Is Amazon Digging Its Own Grave?

 | May 24, 2017 | 1:00 PM EDT
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In the column "Amazon Has the Sharpest FANGs," I wrote about the existential crisis faced by the apparel manufacturing and retailing industry because of Amazon's (AMZN) growth in both areas, and that the same fate may befall Alphabet (GOOG) , Facebook (FB) and Netflix (NFLX) as Amazon continues to broaden its base of operations. 

The point of the observation with respect to the FANG stocks was that the safest of them to be invested in, should Amazon decide to move into markets dominated by the others, is Amazon. 

The logic is very simple. Amazon's growing database of consumers is of their actual consumption, not potential consumption, as is the case with Alphabet and Facebook (which are part of TheStreet's Action Alerts PLUS portfolio). 

That means that in the near future, Amazon will have the ability to anticipate consumers' desires and pre-emptively fulfill them before the process of "shopping" even begins. 

A form of that would be seasonal clothing wardrobes sent to subscribers that match their style preferences, are tailored specifically for them and preclude allocating time to shop and try on clothes. That's catastrophic for other manufacturers, retailers, advertisers and those selling access to potential customers. 

Much more could be said about that, but for the purposes of this column I'll leave it at that. 

Pursuing such a strategy, though -- and Amazon clearly is -- presents risks to Amazon as well. Disintermediating and streamlining the production-to-consumption process, as Amazon is, is hugely expensive. 

This is one of the risks faced by "first movers" in any venture. The investments made must be paid for and present the opportunity of a "free ride" being provided to competitors that follow. 

Amazon hasn't just paid for the growth of its business model over the past 20 years, it's paid for the creation of a new distribution system, the development of much of the technology required for it, and nurtured consumer attitudes to conform to it. 

These are largely not only sunk costs now, but require massive investments to maintain and keep current. 

The ironic aspect of the disintermediation process being advanced by Amazon is that it ultimately applies to Amazon, too. 

Extending the fulfillment technologies for manufacturing, distribution and payment systems just a bit beyond current levels will logically provide an incentive for manufacturers to disintermediate Amazon. 

In such an environment, Amazon could suffer from having to compete with hundreds of thousands of manufacturers bypassing Amazon and dealing directly with end consumers. 

Death by a thousand cuts. 

This concept is known as "first to be second," and I discussed it briefly, and for similar reasons, three years ago in the column "Zillow's Big Bang Is Just the Beginning." 

Coming back to my column from last week, though, as near as I can determine, this is not being considered as a possible business strategy by the existing publicly traded apparel manufacturers and retailers, so this shouldn't be construed as support for holding those stocks. 

The direct-to-consumer model is also part of a growing consumer trend I wrote about in the column "A Retail Revolution Is Revving Up." 

Low-quality, high-cost, highly marketed, branded products are being replaced by demand for high-quality, low-cost, hardly marketed, non-branded items. 

The convergence of the consumer trends and facilitating technology is making the direct-to-consumer business model increasingly viable. 

Compounding that push is the fact that Amazon has traditionally pursued a displacement role in dealing with business partners in which terms of business were dictated and accepted grudgingly by many. 

Amazon is still a good long-term hold, in my opinion, but investors should be watchful for the trends above to continue to grow and cause the company real problems in the future. 

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