In Defense of Gawd Damned Retailers

Per usual, I'm just a guy, in front of a laptop, partially posting the most recent edition of his newsletter a couple days later on LinkedIn but longing for you to subscribe to the real thing if you like the content. You can do that here.

This week's edition has a game at the end-- only one of my subscribers has submitted a correct answer so prove your smarter than them. DMs open or [email protected] for guesses! Let's get to it.

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Almost exactly six years ago, the research firm CB Insights ran a cute little March Madness style poll that asked clients and followers one simple question: “which company’s shares are best to buy and hold on to for 10 years?” The resulting infographic below is a beautiful little Silicon Valley time capsule.?

In the final, Alibaba triumphed over Amazon with 63% of the vote. And how could it not? Between meteoric growth in China’s GDP, a burgeoning Chinese middle class, a shockingly laissez faire CCP (lol) and Baba’s entrenched status as 3D printer for the world, this was a Secretariat in the 1973 Belmont level safe bet.?

My dear reader, if you did the sensible and obvious thing and bought 1,000 shares of Alibaba stock in late November 2017 for $191,900, you’d have…..$74,120 as of the time of this writing.? That’s good for a cool 61.3% loss, not factoring in pesky inflation.???

Albaba even took down the recently departed legend. At a time when many investors were selling off in Q3 2021 as Beijing turned on Jack Ma, Charlie Munger quadrupled his holding, seduced by the growing Chinese internet narrative. Reflecting on what he deemed his worst investment, Munger declared that he “didn’t stop to realize they’re still a gawd damned retailer.”?

Zoom out even further and the story gets even weirder. Hat tip to Trevor Scott for the pithy analysis.?

In a time when Alibab’s revenue ballooned more than 20X, its share price fell.? Baba’s market cap now sits at $180B…or one-sixth of a NVIDIA. To provide a little context, this all went down during an era where China’s GDP grew ~7% YOY on average compared to ~2.5% for the USA.?

It gets worse for Alibaba. Credit to Joe at Marketplace Pulse for shouting out the seismic moment in Chinese business history when Pinduoduo flipped Alibaba.? But Pinduoduo is still fundamentally a god damned retailer, branding itself as a virtual bazaar in its English about us video. So what gives??

Lotto tickets and grand strategies?

Of course, stock prices reflect underlying business fundamentals in more or less the same way porn does with sex. I’ve always liked Buffett’s famous quip that in the short term, the market is a voting machine while in the long term, it’s a weighing machine.?

My less capitalistically correct take is that in aggregate, the stock market is an effective tool to align the interest of Americans with capital rather than labor and serves that purpose well. However, buying any individual stock is just buying a scratch off lotto ticket minus the convenience of being steps from a fridge full of Four Loko. Buying Chinese stocks which exist at the mercy of Beijing is like liquidating your kid’s 529 to buy every Win For Life in the bodega.?

All this is to say, the #1 driver of stock price is narrative. And in the past few years, conventional wisdom says that being perceived as a retailer is a pretty damn bad narrative.?

Both Alibaba and Amazon were two of our largest advertisers at Protocol, spending hundreds of thousands of dollars to essentially run psyop campaigns directed at a small handful of leaders in Washington and Wall Street. Alibaba– the consummate Chinese retailer–had one goal. To convince you that it was neither Chinese nor really a retailer. Through a series of sponsored posts, events and ads, Alibaba tried to position itself as a sort of amorphous global tech company that sells not widgets, but innovation and services to American companies.??

I get why both Wall Street and Silicon Valley kinda hate traditional retail. It’s a comically low margin, high infrastructure business that requires hiring a ton of people to scale. To date, almost every grandiose attempt to existentially replace humans with tech has made shopping worse. ?For all of the hype around its automation and AI capabilities, Amazon employs more than 1.5 MILLION people. It’s a stubbornly old school business that visionaries and financiers alike want to leave behind.?

When the FTC cracks down on Amazon Basics and other monopolistic practices in Amazon’s core retail operation, they mostly miss the point. Amazon wants out of the retail business more than anybody. Amazon’s grand strategy has been to pivot their core business from something of a conventional retail operation to a marketplace.?

In Jeff Bezos 2018 letter to shareholders he said that “third party sellers are kicking our first party butt, badly.” He went on to say:?

We helped independent sellers compete against our first-party business by investing in and offering them the very best selling tools we could imagine and build.??

I’ll let my readers who sell 3P on Amazon’s marketplace weigh in on the work “best” is doing in this sentence but suffice to say, this was always the plan. Your margin is my opportunity has always been Amazon’s guiding principle and the margins are hell of a lot juicier as a services provider with ad inventory for third party brands.?

But here’s the problem. America needs god damned retailers. Wall street suits and Cupertino cool guys may want retail middlemen to be a thing of the past but by and large, the American consumer does not.??

Retail is 6% of America’s GDP, an employer of tens of millions of people and perhaps most importantly, an anti ephemeral business. As the pure play direct to consumer model becomes exposed as an unsustainable wrinkle in time, good old first party retail is back en vogue as a preferred distribution channel. And maybe being a god-damned retailer ain’t such a bad business after all.

Narrative Violation

We’ll end this newsletter with a little game. Below are the stock prices for four conventional retailers over the past five years, all of which have outperformed Amazon stock.?

While some of these companies have small media operations and private-label brands, they are by and large, companies that distribute other brand’s products, largely in a brick and mortar setting.? They are the damndest of god-damned retailers.

Retailer #1:

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Retailer #2:?

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Retailer #3:?

Retailer #4?

?Reply to this email with your guesses! There may be prizes for the winners!

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