The Daily Update - Inflation killing Amazon

When Federal Reserve Chairman Janet Yellen and her colleagues at the Fed meet to discuss inflation,  one word that may have been adding to the discussion alongside oil, health and housing is Amazon. With Amazon’s ability to cut prices and pummel its rivals into submission there is now a growing feeling that, as Ed Yardeni,  economist and president of Yardeni Research puts it,  ‘Amazon is killing lots of businesses. In the process, it may also be killing inflation’. He went on to say, ‘Amazon arguably has done as much as the Chinese to kill jobs and keep a lid on inflation by enabling fast and easy price discovery for anyone with a cellphone’. And now with Amazon’s purchase of Whole Foods, Jeff Bezos, Amazon’s CEO, may be about to extend his reach. As it stands at the moment, food makes up nearly 15% of the US CPI (consumer price index), a little less than transportation.

 

‘Now Amazon is going to reshape the entire food retailing industry and it is highly deflationary — and this is an $800 billion grocery market we're talking about’ is how David Rosenberg, senior economist and strategist at Gluskin Sheff sees it. Sheff believes we are going to see ‘a supermarket war of historic proportions’.   Amazon’s vast use of automation and its unparalleled scale means that price pressure will be intense in the coming years. This is not to say that the likes of Walmart are letting Amazon have it all its own way. Earlier this year Walmart began discounting thousands of items that consumers could purchase online and pick-up instore. This is being expanded to 1m items. Walmart also offered free delivery on orders over $35, Amazon promptly cut the minimum to $25.  In a recent report Morgan Stanley recognised the difficulty that old-style retailers are going to have stating: ‘Traditional retailers will struggle to compete with a business that generated an estimated $225 billion in global gross merchandise value in 2016, growing 29% year-over-year and has the discipline to operate at a 1% margin’.

 

Not all agree with this assessment though. Mark Zandi, chief economist at Moody's Analytics believes the overall impact on inflation will be small. Zandi believes that ‘if Amazon is responsible for reducing retail goods inflation by 1 percentage point per annum — an aggressive assumption — then this will reduce overall inflation by 0.15%. Not inconsequential, but not a game changer’. But in doing the maths, 1% per annum equates to 10% reduction in retail goods over a decade, reducing inflation by 1.5% over the same period. It may be an aggressive assumption, but even if it’s 50% right, that’s still a massive effect.

 

Nonetheless, for many CEOs across a wide range of industries, Amazon remains a ‘ridiculously scary’ rival as Greg Maffei, head of Liberty Media put it. Adding Amazon ‘has an ability, because of its scale, to invest at incredibly low or negative rates of return — because they can cross-subsidize, and the market is willing to suspend disbelief in future profitability’.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.