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Biggest threat to Amazon in 2021 is ‘some kind of regulatory framework’, analyst says

Sucharita Kodali, Forrester Research Retail Analyst joins Yahoo Finance Live to break down how retailers will fare in 2021 and break down how Amazon will continue to lead the e-commerce industry in the new year.

Video Transcript

MYLES UDLAND: All right, let's turn our attention now to the retail space, another area we've seen a lot of transformation this year, a lot of forced transformation. So what sticks around in the year ahead, and what does not? Joining us now with that conversation is Sucharita Kodali. She is a retail analyst over at Forrester Research. Sucharita, great to talk with you once again.

Something stood out in your notes about how the costs of this digital acceleration for a lot of businesses are quite high, and they may not stick around as we get into next year. I mean, how are you trying to tease out which trends that were forced this year are durable and which ones might reverse? Is it the size of the business? Are small businesses not likely to be as digital? Or is there something else?

SUCHARITA KODALI: Yeah it's probably actually a little bit of the opposite. Some of the larger retailers like the grocers that have really been forced to lean into digital, the big questions are which parts of digital do they continue to embrace and which ones are there for the long term?

The truth is is that sectors like grocery and even much of traditional retail is not great from a margin standpoint, and a lot of the efforts that have been just part of the landscape in the last several months like curbside pickup or delivery are likely not long for the world. They are just simply not profitable. And unless there are major changes to the way that those businesses are set up altogether, it's really, really difficult to be delivering orders on demand from grocery stores or from restaurants. So that's really what I'm talking about with respect to what happens.

BRIAN SOZZI: Sucharita, one well-known company that really is not playing in digital at all or even buy online, pick up in parking lots, JCPenney. I mean, this is a real dog of a company, terrible online shopping experience. They just gave their CEO the boot this week after about two years. They just emerged from bankruptcy. Do you think they have any shot at true survival next year and even beyond?

SUCHARITA KODALI: Probably not. I mean, JCPenney has been on life support for years now. I mean, ever since their Ron Johnson years, it has just been on a steady slide down, and it has very, very little chance of recovery. It is not in great real-estate locations. It is not well off financially. It has no brand resonance with consumers, and it's just not well positioned for the future, and it certainly has very little digital strength right now.

So all of the cards that it has are not good. What is shocking is that it is still alive and that it has not died through the course of the pandemic. I think, if anything, that's a lesson in how resilient retailers are and how hard it is to really kill a retailer.

JULIE HYMAN: Sorry. Brian?

BRIAN SOZZI: Yeah. Sucharita, you know I'll even add on too, you know, switching gears from a JCPenney, so much focus right now is on minimum wages, and minimum wages are going up in 20 states on January 1. Are there any retailers that you think could really be hit hard by some of those minimum-wage increases? To me, top of mind are the dollar stores.

SUCHARITA KODALI: Right. Well, a lot of retail and-- well, a significant part of big-box retail, even some of the small-box retail, as you mentioned, are already paying minimum wages. And so any kind of an increase there is going to have an adverse impact on their profitability.

I think that the bigger questions are how efficient do these companies become over time? How strong are they at being able to identify who are there better workers? And what we've seen is some of the most progressive retailers like, say, an Amazon, even arguably a Walmart have already proactively raised minimum wages for their workers ahead of moves like this, in large part to both position themselves for greater automation and to try to get better workers to begin with. I mean, that's just, I think, you know, kind of historically has been one of the flaws of retail is that they have not paid well, and it has often-- it is often a dead-end job. And as a result of that, there is a cycle of poor customer experiences because very few retailers have invested in the store associate as a communicator of great customer experience.

JULIE HYMAN: Sucharita, it's Julie here. I do want to talk about Amazon a little bit more. You just mentioned it with regard to the minimum-wage debate-- but not just Amazon itself but the companies that sort of partner with Amazon and that whole ecosystem that exists around Amazon. Where do you see that going in the next couple of years in terms of what those partnerships look like?

SUCHARITA KODALI: So I assume that you're talking about some of the-- there are different ecosystems that orbit Amazon. There is the seller ecosystem, and those companies are likely not going anywhere because they're highly dependent on Amazon. But then there's a whole ecosystem of technology service providers that help to facilitate people's presence on Amazon, and those companies have essentially their entire bread and butter built on, you know, kind of facilitating Amazon sellers, providing data around Amazon.

