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2 retail stocks to beat the Amazon effect

The Amazon website has now been active in Australia for close to two months. We are soon going to find out how much it has affected Australian retail stocks over the first Christmas. According to many reports, the answer will be ‘not much’.

Perhaps Harvey Norman Holdings Limited (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH) can rest easy? I don’t think they can.

Amazon is the toughest competitor in the world. It takes a lot longer than two months to making a lasting impact on the nation’s consumer. It also takes a lot longer than two months to set up the huge range of products and services that Amazon will eventually offer.

There are also likely to be a huge number of regulatory items that need to be ticked off the list before Amazon can offer every service it wants to. Australia is the leader of red tape in the world after all.

In my opinion, most retail stocks that sell items that could be sold on Amazon are in danger over the long-term. Electronics and other items like that are sold very cheaply on the US and European Amazon sites. Bricks and mortar stores just can’t compete against the business model in my opinion.

However, that doesn’t mean that every retail business is doomed. If a business can offer unique products, better priced products or a better service then it can be a winner.

I think the following two ASX retail businesses will be more insulated than most:

Greencross Limited (ASX: GXL)

Greencross is a part of the growing pet industry, which is a very good tailwind in my opinion. But, there needs to more than just a vague tailwind to make a share a winner.

Management have come up with a smart move to grow both Petbarn and Greencross vet businesses.

If a Greencross vet is co-located inside a Petbarn it should lead to lower costs for both businesses, whilst boosting revenue through cross-selling to each other’s customers. This is also a much cheaper way of expanding the veterinary clinic network as it is a lot cheaper setting up a new clinic than acquiring an operating clinic.

Another thing that Greencross is doing well is expanding its private label sales. Leaps and Bounds made $6 million of sales in its first year, with private label reaching 21% of Australian retail product sales.

Greencross is currently trading at 17x FY18’s estimated earnings.

Bapcor Ltd (ASX: BAP)

Bapcor is one of my favourite companies in the category of companies that people don’t like. Bapcor may have a questionable long-term future due to electric cars but I believe the next few years will be very profitable for the business.

Its biggest brand, Burson, has specialised service for mechanics with a delivery standard of around two hours or less. It will be extremely hard for Amazon to build a network to match Bapcor’s in Australia, it will be even harder to replicate the relationships that Burson has with its customers.

Bapcor already has online capabilities and can sell on the Amazon Marketplace if it wants to.

It’s currently trading at 25x FY17’s earnings.

Foolish takeaway

I am quite confident that both of these businesses will beat the market over the next few years because they are both growing same store sales and the number of stores at an impressive rate. I think they will be fine in the face of Amazon.

I also think that these top stocks will keep growing regardless of Amazon too.

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Motley Fool contributor Tristan Harrison owns shares of Bapcor and Greencross Limited. The Motley Fool Australia owns shares of and has recommended Bapcor and Greencross Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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