Here is a little-known fact about Jeff Bezos. He once considered naming his online book store “Relentless,” and registered the URL in September 1994. In fact, if you type the web address www.relentless.com into your web browser, it redirects toward Amazon to this day.
That makes perfect sense, because Jeff Bezos is the most relentlessly brilliant businessman who has ever lived. He is like the Genghis Khan of e-commerce, conquering the Western World of retail.
But instead of laying siege to fortified cities and castles with moats and walls, Amazon — the trillion-dollar company Bezos founded — vanquishes brick-and-mortar foes. If you have stores and you sell to retail customers at scale, Amazon is terrifying.
The nosebleed valuation of AMZN shares suggests that e-commerce world domination is already priced in, making it hard to say whether AMZN is an immediate buy. But the implication here is not just to be bullish on Amazon. It is to be bearish on Amazon’s retail opponents, who are under siege by the relentless Amazon machine.
Believe it or not, sometimes the bearish side offers the easier trade. Consider the rise of the automobile in the early 20th century. It wasn’t clear which automobile company to buy, but it was a dead obvious move to short the horse and buggy.
This comes to mind in the aftermath of Amazon’s latest master stroke: Raising wages to $15 an hour for roughly 350,000 employees, while up-ending the entire retail employment landscape in the process.
Jeff Bezos already had credit for being a visionary, but the $15 wage move takes him to a whole new level of tactical brilliance. In raising wages to $15, Amazon has made peace with its loudest critics in a single stroke. It has insulated itself from political pressures. It has gone from “bad guy” to “good guy” in terms of big tech optics. And it has done all the above with a first-mover advantage in an area where it would have had to act anyway. And best of all, this $15 wage move could absolutely gut brick-and-mortar competitors.
Meanwhile, Amazon’s total cost for the move is estimated to be less than 1% of annual revenues. The company will be penalized far less than rivals for higher wage costs, because Amazon is a leader when it comes to labor-reducing innovation. In addition, the wage hike makes Amazon impossible to compete with in a super-tight labor market for seasonal workers ahead of the holiday season.
In this late stage bull market, happy investors are prone to assume that all stocks can go up. But they forget that “creative destruction” is a key aspect of capitalism, more cutthroat than Kumbayah. And in taking market share and profit from its rivals, Amazon is possibly the greatest destroyer since Shiva.
Consider the crazy optics of Bernie Sanders, arguably the most famous left-wing populist on the planet, tweeting out praises for Bezos, a CEO tech titan who made nearly $40 billion in a single year.
“What Mr. Bezos has done today is not only enormously important for Amazon’s hundreds of thousands of employees, it could well be a shot heard around the world,” Sanders tweeted in response to the $15 wage news. “I urge corporate leaders around the country to follow Mr. Bezos’ lead.”
Sanders had been a serious political threat to Amazon. He had just co-sponsored the Stop BEZOS Act, a bill that would tax companies based on how many workers are on public assistance. And now, he is cheering Amazon instead of criticizing them and urging other companies to follow suit. You can’t buy that kind of PR. (Or maybe you can actually…)
Amazon and Bernie Sanders are now on the same team in terms of broader wage movement. Amazon has promised to help lobby for a $15 wage all across the country. That’s huge in a time where the federal minimum wage is $7.25 and, as of this writing, no U.S. state has a minimum wage above $12.
The $15 level chosen by Amazon is no accident either. In theory, a $14 wage would have worked too. But in choosing $15, Amazon has also appeased the “Fight for $15” wage movement, which has a lot of attention and support. They, too, must now see Jeff Bezos as their strong ally, leading the way for $15 everywhere.
This is a nightmare for all of Amazon’s competitors currently paying less than $15, who now have to pay more to their employees or look like jerks, and who are now beaten in a time of labor shortages.
Wal-Mart had only gone to $11 per hour this year. Target had gone to $12 per hour, with a promise of $15 eventually, but not until the year 2020. Surprise! Now they are the bad guys unless they raise wages quickly, which will squeeze their profits and reduce their available expansion capital.
Oh, and if they don’t raise to $15 an hour, then aside from the bad press (Sanders is now trained on them) they will fall further behind in the competition for seasonal workers ahead of the holiday season, which is now so brutally competitive it is practically a knife fight on the docks among big retail players.
Everyone of note in retail is trying to add tens of thousands of seasonal workers ahead of Thanksgiving and Christmas, some of them seeking a hundred thousand or more — including logistics players like UPS and FedEx. Amazon just took a lead on all of them, while garnering huge publicity in doing so.
This wage move by Amazon is reminiscent of what they did with sales taxes. For many years, Amazon resisted paying state sales taxes — a crucial move as the company plowed every penny it could find into scaling and growing at a breakneck pace.
