Which Brick-and-Mortars Can Contend With Amazon?

Zain Akbari: Although Amazon has dramatically disrupted the retail landscape, we believe not all sectors are equally vulnerable to the digital juggernaut. In an Observer titled "Up the Creek but With a Paddle: Retailers That Can Succeed Despite the Age of Amazon," we update our proprietary framework evaluating brick-and-mortar retailers' standing in an increasingly multichannel world.

Our proprietary framework highlights immediacy of need, customer proximity, difficult-to-digitize business models, pricing dynamics, and the store experience as areas from which conventional retailers can derive enduring protections against the digital onslaught. Although we believe Amazon and the rest of e-commerce have significant room for future growth, we expect customers’ channel decisions will vary based on the situation, product, and their personal circumstances.

We believe home improvement and auto-part retailers are among the best protected, as the sectors deliver in-store advice and convenience that benefits DIYers, strong levels of availability, and an efficient purchasing experience for professionals, and capitalize on customers who prioritize speed and service ahead of price. Although not to the same extent, we see off-price apparel retailers and discount and dollar stores as benefiting from protections against competitive pressure.

Of the more protected retailers we identify, we believe narrow-moat Advance offers patient investors an opportunity. While the firm is still in the midst of a multiyear turnaround, we believe management is taking the right steps to boost part availability and streamline its supply chain and distribution infrastructure.

Additionally, although we expect some sectors will be harder for it to crack, we believe shares of wide-moat Amazon are attractive at current trading levels.