Commerce: Stores, Apps & Avocados

Business models change. Innovation plays a huge role. Pricing impacts. It drives behavior and consumption. It spurs creativity and investment. Things move so much faster these days. It’s not going to stop. Competition drives success. Complacency is the enemy of success. It really is.

Amazon turned the retail industry upside down. It started by selling books on the internet in 1995. Three years later, it acquired a company called Junglee, which expanded their distribution into far-reaching items beyond literary, from clothes to computers. Along the way, Amazon established a new business line selling space on its vast server farms as Cloud computing took off. The web leader was the fiercest of disruptors in the Digital Age. It forced competitors to scramble in response to secure its existence. It sent some retailers into the grave. The retail business model changed, for good.

What’s interesting is how Amazon has gone Old School of late. That is to say, they found value in physical stores. The Whole Foods purchase, a year and a half ago, sent shockwaves throughout the grocery space. It was a brilliant move, considering the overlap with its Prime members and Whole Foods shoppers. People like to visit stores and touch the merchandise. You just have to give them a reason to go. Amazon has given shoppers a reason to use their service from day 1, and are always looking for new ways. Its expansion in Artificial Intelligence, led by its Alexa device, has created new ways for users to purchase. That is New School. But Amazon is also playing Old School. Now, Amazon plans to open dozens of grocery stores across the U.S. that have a lower price point and broader offerings than its Whole Foods stores. The first store could open in Los Angeles later this year. Amazon is also pursuing an acquisition strategy to widen the new supermarket brand with eyes on regional grocery chains that have about a dozen operating stores.

When’s the last time you went into a Gap store? I can’t remember either. That’s the point. The once dominant San Francisco retailer which pretty much created Casual Friday in the 1990s under Mickey Drexler has completely lost its way. Drexler left and Gap got complacent. But it is not yet dead. The company announced it is going to spin off its successful Old Navy business as a standalone, and concentrate the remaining Gap, Banana Republic and Athleta brands in a new company. They would be smart to consider using the Athleta name for its strategy and go after the market as Lululemon has done so successfully. Athleta is a brand that has resonated with customers and is very relevant to today’s consumer. For the record, I hate shopping, but Meredith doesn’t disagree with me. She loves shopping. You’ve probably seen how she spends Thanksgiving.

There’s been a major shift in the food industry. What people eat, how they eat it, how they receive it and how they pay for it have all changed in the Digital Age. Traditional food companies like Kraft Heinz have struggled at the grocery store as most shoppers are spending their time on the perimeter where the fresh food is, rather than the inner aisles where packaged dry products reside. Retailers have had to be more creative in how they market their products and stay ahead of the trends.

Avocados have become a smoking hot commodity. Americans have been eating up the prized California fruit with spiking frequency, putting it on burgers, salad and toast. In the 1990s, an average American consumed 1.5 pounds per year. In 2007, the number increased to 5 pounds. That’s also the year that Mexican avocados were allowed full access to the US. 2007 brought a guacamole spike. Dietary trends have changed quite a bit, with the emphasis on fresh. Low carbs and high natural fat foods found in avocados, fish and nuts continue to gain. You’ve no doubt seen the prices at the store. Avocado prices are nearly double what they were 5 years ago. It’s not just Americans increasing the purchases. Mexico, the largest producer, which provides nearly half the world’s supply, is selling twice the number of avocados to China in just the last few years. China has seen a 1,000% increase in avocado imports since 2011. Even though avocados grow on trees, they are not a quick and consistent fruit. To meet this demand takes time. Some avocado trees take over 10 years to bear fruit. They also require a lot of water. The California drought had a meaningfully negative impact on production and pricing. Strong demand coupled with low supply results in higher prices. They can’t make avocados fast enough. And apparently, they never will. In case you’re wondering, Super Bowl Sunday is the biggest day for the avocado. Over 100 Million pounds are consumed on that day alone.

Pricing matters for all industries and markets. The first 2 months of the year were the strongest for the S&P since 1991. It was the strongest for the DOW since 1987. 1987 didn’t finish well, but the starts were undeniably impressive. We’re back at that 2800 level on the S&P and DOW 26K. Both levels have provided some resistance. It’s nice to see this green on the screen and such a strong start to the year, particularly considering how last year ended. The overall trend is back up. That’s key. But we’ve seen these circumstances before. Complacency is the enemy of success. We are anything but complacent and this Market has our full attention. We still see a lot to like. But we are guarded with the speed and size of the rally in the young year.

Have a nice weekend. We’ll be back, dark and early on Monday.


Bedell Frazier Gives Back

We believe it is so important to give back to the community. We have been supporters of the Save Mount Diablo organization for a few years now. It is run by a fantastic group of people who have one mission: to preserve the natural beauty of our land and promote conservation for generations to come. We spent a day on the mountain with 6th graders from Joaquin Moraga Middle School to help introduce the natural beauty and importance of the Bay Area and get them off their electronic devices and spend time outdoors. We are investment professionals. There is no investment more important than our kids and grandkids, and our community.

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