The challenge for those companies is that Amazon could displace them at any moment in time. Terms and conditions and what data they may have available could change at any moment in time. But most of these companies are relatively small. They're essentially agencies. A lot of them have been growing to support other marketplaces so that they are not entirely dependent on Amazon.

But, you know, in general, I am not a big fan of any company whose entire business is dependent on Amazon because it is just extremely-- you're placing yourself in an extremely vulnerable position. I mean, it's the Porter's Five Forces, you know, challenge where, you know, if everything is dependent on one outlet and that outlet holds the keys to distribution, that's a problem for you.

JULIE HYMAN: Yeah, most definitely. I want to ask about Amazon itself too because while this has been a year where Amazon has really been dominant, it's also exposed some of its vulnerabilities, right? It has had shipping delays. It's not been immune from those issues. And we've also seen some of its competitors really heat up. I mean, Walmart has really been quite successful, particularly when it comes to fresh and groceries. Is Amazon imperiled in any way or any parts of its business under more direct threat now?

SUCHARITA KODALI: I can't see any situation where the competitive landscape threatens Amazon. The biggest threat to Amazon at this point in time is some kind of a regulatory framework, some type of antitrust regulation or penalty that the company has to pay, some sort of forced divestiture of parts of their business. That's really the only threat that I see.

Even though they have not always delighted customers through the course of the pandemic-- many orders have been late. They've been out of stock. You know, and there are perpetual questions around the quality of merchandise and inventory because a lot of the merchandise in Amazon comes from retail arbitrage where consumers and sellers are literally buying things and reselling them, which does not bode well for great-quality merchandise.

The truth is is that it's indomitable right now. I mean, you know, Amazon is top of mind, and it's a bit of a self-fulfilling prophecy where so many companies that I talk to just think that there's no other game in town than to sell on Amazon. I think that that leads to the behemoth that Amazon has become and will continue to be, which is why, you know, kind of regulation is really so important and why these questions are very valid to be raised now.

And that, I think, is probably the big theme I think in 2021 for all of the tech titans is what happens from a regulatory framework? Will Europe lead the charge? And what ultimately-- what impact does that ultimately have on the consumer experience?

MYLES UDLAND: You know, Sucharita, it's interesting. My wife and I are eyeing up a semi-large appliance purchase. And I was like, we can't buy it on Amazon. It's probably going to be fake. And we haven't settled that debate yet, but certainly a lack of trust there.

And speaking of a lack of trust and regulatory concerns, I want to finish with Alibaba. We have seen that story evolve pretty quickly over the last couple of weeks with the Chinese government cracking down on Ant Group. And, I mean, it seems Jack Ma personally is sort of being targeted here as well. What does that change for Alibaba? Which, for viewers who might not know, owns 33% of Ant Group, which is really under the microscope here.

SUCHARITA KODALI: Right. Right. What is happening in China I think is so fascinating. China is the largest e-commerce market in the world. Alibaba is the dominant player there.

And it always struck me as strange that Alibaba had as much market share in China as it did because if it were truly operating in a market economy where, you know, the best ideas, you know, kind of percolate to the top, there would have been more competition all along.

So where I'm left with is the conclusion is that Alibaba had been propped up by the Chinese government all along. And what that did was that they essentially gave Jack Ma, you know, kind of substantially more, you know, kind of ability to impact commerce in China than probably they ultimately-- which is what is happening now-- than they probably realized was prudent.

And what you essentially have is the Chinese government basically pulling back on the free reign, the loose leash, so to speak, that they had given him. And the question becomes, I think, for Alibaba is does the Chinese government now allow other players to have a greater role in Chinese e-commerce, or do they continue to have their faith and trust in Alibaba and everything that that may be able to provide, like data on customers? And, you know, there are claims that Alibaba doesn't share any of that with the Chinese government, but I just don't know how we audit the truth or the reality of that. That seems highly likely to be happening.

Is there another leader who they can put in the-- instead of Jack Ma in that position and essentially still have their way and get them out of the way so that, you know, kind of anybody who critiques the government is no longer, you know, kind of an issue for them? So I'm fascinated to see how this unfolds and what ultimately, you know, happens with the government.

MYLES UDLAND: Yeah, very interesting story that we'll certainly be tracking in the year ahead. All right, Sucharita Kodali, a retail analyst at Forrester Research. Sucharita, always great to get your thoughts. Have a great new year. We'll talk to you in 2021.

SUCHARITA KODALI: Thank you. You too.