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Amazon's 'Achilles' heel' is that it is an ‘everything store’: Analyst

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Larry Cheng, Volition Capital Managing Partner joins the Yahoo Finance Live panel to discuss the latest retail news.

Video Transcript

- I want to shift over though, as we're watching Alibaba shares under pressure, and of course coming after Amazon reported results last week that disappointed, as well as Q3 forecasts that disappointed as well. It raised a lot of questions about e-commerce in the wake of retailers, as Emily highlighted their traditional ones, Under Armour, Ralph Lauren, and where they fit into this mix. And for more on that, I want to bring on Larry Cheng, Volition Capital managing partner, back with us, and Larry, I appreciate you taking the time. I mean, when we look at e-commerce, obviously it's so big and people are drawn to Amazon as kind of the leader in the space. But when you think about where we're at now in this cycle as we start to open back up and potentially run into issues, how are you seeing it all shake out and what retailers do you have your eyes on to really, I guess, carry the gauntlet from here?

LARRY CHENG: Well, Q2 was a perfect storm of headwinds for Amazon and the broader e-commerce industry as a whole. Obviously, the opening up of the economy helped physical retailers, maybe not so much online retailers, but there were other issues as well. Ad rates soared in the quarter. Facebook reported that their ad prices grew 50%. We have seen that the ad prices on Amazon as well have grown maybe 50% to 100% in some cases, and then you have a lot of supply chain issues with components being out of stock and in products therefore being out of stock. So there's a gap. There's an issue there for some of the secular e-commerce growth that we're used to, and that is opening up opportunities for some of the omnichannel incumbents like Walmart and Target to really take some share and slow down the growth of some of the more pure play e-commerce incumbents.

- Yeah, Larry, there is a question here moving forward on what that online, offline mix is going to look like in retail, and we heard Amazon last week saying that they are expecting things to slow down a bit in the second half of the year when you compare it to the height of the pandemic last year. Where is all that going? You think people are actually going into stores now and purchasing at the expense of Amazon, or is that online space only going to increase regardless of where this pandemic goes?

LARRY CHENG: If you look at the medium to long term of e-commerce, you can absolutely bank on the secular growth trend of the offline to online shift. That is without a doubt. There are going to be hiccups here and there because we're dealing with a unique time of opening up from the pandemic and shutdowns in the past, maybe shutdowns in the future. And so I don't get caught up in the quarter to quarter dynamics. The e-commerce shift is strong and secular. It will continue.

The question is, who wins in the e-commerce shift? Obviously, Amazon is dominant today. Target, Walmart, others are growing in their e-commerce share in the tens of billions of dollars of online sales, and then you have a number of pure play e-commerce emerging players like Chewy in the pet food space and Wayfair in the furniture space and many others that are growing quite aggressively as well. So I think you see the playing field of e-commerce becoming much more competitive. Amazon is strong, but Amazon also needs to stay on top of their game in merchandising and so forth to maintain their dominant market share.

- There is one, as you labeled it, an Achilles heel maybe to point to within Amazon, and you think about how a lot of the platforms attracted third-party sellers and whether or not the goods on the platform were actually what customers order or even live up to expectations and the ratings on the site. I mean, how important has that become as you see brands start to build out their own e-commerce platforms to make sure that, you know-- you can envision a world that's already happening where you can go online and get whatever you want from the specific brand themselves rather than going to an Amazon and still have the question mark about authenticity.

LARRY CHENG: Well, Amazon's dominant today. They'll be dominant in the future. However, I do think during this period their Achilles heel has emerged, and it's the strength and the weakness being the same thing for Amazon. Their strength is that they are the everything store. Their weakness is that they are the everything store, and what manufacturers have proliferated products into Amazon, which is confusing the consumer experience. So now it's possible that when you buy a product, it's going to be shipped direct from manufacturer in China. It will take two weeks. It will arrive, and it will be a lower quality than what you had anticipated. And that's because everything is on Amazon today. So that-- and that's a problem.

What you're seeing other pure play e-commerce companies do is they are merchandising. They are curating. They are holding a quality threshold for anything that's listed. And Amazon's sort of penchant to be the everything store, I think, is a strength and weakness that's opening up avenues for others to steal some of their share.

- Larry, where do you put the malls in the retail mix? We heard from Simon Property Group David Simon there sort of talking about how malls have maybe, he thinks, have been a bit mistreated, that the demise of the malls have been exaggerated, but it feels like everything you're pointing to doesn't necessarily include that piece of the retail pipeline.

LARRY CHENG: What you're seeing in malls, and Simon is a good example, is they are merchandising their stores more towards emerging direct to consumer brands that are internet native. It's not the mall experience of 10 years ago. And I think that's a smart move in the same way that retailers are looking for emerging brands, malls are looking for emerging brands that connect with the next generation. So I do think physical retail has a very strong place in the retail experience for years to come, but you need to merchandise it properly, whether it's from a product perspective or a store perspective. And you see the face of malls changing quite aggressively to accommodate the newer, next generation customer that is looking for those newer brands.

- All right, Larry Cheng, Volition Capital management partner, I appreciate you hopping on to break it all down for us. Be well.