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November 30, 2005

Internet shopping is growing quickly, Wed., Nov. 30, 2005, 8:23 AM

As broadband moves into the home, retailers like EBAY, Amazon and Wal-Mart are the beneficiaries. Without getting into the actual growth numbers, which, let's agree, are huge, there are two facets of this phenomenon that I think bear watching:

1. Use of gift cards. More of us now are buying gift cards rather than buying actual items. That allows the person to whom we send the gift to both select what they want but also decide when to make that purchase, which may not be within the traditional holiday retailing period.

Gift cards are then used to make purchases electronically (EBAY, Amazon and Wal-Mart) which serves to transfer the business model from the realm of the physical to the virtual. Vendor costs, including real estate and employee costs, are pushed down.

Conventional selling practices, which is to say the promotion of fashion via story-telling (you simply must have this thing"), which reaches its zenith in the U.S. Thanksgiving to Christmas period, does not carry the same weight if the purchases using gift cards are made in February or March.

The loser then is the traditional mass media (TV, radio, newspaper advertising), which in the past was used to broadcast the sell-side pitch. The winner, of course, is the Web.

2. Product pricing. In the virtual world, where you can get four offers of a home mortgage in the next minute", purchase and sale transactions come down to low price (apples to apples), and low price is going to be effected by the 800-pound gorilla department store retailers like Wal-Mart, or the biggest specialty retailers like Amazon (e.g., books).

Smaller retailers simply cannot compete with the massive buying power of a Wal-Mart, and interestingly that means, within a product like say an apple, delicious apples or platinum/gold/silver apples or designer apples.

Interestingly, the rich and famous will now start buying from Wal-Mart because that is where they will be able to get the best price for that expensive watch for instance.

So now the traditional business model is being changed from an emphasis on sales to one where those companies that have the best purchasing and transport systems, which will be the winners.

Traders must have three ways of looking at anything, with is the deep view, the wide view and the detailed focussed view. I noted that this in one of The Martha Rules, which I will discuss later today.

By that I mean, traders must have an eye for how the world is changing, how long-living those major changes are likely to be, and then what specific companies are best positioned by management to take advantage.

As I show here: the physical world is changing into the virtual world, the companies that have sustainable business models are the ones with the best purchasing-distribution systems, and finally, the EBAY's and Wal-Mart's are the companies that have proven an ability to dominate their peers.

So far, Google may be dominant, but their field is media, which the Web will soon bring many competitors. Google is already the world's biggest media company, but competition in that space prior to the Internet never allowed any one newspaper, TV & radio network, or advertising agency, to dominate. In fact, the Internet will make it easier for competitors to knock off the present king of the hill. GOOG is already perfectly" priced, so I have no interest. In subsequent share trading cycles, there will be competitors that come into fashion, and GOOG will lose the perfect" pricing status it enjoys today.

However, the bottom line to my point is that EBAY and Wal-Mart are sustainable business models as they provide a value-add that is not dependent on fashion. Their strength or value is based on the how to", which is to say, in getting a transaction done.

In this area, management of those companies has excelled. So they are listed among the Cara 100 Best Companies. The EBAY and WMT stock is often over-bought, and traders must employ mathematical analysis to determine the best timing of purchases and sales of their stocks for your portfolio.

This is what Martha Stewart calls using the microscope, once you have sized up the long and broad of it.

Posted by Posted by Bill Cara on November 30, 2005 08:16:12 AM | Category: The Big Picture

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