Amazon's New Conquest Begins

The latest on the 'death of retail'... Amazon's new conquest begins... Why grocers should be terrified... Wal-Mart is fighting back... The last hope for traditional retailers?... The surest way to bet on this trend... In the mailbag: Porter responds to Frank T...

Regular Digest readers know the traditional retail sector is in serious trouble...

Brick-and-mortar retailers – especially those located in shopping malls – are filing for bankruptcy in droves. So far, 2017 has claimed The Limited, hhgregg, Wet Seal, Payless, BCBG, and Gymboree, just to name a few.

Meanwhile, major department store chains like Macy's (M), JC Penney (JCP), and Sears (SHLD) are closing hundreds of locations. And Sears has hinted that it may be nearing bankruptcy.

Of course, while traditional retailers are struggling, online retailers are thriving as consumers turn to the Internet for their shopping needs. Department-store sales slid 4% from May to June, according to the latest U.S. Census Bureau data. Yet e-commerce sales soared 11% during the same period.

It's no secret that much of the growth in e-commerce is due to Amazon (AMZN)...

Amazon already dominates the online retail world. It accounted for a huge 43% of all U.S. online sales – and for more than 50% of all e-commerce growth – last year, according to retail data firm Slice Intelligence. But it continues to pursue aggressive growth in new markets, as its recent acquisition of upscale grocer Whole Foods shows.

Amazon took control of the company's 465 stores on Monday, and wasted no time slashing prices on many of Whole Foods' notoriously pricey products. As Bloomberg reported...

Amazon spent its first day as the owner of a brick-and-mortar grocery chain cutting prices at Whole Foods Market as much as 43%...

The tech giant's $13.7 billion purchase of Whole Foods has sent shock waves through the already changing $800 billion supermarket industry. The wedding between Amazon and the upscale grocery promises to upend the way customers shop for groceries. Cutting prices at the chain with such an entrenched reputation for high cost that its nickname is Whole Paycheck is a sign that Amazon is serious about taking on competitors such as Wal-Mart, Kroger, and Costco.

"Price was the largest barrier to Whole Foods' customers," said Mark Baum, a senior vice president at the Food Marketing Institute, an industry group. "Amazon has demonstrated that it is willing to invest to dominate the categories that it decides to compete in. Food retailers of all sizes need to look really hard at their pricing strategies, and maybe find some funding sources to build a war chest."

The threat to traditional grocers could be even greater than many believe...

Remember, as we've discussed, Amazon has become a master of "bizarro capitalism." As Porter explained in the April 21 Digest...

The last several years have seen the rise of companies that are experts at exploiting technology to reduce labor costs. Free capital and zero per-unit marginal labor costs equals a whole new form of capitalism that's genuinely unlike anything the world has ever seen before.

These are companies with massive scale, massive sales growth... and virtually zero profits.

Amazon is the most famous example. In just the last three years, the Internet retailer's revenues have almost doubled (from $80 billion to $140 billion). Meanwhile, its profit margins haven't budged. They remain less than 2%. With this kind of scale and almost no profit, Amazon has been able to grow faster and faster, into all kinds of new businesses. The company doesn't have to worry about cash flows to power investments into new lines of business because, after all, capital is free.

So even though Amazon has only earned profits of $3 billion over the last three years, it has been able to invest $17 billion into growing its core business and building new businesses...

It's a for-profit company that doesn't intend to make a profit. And it doesn't have to because there's unlimited amounts of additional investment capital, available essentially for free.

In other words, while Whole Foods is currently profitable, Amazon doesn't need it to make money selling groceries.

Traditional grocers already operate on razor-thin profit margins. How will they survive if Amazon chooses to slash prices further and operate Whole Foods at a loss? It's not only possible... Amazon's history suggests it is virtually certain.

But Amazon's plans likely extend beyond becoming the dominant brick-and-mortar grocer alone. The deal gives the company a clear path to dominate the growing $700 billion grocery-delivery market, too.

Amazon also announced plans to weave its Prime membership program – which already boasts an estimated 85 million customers, or about 25% of the U.S. population – with a Whole Foods rewards program.

Along with new lower prices, these moves could bring in millions of new Whole Foods shoppers... and drive additional sales of Amazon's existing products.

Traditional grocers should be worried indeed.

In the meantime, one major retailer is trying to fight back...

Wal-Mart (WMT) shifted its growth strategy toward e-commerce last year. And while it remains in a distant third place behind Amazon and Apple (AAPL), the retail giant just stepped up its fight in a big way...

