Faced with the prospect of Amazon.com (Nasdaq: AMZN) crushing them, traditional retailers increasingly are choosing to partner with their giant nemesis instead. An SLI Systems study found that 65 percent of retailers have forged partnerships with Amazon as a way to increase revenue, with almost half seeking greater visibility and customer acquisition.
Nike ( NKE) and Sears Holding Corp. ( SHLD), for example, began partnering with Amazon this summer to sell their products through the giant online retailer’s site.
For investors, there may be an opportunity to ride Amazon’s coattails by buying one of its retail partners instead. The share price would certainly be cheaper. But not all retailers will benefit from partnering with Amazon, and even those that do, still risk being swallowed whole. That same SLI Systems study that found retailers open to selling through Amazon also discovered that 47 percent worried Amazon might use their sales data to compete with them.
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“Partnering with Amazon is called cooperative competition,” says Sunder Kekre, professor of operations management at Carnegie Mellon University’s Tepper School of Business. “There might be competition with Amazon in certain products but cooperation in others. This is an age where we have to cooperate and compete at the same time.”
A relationship blossoms. Nike offers a prime example of what a beneficial partnership might look like in its early stages. When the company announced June 29 that it would sell a limited line of apparel and equipment on Amazon, Nike shares bounded 11 percent. The pilot program would start small and expand if successful, Nike president Trevor Edwards says.
Experts already anticipate that Nike’s top line will benefit. Nike’s initial deal with Amazon led to $300 million to $500 million in revenue, according to Goldman Sachs analyst Lindsay Drucker Mann. Although this represents only 1 percent of Nike’s worldwide revenue, there’s huge potential for expansion.
Nike turned to Amazon because sales at the iconic sportswear company have been declining. In July, Nike logged its second quarter of margin decline along with flat sales growth in North America. The company will also have to sprint to keep up with rival Adidas, which on July 27 reported higher earnings and raised its revenue guidance for full-year 2017 to between 17 and 19 percent from 12 to 14 percent.
Many investors rejoiced at Amazon and Nike’s blossoming relationship because it unites their biggest strengths: Nike brings the brand, Amazon brings logistics and analytics data. Part of Amazon’s appeal to big companies is its storehouse of data that can be used to manage risk. If a product or service doesn’t entice picky millennials to buy it, for instance, Amazon can adjust the supply. This comes in addition to Amazon’s vast logistics channels.
At the same time, Nike competes with Amazon by selling through its own website and other online channels.
Betting big on artificially intelligent appliances. Struggling discount retailer Sears hopes Amazon will be a lifeline.
The agreement with Amazon, announced July 20, will let Sears sell its Kenmore appliances on Amazon’s website. Sears is battling a long-term decline in sales, down 7.4 percent from 2015 to 2016. E-commerce also fell 1.8 percent, but selling through Amazon should increase distribution of Kenmore appliances.
Sears should also benefit from Amazon’s technology, as Kenmore appliances will incorporate Amazon’s Alexa voice technology so that ovens, air conditioners and other appliances can be operated at home through voice command, enabling Kenmore to keep up with Whirlpool Corp. ( WHR) and General Electric Co. ( GE), which already feature Alexa in their products.
“Odds are Kenmore smart appliances will be smarter, faster and at lower cost than many alternatives,” says Lee McKnight, associate professor at the School of Information Studies at Syracuse University.
What’s more, making Amazon its primary storefront could help compensate for diminishing foot traffic in Sears’ physical stores, as well as extend the traditional retailer’s reach into markets it does not currently serve, potentially stimulating growth. Without Amazon, McKnight says, Sears’ future looks “increasingly bleak.”
Because the terms of the deal with Amazon were not disclosed, investors will have to guess at how much revenue Sears might generate through the partnership initially. Although getting in the race for smart and artificially intelligent appliances could give Sears a pricing and competitive edge, McKnight thinks the Amazon deal may have already been priced into the stock.
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Instead, McKnight suggests investors should consider companies that announce a deal like the one Sears struck with Amazon for its Kenmore appliances, as those retailers may be worth buying. Investors, he says, should view such a deal as an assurance of the retailer’s future growth and profitability.
The potential for more partnerships. As the field widens for more retailers to partner with Amazon, what else should investors consider?
Krista Fabregas of FitSmallBusiness.com says to look for struggling retail chains with established brands like Sears’ Kenmore or those that can benefit from Amazon’s direct-to-consumer distribution, like Nike. She also recommends brands that can include Amazon’s technologies in their products, such as the Alexa-integrated Kenmore appliances.
As more details emerge about Amazon’s existing partnerships with traditional retailers, so too should a clearer picture of the risks.
“After all, Amazon might boost the retailers’ sales but those sales might be less profitable — it would really depend on whether the retailer offered a brand popular with consumers that Amazon had trouble copying,” says Peter Cohan, strategy and entrepreneurship professor at Babson College. Otherwise, he says, partnering with Amazon might be a mistake.
Investors also should beware of deals unfairly skewed in Amazon’s favor, which would be counterproductive for retailers.
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“It has to be a win-win for both parties. It can’t be a zero-sum game. Amazon should win and the vendor should win,” Kekre says. “Then I think the marriage would last; otherwise, you may end up in divorce.”
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