember I mentioned I had KMD as a stock to get whacked from the fear of Amazon coming and was intrigued when it never sold off. Now we know why. We also have going gangbusters still.

We just have to take each company on its merits and watch their earnings announcements as they come.

I still think I’m right about one thing though. The fear of Amazon will drive every Aussie retailer to cut costs and invest in their businesses to be as competitive as they can be.

The equation is simple, as I put it in my brand new research report on this very story – adapt or die. I forwarded it to you yesterday afternoon while I was on the move.

I hope you read it. Amazon is so frightening because it sets the highest benchmark for customer service. Perhaps Apple comes a close second. I don’t think an Australian company really ranks here.

Express post to the the middle of Spain

I can give you a personal example Amazon’s level of service, actually.

I was in Spain last year living in a small, remote village. There was barely anyone that spoke English, let alone English books. I had to order what I wanted online.

I bought quite a technical and expensive copy of a technical analysis guide. It never showed up. After a month, I got in contact with Amazon to chase it up. The local delivery company had messed up the order and it was back in the distribution centre in Madrid.

Most companies at that point would apologise and mess around trying to get the original book back in my hand. Instead, the guy at Amazon shipped me a new copy at their highest express order, no questions asked.

I had it either the following day, or the day after that. I don’t quite remember, except being amazed. No quibbling, no hassles, no asking a manager for permission or stuffing around. He solved the problem in five minutes. I got my book in light speed – in the middle of Spain!

They would have lost money on that sale. They put my satisfaction above their short-term profit.

Keeping me – and you – as a lifetime buyer trumps everything.

That experience also reaffirms why I think Amazon will move into logistics completely. It can’t control that part of its business, and using third party firms is a weakness.

But it won’t be left that way.

I’m not alone in thinking along these lines. Analysts at Citigroup are saying that the ‘Amazon effect’ will drive Aussie retailers to cut costs everywhere they can.

The Citigroup guys suggest this will be good for a company called Qube Holdings Ltd [ASX:QUB]. That’s because it owns the largest Australian freight hub in the country. It also has up to 850,000 square metres of warehousing available.

Retailers can set up here to get their goods moving as efficiently and fast as possible.

I actually don’t recall ever seeing or hearing about Qube before. It’s not a stock I’m familiar with. But there’s something to that idea. I took a brief look into Qube this morning. Perhaps the biggest problem is the size of the company already: its market cap is over $4 billion.

It can take a lot to shift the stock price of a company that big.

Personally, I prefer smaller companies that can move much faster on news. Usually any one announcement can have a much bigger effect on their business. The price shoots up or down depending if the news is good or bad.

And I think the news around Amazon can be very good for some. Qube is one example of that, although not the best, in my view.

If you like to know what I DO think is the best company to cash in on the arrival of Amazon to Australia, go here.

Best wishes,

Callum Newman
Editor, The Daily Reckoning Australia