Last week, Wal-Mart announced it is teaming up with Google to offer voice-activated shopping – an area where Amazon has essentially had a monopoly position with its virtual assistant Alexa.

Soon, customers using Google's virtual assistant will be able to buy hundreds of thousands of Wal-Mart products through the Google Express online marketplace. And this will allow Wal-Mart and Google to compete directly with Amazon in this small but rapidly growing corner of the market.

The deal could also highlight a potential path forward for some other traditional retailers...

In fact, according to Cooper Smith – director of research at retail advisory firm L2 – connecting with big tech companies like Google is one of the few viable options these companies have left. As financial-news network CNBC reported...

"A lot of luxury brands like LVMH, which has refused to touch Amazon with a 10-foot pole, are talking about banding together to create a new luxury e-commerce space. Amazon hasn't been able to disrupt that market yet. Google and Facebook are the platforms with the reach, those are the alternative platforms that would help brands and retailers reach consumers without having to partner with Amazon," Smith said.

Chris Horvers, retail analyst at JPMorgan Chase, was on CNBC Wednesday morning with a similar sentiment: "Wal-Mart's move to enable voice ordering and linking the history is really important. The idea is if we can get the Home Depots and the Costcos to enable that and the Targets to enable that same feature, you start to develop an alternative platform to Amazon... We need to create an alternative site where the rest of retail can go and create critical mass from a customer's perspective."

Of course, the odds are still long...

Many brick-and-mortar retailers will not survive. And those that do will have dramatically smaller footprints, if they continue to operate physical stores at all. As Porter explained in the August 18 Digest...

My top, most certain trend is the death of retail. I have no doubt that within 10 years, more than half of the retail space in America will no longer exist. And that's probably too conservative an estimate. The destruction in retail is likely to be far worse and occur far faster, like a 75% decline within five years...

We buy everything – groceries, clothes, cars, toys, tools, services – absolutely everything online. I won't go into stores anymore. Not even for a pack of gum. Wegmans will bring me gum along with all my groceries within hours, and the workers stack them all neatly for me in my garage. They even put the food and drinks into my fridge for me.

The rest of the country is right behind me, walking away from the mall and from Target (TGT), too. Nevertheless, most people don't understand just how big of a change this will be for the U.S. economy.

Consider a few important facts... Between 1970 and 2015, the number of malls in the U.S. grew twice as fast as the population. As a result, America has a truly absurd amount of retail space per capita... America has more than 7.5 billion square feet of shopping center space. That's about 23 square feet of mall space per person. On a per-capita basis, that's 10 times more than Germany.

As we've discussed, this means a huge number of shopping malls are doomed. So what happens next?

As a result, shorting mall owners is one of the surest ways to invest in this trend.

Longtime readers will recall Porter and his team recommended shorting shares of GGP (GGP) – formerly known as General Growth Properties – last September. GGP is one of the largest and most troubled mall landlords in the U.S. More than 90% of its 127 properties have JC Penney, Sears, or Macy's as an anchor tenant. And more than 40% have all three.

Even if these retailers somehow survive – which is unlikely – the vast majority of their stores will be left vacant... and GGP's cash flows will disappear.

Porter's thesis is already playing out. GGP shares are down about 15% so far this year and recently touched a fresh three-year low... and Stansberry's Investment Advisory subscribers are already up about 25% on the short position in less than a year.

New 52-week highs (as of 8/28/17): WisdomTree Emerging Markets High Dividend Fund (DEM), PowerShares Chinese Yuan Dim Sum Bond Fund (DSUM), iShares MSCI Italy Capped Fund (EWI), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), National Beverage (FIZZ), iShares China Large-Cap Fund (FXI), iPath Bloomberg Copper Subindex Total Return Fund (JJC), KraneShares Bosera MSCI China A Fund (KBA), McDonald's (MCD), iShares MSCI Global Metals & Mining Producers Fund (PICK), ALPS Medical Breakthroughs Fund (SBIO), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).

In today's mailbag, Porter responds to paid-up subscriber Frank T.'s accusations. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.

Porter comment: Frank, I wanted to add a few more thoughts on your recent criticisms...

I've found that my customers can often recognize a problem long before my staff is willing to tell me about it. And behind your criticisms lay some issues that concern me deeply. We strive to serve all of our subscribers fairly and with total integrity. Obviously we don't want to overcharge for our work, as doing so would cost us a lot of money in lost business.

So I hope you'll read this reply carefully and with an open mind.

First, about your concern that Steve Sjuggerud was "late" with his recommendation of Chinese Internet leader Tencent... It's obvious you're poorly informed. As Justin explained yesterday, Steve shared his research on Tencent and other "New China" stocks with True Wealth subscribers more than a year ago in July 2016. This was before we even launched his higher-priced True Wealth China Opportunities service.

