Climate Change And Antifragile Investing In The American Retail Sector

A few years ago, Albert Wenger wrote about the concept of “Antifragile Investing,” based on the book “Antifragile” by Nassim Taleb. Wenger, who has occasionally written about the forthcoming dangers from climate change, suggested that as trends form (like a storm), it presents both chaos and also an opportunity to invest in what Taleb may call “antifragile investing.” Wenger writes:

the evidence around climate change is becoming ever stronger that human made greenhouse gases are the key forcing function for the next hundred years. The change appears to be accelerating in particular with Greenland melting at a faster rate than predicted by even the most aggressive models. These changes are receiving more coverage and with storms like Sandy taking place public opinion in cities like New York is beginning to change.

In Albert’s post, the protagonist is climate change. What if we applied that logic to a slightly less catastrophic topic — the retail sector in the U.S.? I’ve been thinking (link to tweetstorm!) about how all of this comes together for a while, after years of investing in the space and writing about it, but it all finally clicked this past weekend when I heard about Amazon’s new mobile app — Prime Now — and rushed to download. Over the past year, my own household’s experience with Amazon Prime has gotten better and better. In addition to the media bundles, inventory choice, and ease of ordering, deliveries were now often being offered for that same day, not to mention all the potential integrations with Amazon Echo. When we moved back to California in mid-2010, it felt like my wife and I went to Target 2-3 times a month; for the past few years, I can’t recall stepping foot into the store once.

Over these past five years, the rise of Uber has paved the way for other on-demand startups to offer both consumers and businesses items on-demand. Yet, as we all know, not everything needs to be on-demand. When I look at our own household’s behavior, Amazon Prime membership covers most everything we need. They have all the SKUs we’d need. There will always be a long tail for specialty retail, of course. The other items that would need to be on-demand, besides transport (Uber), are food-related — grocery and prepared foods. More and more, Amazon is building inventory in grocery and some in prepared foods.

Google is attempting the same with Google Shopping Express. I just visited their site again after a year had passed. It’s quite impressive. Their offering may rival Amazon’s in some ways (shops, etc.), but likely not in most others. It’s clear that Uber would want to get into this game somehow as well, but right now, I don’t see how either Uber or Google can beat Amazon’s core customer base and logistics for same-day against a huge inventory backdrop. If that prediction is correct, that will mean the next battle ground after CPG will be food, either grocery and/or prepared food. This is where things get interesting.

Grocery as a category is important for a few reasons. First, it’s a HUGE market in the U.S., almost $700B annual. Second, it’s often a weekly purchase for most households, and sometimes, more than once a week. Third, major big box retailers have invested a lot in grocery (Walmart, Target, Costco, etc.) as a means to eat more share of the household wallet, but also as a hook to generate more recurring foot traffic to their stores.

Prepared Food as a category is also critical (over $700B in annual consumer spend in the U.S.), but slightly more complex in that it comes in two flavors: Flavor A, which contain logistics-oriented companies like publicly-traded GrubHub and startups like Postmates, DoorDash, and Caviar (now part of Square) which offer a broad selection of local food merchants to customers with delivery; or Flavor B, which are vertically-integrated models that make and (for now) deliver their own food, such as Sprig, Munchery, and SpoonRocket. The benefit of Flavor A is that the customer gets variety and choice; the benefit of Flavor B is economic, where the company making the food itself can control the cost of goods sold and, therefore, the margin on each sale.

[As an aside, as I wrote about the forthcoming Uber IPO story line, I believe they will need a new vector upon which to show the power of its platform. I find it telling that it’s put the EATS button right in the middle of the app, not buried in the settings menu; and I think given how Amazon is executing on same-day delivery for Prime (and now with Prime Now) and given how Google can use its market power and cash pile to undercut, I don’t see Uber touching CPG for a while unless they make a very bold move. Therefore, there’s more riding on EATS, but just picking up and delivering food glosses over how complex these business processes are, not to mention the fact that many of the best startups in these categories have shifted models slightly to charge back the original retailer to enjoy a piece of every transaction. In this world, owning the customer relationship and the brand are the most valuable commodities.]

So, here we are. According to me — and I could be wrong — but between the potential leaders in “new retail,” Amazon is increasingly going to own CPG for the foreseeable future and will continue to penetrate grocery, but not prepared foods; Google will likely make a big acquisition to level up to Amazon in CPG and grocery (but not prepared foods); and Uber, sensing all of this, will focus on its own branded “EATS” to show it can deliver more than just people from Point A to Point B. (There are other things Walmart, Target, and Costco can do, of course. Instacart now works with Target and Costco; Costco itself has massive market power; Walmart is the retailer of choice for the majority of Americans and is recession-proof given its scale; a NY-based startup Boxed Wholesale is working directly with CPGs; and, of course, much-covered Jet.com has (in)famously tried its own membership-based model to compete with Amazon. That said, the manner in which Amazon, Google, and Uber are executing at scale combined with the stormy conditions hanging over retail overall would worry me if I was a large shareholder in the older guard.

And, this is where we come back to climate change and Antifragile Investing.

What if the storm brewing in retail could have not gradual effects on the old guard, but catastrophic consequences? What if everyone observing retail has underestimated these consequences, not only the depth of the them, but also the timing as to when the storm will hit shore? Earlier this year, Walmart missed earnings — that’s not a usual occurrence. And what if those who are bringing the storm don’t want to stop at CPG and food — what if they want to get more voice-controlled (Echo) or home security (Nest) or location trigger points (beacons) inside your home? What if they wanted to take a bigger swing in hyperlocal commerce and use terrific delivery for things you need always (CPG and food) and then bake in local services (like Thumbtack, Yelp, etc.)? When one applies the idea of “Antifragile Investing” in the way that Albert mentioned it above, all of the criticism of on-demand startups in a variety of verticals all gets cast in a different light.

Further adding to the crowd’s confusion is that while these are operationally-complex businesses, we are not talking about rocket science here — it’s more about what the average consumer and household needs and spends money on. It’s about creating a better channel from the company to the consumer, and given the consumer more choices, better prices, and most importantly, more time (and often money) back in his or her day. And as the storm continues to approach shore, with the combined market caps of Target, Costco, and Walmart hanging over $300B alone, I’ll leave you with the last paragraph from Albert’s post — where you can interchange the references to climate change with on-demand logistics:

What would be the best investment strategy here? Place a number of small bets in public stocks that are particularly beaten up with companies such as Amyris or Gevo and/or invest in some new early stage companies (which could include information systems for measuring and tracking carbon). Each of these is essentially a call option on an acceleration in climate change. From an options pricing perspective these options seem significantly underpriced because people are vastly underestimating the volatility of the overall climate system (which is highly non linear). This is a perfect example of an antifragile investment strategy.