Why Retailers May be Ordering this Book from Amazon

In today’s Money Morning…why retailers may be ordering this book from Amazon…China’s controlled slowdown…the worst investment sector on the ASX…what you can learn from Sam’s dog and cat…and more…

The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process.’

Joseph Schumpeter, Capitalism, Socialism and Democracy

Australian retailers would do well to get their hands on a copy of Joseph Schumpeter’s 1942 book, Capitalism, Socialism and Democracy. Ironically, though, their best bet may be to order a copy via Amazon.

Schumpeter was one of the 20th century’s more forward thinking economists. And he wasn’t afraid to tread outside the box. You may not be familiar with his name. But you’ve probably heard of his most famous theory — creative destruction.

Creative destruction reveals that industries are always evolving. As companies create better products and become more efficient, consumers tend to win. And their competition tends to lose — that’s the destruction part of the equation.

This invariably leads to some short-term pain for the losers. But it tends to benefit society as a whole with better, cheaper products and services. And, over time, even the losers should come out on top. At least once their capital is redirected in more profitable ways.

We can only hope this light at the end of the tunnel offers a little consolation to the likes of Wesfarmers Ltd [ASX:WES], Woolworths Ltd [ASX:WOW], JB Hi-Fi Ltd [ASX:JBH] and Myer Holdings Ltd [ASX:MYR], to name a few. With retail spending growth at multi-year lows, and Amazon knocking on the door, they can use all the solace we can offer.

The woes facing Australian retailers gained plenty of headlines this week. Including Wesfarmers’ decision to abandon its planned IPO of Officeworks. Some pundits placed the blame on investors’ rising caution with public floats.

According to the AFR:

Investors have grown increasingly concerned about the quality of floats coming to the market after a series of recent disappointments, including Automotive Solutions Group, Wellard Shave Shop and Murray River Dive.’

There’s likely some truth to that. But we have no doubt that the creative destruction looming for Wesfarmers’ bricks and mortar business model played no small role in their decision to pull the float.

This week, Greg and Sam both had their own take on the struggling retail sector. Greg traces the problem back to central banks and cheap money. Sam has no doubt that the mere mention of Amazon is to blame for the share price slump slugging many of Australia’s biggest retailers.

This week in Money Morning

Greg kicked off the week with a look at China. The world’s second largest economy is crucial to Australia’s own success…or failure. So it’s important to keep an eye on the Middle Kingdom. First, Greg notes, short-term interest rates are on the rise. That’s largely due to the People’s Bank of China taking money out of the money markets. This in turn has seen stocks suffer. Since the high in April, the Shanghai Composite Index is down around 8.5%. Commodities are now also at 10-month lows. Those are worrying numbers. But Greg believes China is firmly in control of this slowdown. To read why, and what it means for Australia, you can find Monday’s Money Morning here.

On Tuesday Greg noted that the S&P 500, the NASDAQ, the FTSE 100 and Germany’s DAX index all hit record highs. These numbers certainly fly in the face of the financial doom and gloom you keep reading about. Apparently markets liked OPEC and Russia’s renewed agreement to restrict oil output. Oil prices jumped by 2%. With global markets hitting new highs, Greg suggested this bodes well for the ASX to make a fresh run at 6000 points. If investors can shrug off the hysteria generated by the Big Four bank tax, we may see that level breached shortly. You can read the full story here.

With most stocks trading sideways in the previous days, why are retail stocks slumping? On Wednesday Greg explained that, rather than a cyclical downturn, the retail sector is facing more serious problems. And the root of this problem…central banks. Dating back to the 1980s, Alan Greenspan’s easy money policies saw an explosion in household borrowing and consumer spending. This in turn led to a flood of new shopping centres. The housing boom of the early 2000s exacerbated the problem, leading consumers to believe they were better off than they really were. Australians followed a similar pattern. And when retail stocks are floundering, it tells you that any economic growth you hear about isn’t filtering down to the ‘man on the street’. Now throw the arrival of Amazon into the picture and… Greg has the full story for you in Wednesday’s Money Morning here.

Sam had an even stronger take on retail’s woes on Thursday. He calls it the worst sector to invest in on the ASX. The culprit? Sam points an accusatory finger directly at Amazon. You’ve surely heard of Amazon. But Sam says you likely don’t understand just how dominant they’re going to be. Or how vast their business empire already is. Sure, you know they sell things — books, music, TVs…you name it. But they also own crucial parts of the internet. In fact, Amazon owns more of a particular virtual sector than its next biggest competitors (IBM, Microsoft and Google) combined. You can read Sam’s full analysis here.

On Friday Sam turned away from retail markets to explain what you can learn from cats and dogs. Specifically the research he put into both his cat and his dog before buying either. The power of detailed research is crucial in life. Whether that’s mixing the right pets together. Or buying the right stocks. And listening to popular opinion is the fastest way to mediocrity. Don’t be afraid to think on the edges of the bell curve. Sam explains why here.


Bernd Struben,
Managing Editor, Money Weekend

Money Morning Australia