Could Amazon Spur a CapEx Boom Rather Than Disinflation?

Just turning over an idea in my mind right now about the real implications of Amazon’s recently announced deal to buy Whole Foods and expand dramatically into the physical retail world…

The current popular idea about Amazon’s influence in the economy – held by me as well – is that it is disinflationary. It is driving competitors out of business, cutting out costs for consumers (read: eliminating profits for middlemen) and putting people out of work at brick and mortar stores at a far faster rate than it is creating fulfillment center / IT jobs. There are now Fed officials openly admitting that the internet is partly responsible for the central bank’s inability to engender wage growth and price inflation.

But could it end up working the other way ’round? Could the challenge of competing with Amazon actually end up spurring a boom in R&D, CapEx and other forms of longer-term corporate investment?

A recent piece at the Harvard Business Review hints at this possibility…

To give you a sense of the expense required, Amazon spends over $16 billion (11.8% of sales) on “technology and content.” This is not all innovation R&D or IT, but it’s mostly that. Meanwhile, Gartner reports that retail and wholesale companies spend about 1.5% of sales on IT. (Most of my retail clients seem to fall into the 2%–3% range.) Research and advisory firm IHL Group recently asked top retail CIOs how much their IT budgets are currently increasing and how much they should increase to compete against Amazon. The answer: Budgets are growing by 4.7% but would need to increase 87% to 237% to start closing the gap.

The author is Darrell K. Rigby, who is a partner at Bain & Company – he heads the firm’s global innovation and retail practices.

More:

Last week the retail world learned the limitations of predictive planning compared with adaptive innovation in an increasingly unpredictable market. This week retailers will need to rapidly and radically adapt their lists of strategic initiatives, the prioritization and sequencing of those initiatives, as well as the speed and funding of their execution. We’ll know traditional retailers are getting it right when announcements of breakthrough innovations start driving their stock prices up, finally raising doubts about Amazon’s ability to respond.

The general idea is that not every retailer is simply going to stick to their original plans of perfecting a single-digit growth rate, single-digit profit margin company. Some of these organizations are going to break the mold – in innovative ways – in order to survive. Others will take bigger risks, a la Walmart buying Jet.com to revamp its ecommerce efforts. All of these measures will require investment.

Younger investors haven’t yet seen a Capital Expenditure bubble. What went in the mid-aught’s was a debt and real estate bubble and what’s going on now is a buyback bubble. (Yes, everything is a bubble).

But in the mid- to late 1990’s, we had the CapEx bubble to end all CapEx bubbles (involving computers and wireless telephony), and it was good for the economy (for awhile). The 1950’s featured an infrastructure CapEx bubble (the Interstate Highway System), the 1960’s had its “Space Age” CapEx bubble and the late 1800’s enjoyed a railroad CapEx bubble.

These spending sprees were unlike the debt bubble of the 2003-2007 period in that, when the dust settled, at the very least they had left something useful behind (roads, rails, fiber optics, jets and rocket technologies). The last bubble we had only left behind unpaid loans and financial losses.

I’m all for another CapEx bubble if it’ll boost wages and increase the likelihood of there being more than one company left standing in the consumer economy, which represents 70% of US GDP.

Just a thought.

The Amazon–Whole Foods Deal Means Every Other Retailer’s Three-Year Plan Is Obsolete (HBR)

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