A few years ago I wrote a series of columns on the changing structure of the economy grounded in the four procyclical drivers of that change -- energy, technology, debt, and demographics.
One of the issues addressed in that series concerned the differences in potential between unbranded and branded manufacturers and retailers in the apparel space. I made the point that advances in technology will allow retailers the opportunity to "produce their own high quality, private label, low price, non-branded products."
With the recent news that Amazon (AMZN) has already begun doing such (although the company has yet to officially acknowledge it), this is a good time to revisit the subject. (Amazon is a holding in TheStreet's Growth Seeker portfolio.)
In the past 18 months, stock prices of the seven retailers of unbranded apparel have increased, from a low of 20% for Target (TGT) to a high of 65% for Amazon, with the sole exception being Wal-Mart (WMT), which is down 13%. (I will address Wal-Mart's issues in a separate column.)
Meanwhile, the stock performance of the 12 branded retailers discussed in my previous column have been overwhelmingly negative, with losses on average of about 40%. The outliers are Aeropostale (ARO), with a 95% loss, and L Brands (LB), with a 32% advance.
Amazon's move into this space follows a similar decision by Costco Wholesale (COST) a generation ago with its introduction of Kirkland Signature products, which has been a major success. However, Amazon entering the space changes the dynamics of the discussion -- from branded vs. unbranded apparel retailers to the competition for distribution and sales between e-commerce companies. (Target and Costco are both part of Jim Cramer's charitable trust portfolio, Action Alerts PLUS.)
The branded retailers are now just collateral damage in the battle. Most will probably not survive, either forced out of business completely, or bankrupted and resurrected as private companies serving a niche clientele.
This is not to imply that there are no risks in Amazon's new strategy. It is very similar to that of Zillow Group (Z) in the real estate space, which I recently wrote about. The principal similarity is that both companies are relying on revenue and earnings from a corporate client base that they are also competing with, and with an obvious end-game of putting them out of business.
In Zillow's case, it's the reliance on real estate brokers and mortgage lenders for revenue while simultaneously seeking to displace them. For Amazon, it's the reliance upon distribution channel agreements with manufacturers and retailers that it, too, is now attempting to displace.
This is generally called "disintermediation," the process of reducing the organizations and people involved in the process of moving goods or services from manufacturers to end consumers.
For both Amazon and Zillow, though, these moves are not just targeted at the current intermediaries and are not just proactive. They are as much defensive as they are offensive, as technological advancement is lowering the barriers to entry for new e-commerce sites, most evident in the spectacular rise of Alibaba (BABA) and, specific to this column, its retail site http://taobaofocus.com. To a lesser extent, but also growing, is the private U.S.-based retail site, https://www.wish.com.
If Amazon and Zillow did not make these moves they would risk others doing so -- and doing to them what they are doing to their clients. This process will also mandate that the other unbranded apparel retailers referenced above follow suit or be driven out of business.
Most importantly, though, coming back to the global metanarrative concept I referenced at the beginning, is that this process is not confined to apparel and real estate services.
What's happening in these two sectors is on the verge of becoming required in all areas, and most importantly the ones that have been the prime drivers of economic activity over the past two generations: health care, education, financial services, government, hoteliers/resorts/casinos, casual dining restaurants, builders, biotech, pharmaceutical's, telecommunications, media, and more. This is a part of what I was referring to in the recent column,"Bitcoin Is Dead, Long Live the Blockchain."
The bottom line is that human labor is no longer a financially viable economic input and companies are racing to displace it by necessity, with technology.
The implications for capital markets, investors, and economic activity overall is dizzying.