You might argue that Steve didn't actually recommend Tencent at that time – he recommended an exchange-traded fund ("ETF") that owns it. True enough. In his True Wealth publication, Steve recommends very few individual stocks. Instead, he focuses on low-cost (and lower-volatility) ETFs. These investment vehicles are often the best way to get exposure to Steve's ideas (and the macro themes that drive them) at the lowest total cost. As a financial planner, I'm sure that makes sense to you, too.

However, Tencent was such a compelling and important idea that Steve came back to it earlier this year and recommended the stock on a standalone basis. That's unusual. Steve doesn't recommend many individual stocks in True Wealth.

Given these facts, I suspect you'd agree with me that paying around $200 a year for True Wealth was, at least in this case, money well-spent.

But... the deeper and more troubling issue you raise is your concern that by providing multiple levels of service to our subscribers, we are in some way "short-changing" the readers of True Wealth and our other "entry level" products.

Yes, it's certainly true that we at Stansberry Research provide multiple products, across a wide spectrum of prices. Some of the information we provide, like research on distressed corporate debt... or startup biotech companies... is simply worth far more money because it is incredibly difficult to acquire and because the gains made with such information can be massive.

But the idea that offering such premium research hurts the subscribers of our lower-priced products is laughable. In fact, nothing could be further from the truth. What happens instead is that millions and millions of dollars we can afford to spend on additional travel, computers, databases, building contacts, etc. all filters into our low-cost newsletters, greatly enhancing their value as well.

For example, as Steve explained in the April 2016 issue of True Wealth, it was the computer database we built to serve our True Wealth Systems subscribers that first quantified the value he identified in Chinese stocks last year...

This month, I'm stealing... I think you'll be OK with it, though. Let me explain... My most exclusive service – True Wealth Systems (TWS) – costs $3,000 a year. The idea behind this service is simple: I've put the best ways I know to find investments (based on history) into a computer system. The computer system back-tests my ideas and then lets me know what the buys are today, based on my criteria. In short, it works... Darn it. It finds my best ideas faster than I find them myself. This month, our TWS computers gave me such an incredible idea, I have to steal it. I feel compelled to share it with you because this idea lines up so perfectly with our True Wealth investing principles...

I've spent more than $1 million on computer data alone, not to mention multiples of those amounts for programming and hardware to build a computer database system that allows our team of researchers to study virtually any investment theme or concept of any previous market cycle... in almost every tradable market in the world.

Do you provide a similar service for your customers?

Of course, no one made me spend all of this money. But I chose to do so because I wanted to prove that Sjug's instincts about the markets were right on. I had seen him make big trades like his current China trade work time and time again since the mid-1990s. I didn't need the computers to tell me that Sjug is a savant. But I needed them to convince our subscribers – who weren't going to risk their money just because I said they should.

Working with this system over the last decade has greatly improved our results. It has made Steve a much better investor, which is paying dividends month after month for all of our subscribers, but most of all for True Wealth subscribers, who didn't have to spend a penny extra for their access to this kind of exclusive information and research.

As I believe anyone who has been reading our work for 10 years or longer would tell you, we continually invest more and more capital back into our company's products, making them better and more comprehensive. Meanwhile, many of our entry level products are still available (at least for the first year) for less than $100. I believe they represent the greatest possible value in the market for financial research today... and I continue to publish our annual Report Cards that prove it.

And that brings me to my final point...

If paying less than $200 for True Wealth is too expensive for you, I honestly don't believe you have any money to invest. There's simply no better value anywhere for financial insight, much less specific, highly valuable, investment advice. I'm willing to bet a lot of money that if you charged all of your customers $200 or less, you'd quickly go out of business.

If you're not able or willing to spend more to get Steve's more sophisticated, more specialized, riskier, and more expensive publications, that's fine. Thousands and thousands of subscribers have come to trust and admire his work. When Steve decides that an investment trend is worth creating a separate advisory to follow exclusively (as he has a few times in the last 20 years), we aren't short of customers.

And why would we be? In Steve's latest special project – True Wealth China Opportunities – which we launched a year ago, Steve followed up on his ETF and large-cap stock recommendations with an entire portfolio of China-focused leading stocks – about 20 in all. The average year-to-date return of this portfolio is 43% as of yesterday's close. And it doesn't have a single losing position.

If you can do better than that, please tell me where I can sign up.

Regards,

Justin Brill
Baltimore, Maryland
August 29, 2017