The Real Estate Philosopher


How to Beat Amazon

Jun 29, 2017

I have been reading all the articles about Amazon buying Whole Foods and how that ends the grocery business for everyone else, including Walmart.  And beyond that, it also means the end of retail since Amazon could buy other retail companies too.  From the articles it sounds like “game over” for not only groceries but all of retail.  This seems like kind of defeatist thinking.   
 
So I was thinking about how one could compete with Amazon.   Here is how to do it….
 
First – let’s examine why Amazon is so hard to compete with in the first place. 
 
It is brilliantly run for sure – but so are many other companies.
 
It has a dominant place in many markets, with a super-strong distribution network, etc, but it has one amazing thing going for it and that is that, for reasons no one can satisfactorily explain to me, Wall Street determined long ago that Amazon doesn’t have to make money!
 
I am certainly very impressed with Jeff Bezos, but I think this was just an (incredibly) lucky break.  I don’t think this break was due to Bezos’s amazing skill or Amazon’s incredible business model.  He just got (incredibly) lucky.
 
Look at the other major tech stocks that are consistently held up next to Amazon; namely, Google, Microsoft, Intel, Facebook, and Apple.  They are all the same except for one HUGE difference – the others are all printing insane amounts of money.  But Amazon barely breaks even after you take out stock-based compensation and the billion or so it is getting from its cloud business (which does actually make money). 
 
For example:

  • Apple will likely make about $50B this year and is worth $750B

  • Amazon is on pace to make about $2B this year and is worth $450B

Seem a little funny to you?
 
So how do you compete with a company that doesn’t have to make money when your company has to make money?  It is like competing with the government isn’t it?

There is a simple plan that I espouse, which is to just wait a bit longer…..
 
My thinking is that buying Whole Foods is going to be a disaster for Amazon.  This is because, for the first time, it is going to be obvious that the Emperor’s core business model is not wearing any clothes. 
 
Instead of just fulfilling orders and taking a cut – and loving every minute of not having to make money to have a high stock price – Amazon is now embroiling itself in one of the most brutally competitive businesses in the world and taking on the strongest competitor in the world; namely, Walmart and a fair number of other established players as well.  These players are not a bunch of patsies – they know the groceries business super well, which has razor-thin margins and has to be run pretty close to perfectly to make a profit. 
 
In addition, Amazon is taking on a struggling business in Whole Foods. 
 
This acquisition is not a layup for Amazon but a very poor risk/reward in my assessment.
 
My proposition is that Amazon will do well with Whole Foods only as long as Wall Street continues to give it a free pass not to make money. 
 
And what happens if Whole Foods proves to be a major burden on a company that has never actually run a retail company – not to mention a groceries company.  At minimum a major distraction for management.  At maximum, maybe a further drag on the relatively small earnings……
 
In my assessment, what happens next is Wall Street – which is all of us who buy and sell stocks one way or another – and which can be so fickle as we all know – will start to wonder “why is it that a company that cannot make any money is worth close to half a trillion dollars?”
 
After twenty years of not making money – in its core business – for Amazon, investors might conclude that maybe they should put their money into business models that actually make money – and not put their dollars into a company which is dramatically over-valued by customary valuation metrics.
 
What happens then?
 
Suddenly, Amazon and Bezos – and Whole Foods – are judged just like everyone else.  The stock goes down to a normal number.  I have no idea what that number is, but certainly a lot less than it is today.  Maybe a company that is growing at 20% a year and earning two billion dollars might be worth, say, $40 billion?  Yikes – that is about 10% of what it is trading at now.  But I am just musing here.  My point is it would be an awful lot less.
 
At this point Amazon would have to actually make money in its core business, which means that – just like everyone else – Amazon will have to charge more money and do the same things retailers are doing.  At this point the Amazon-based distortion of the retail world, which I will call the “Amazon Retail Distortion”, will finally be over.
 
So I suggest that your game plan, if you are a retailer competing with Amazon, should be the following:

  • Don’t freak out – this is a temporary phenomenon – albeit a long one – it will end at some point – and Whole Foods might be the beginning of that end

  • Set up your business so that you can survive until the Amazon Retail Distortion ends – and yes get your costs as low as possible and your business run as efficiently as possible.

And consider following the other suggestions in my previous Real Estate Philosopher articles; namely: (i) don’t try to be “better” than others and instead try to be “different” from others, (ii) sell only exclusive branded goods in your store, (iii) consider yourself as much in the distribution business as the retail business, and (iv) don’t go nuts setting up expensive structures to enhance the consumer’s “experience” in the store, which I bet will get old awfully fast and be intensively expensive and difficult to maintain.
 
Am I right here?  I guess we shall see.  However, I do wish the retailers the best of success.  I run a real estate law firm and certainly know how emotionally draining it is to have business go up and down dramatically. 
 
Also – this is my hobby as well as my job.  If you are running a retail company and struggling and want to brainstorm with me, just call me!

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As the Managing Partner of Duval & Stachenfeld – a 70-lawyer law firm in mid-town NYC known as The Pure Play in Real Estate Law – I am inviting you to join The Real Estate Philosopher™. This will consist of my thoughts and also thoughts of friends and colleagues.

It will not be published in any traditional media – it will go only to friends of our firm. The purpose here is very simple – to put forth thoughts in the real estate world that are different, provocative, and challenging of accepted wisdom. Hopefully, nothing said here will be mainstream thinking.

You may be wondering how I am qualified to write on these topics since I am “just” a lawyer. However, I have an unusual place in the real estate world. As the managing partner of The Pure Play in Real Estate Law (one of the largest real estate law practices in NYC), I interact with an incredible number of real estate players. This ranges from small real estate shops with nothing but a gleam in their eyes, to some of the largest real estate institutions in the world, and everything in between. This gives me a unique and global perspective and allows me to act as an amateur philosopher in the real estate world. This has always been my hobby and it is what I love doing.

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Bruce Stachenfeld
a.k.a The Real Estate Philosopher™

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