But then, one day, Amazon happily changed its tune — and it now voluntarily collects sales taxes in 45 states and the District of Columbia. Why the change? Because Amazon switched to a new strategy of building warehouses across the country, which would have required tax collection anyway.
It’s similar with wages. At some point, Amazon would have had to raise wages regardless, just to stay competitive in a hot labor market. The average wage for warehouse workers had also been rising at least twice as fast as the national average, and $12 an hour was already seen as a floor.
So, Amazon is now getting rounds of applause from its biggest critics for making a move that it would have eventually had to do anyway while putting the big hurt on its competitors. And, as if that weren’t enough, Wall Street is likely to penalize Amazon less for wage hikes, because the company is on a fast path to automating its warehouses.
It is far easier to gear up robot shelf pickers and box packers than it is to replace human retail workers. Yet another pain point for brick-and-mortar competitors — and more Wall Street love for Amazon.
Bezos is also thinking about political threats, which will only intensify as Amazon gets bigger.
The tech giants have increasingly been under a microscope, with the threat of regulation looming and consumer sentiment souring. And yet all of a sudden, as a result of the $15 move, Amazon has become one of the good guys (while Google, Facebook, and even Apple, are increasingly treated as bad or questionable on multiple fronts).
As a side note, we have to wonder, perhaps a bit cynically, if the multi-state competition for Amazon’s second headquarters was always fixed in favor of Washington, D.C. After all, Amazon has already doubled its lobbyist count since 2016. It is the most active D.C. lobbyist in big tech by far, with lobbying interests in drones, autonomous vehicles, air cargo, cyber security, data privacy, intellectual property infringement, cloud computing, pentagon procurement, and tax and food stamp issues (according to the Financial Times).
It makes perfect sense, then, for Bezos to have his second HQ and his second home where he entertains top D.C. power players — in easy reach of the political movers and shakers whose plans he will need to influence as he seeks to protect and grow his empire.
Again, the brilliance here is epic. And the CEOs of large brick-and-mortar retail companies should be throwing up in their wastebaskets. Bezos is coming for them.
Consider, for example, what happens in a super-tight labor market for seasonal holiday workers. With $15 wages on offer from November 1, it becomes far more rational for a seasonal worker to choose an Amazon warehouse job over a lower paying one at a brick-and-mortar retail store.
This means the customer service experience for brick-and-mortar retail outlets will suffer — due to worker shortages — at a time of year when the crowds are thickest and sales staff are most needed. That could lead to lost sales, longer checkout lines, soured customer experiences, and more customers swearing off brick-and-mortar permanently and switching more toward e-commerce — turning primarily to Amazon.
At the same time, we are now seeing weak brick-and-mortar retail players on the brink of extinction, with their implosion having a knock-on effect on larger retail outlets. Amazon is accelerating that extinction process to its own compounding benefit.
In recent days Bed Bath & Beyond (symbol BBBY) and Pier 1 Imports (symbol PIR) both saw greater than 20% share price declines in a single day, as poor sales numbers accelerated a sense of crisis. In fact, Pier 1 Imports has seen a stock price decline of greater than 90 percent over the past five years. But Pier 1 still has nearly 1,000 brick-and-mortar stores. So does Bed Bath & Beyond.
What this means is that, as PIR and BBBY start to inevitably shutter their large network of stores, the shopping centers where they have a presence will see reduced traffic. The blight of empty stores will be harmful to the other tenants that are still alive. And more customers will shrug and shift more of their purchases to online retailers such as Amazon.
So here is the trade in all of this. If you are worried about nosebleed market valuations in terms of an overbought market in general or just want to hedge your portfolio a bit in these lofty times, you might consider put options on XRT, the SPDR S&P Retail ETF.
Amazon is not represented in the top holdings of XRT. And most of the companies in XRT are retailers now under siege, either indirectly or directly, by the Amazon machine. Here are XRT’s top 10 holdings by weight via Yahoo Finance (as of today):
In fact, the news of Amazon’s $15 wage move was attributed as a driving factor for the recent sharp drop in XRT, which took a nasty tumble on Oct. 2. To use Sanders’ words, “a shot heard around the world,” indeed.
As of this writing, XRT has not shed its green zone status with respect to TradeStops.
But a few more days of decline could break an uptrend that had been in place for more than a year (since August 2017) and the bloodletting could now be underway.
The $15 wage hike was a warning shot: Amazon is not only coming for the business of the brick-and-mortar players, it is coming for their employees too, while raising their costs and degrading their seasonal holiday offerings.
We are agnostic as to Amazon’s immediate outlook due to its lofty valuation these days (world domination already priced in) — but things could hardly look more bearish for XRT, and investors are only just waking up to this.
Richard Smith, PhD
CEO & Founder, TradeSmith