Gene Munster, the Minneapolis technology industry analyst known for forecasting Apple Inc.'s meteoric rise in the early 2000s, grabbed headlines again a year ago this week by predicting Amazon.com Inc. would buy Target Corp. in 2018.
With the year about to end and no such megadeal in sight, Munster now says he was wrong.
"It's a big disappointment because our goal is to get things right," he said in an interview this week after writing a blog post that examined why a deal didn't happen.
But Munster still believes the combination of Amazon and Target makes sense because of the distance Amazon needs to go in brick-and-mortar retailing and steps Walmart Inc., the nation's biggest retailer, has taken in the online space. He thinks the odds of such a deal happening within three years are still good and said it may even ensure Target's longer-term future and its role as one of the largest employers in the Twin Cities.
"If we're wrong and it goes in a different direction and they don't acquire Target, whatever the brick-and-mortar beast is that Amazon creates will be well-capitalized and a more formidable competitor than Target is dealing with today," he said.
An Amazon-Target deal was the boldest prediction that Munster and his colleagues at Loup Ventures, a research and investment firm, made for 2018. They hit the mark on several other ideas for the year, including the collapse of bitcoin and almost-to-the-number guesses on the production output of Tesla and average selling price of the iPhone.
Munster's Amazon-marries-Target prediction is rooted in a bigger idea: that Amazon in coming years will challenge Walmart as the nation's biggest retailer. There's still a distance to go, with Amazon at around $200 billion in annual revenue and Walmart at $500 billion. Target has about $70 billion in annual revenue.
"You really see this collision course that would suggest Amazon needs Target and Walmart needs to do more with online," Munster said.
He said his prediction for a deal in 2018 was wrong because of two developments at Amazon that he didn't expect. The first was Amazon's push into brick-and-mortar retailing on its own — the company opened dozens of stores under four sub-brands this year — and the second was its speedy steps to integrate the Whole Foods grocery chain, which it acquired in 2017, into broader Amazon operations.
"In hindsight, I should have seen the latter," he said referring to steps by Amazon with Whole Foods. The opening of so many Amazon stores, he added "would have been difficult to predict."
Not counting Whole Foods, Amazon operates 107 physical retail stores around the U.S. under the Amazon Go, Amazon 4-star, Amazon Pop-Up and Amazon Books brands. Target has about 1,850 stores. Walmart has more than 5,300 stores in the U.S. and Puerto Rico and another 6,300 or so in other countries.
Stores still account for about 80 to 90 percent of retailing in the U.S., and e-commerce is unlikely to ever fully replace them, despite the flexibility and convenience online shopping provides.
"People jump to the conclusion that stores are going to be a fractional part of how we buy things a decade from now, but we don't believe that's the case," Munster said. "You can debate whether or not Amazon will ever acquire Target, and you can debate how much brick-and-mortar retailers will play in the future of retail. But no matter the number, Amazon needs to do a lot more in brick-and-mortar."
Beyond size, Target is a fit for Amazon for other reasons, he said. The two companies pursue the same customers, people with middle to high incomes. The median income for Amazon-shopping households is just over $90,000, and Target is just slightly under that, Munster said. Target also knows how to make stores appealing, he said.
"We all give Amazon a lot of credit because they've made our lives better, but there's a lot of things they don't do well," Munster said. "And probably the biggest thing is they don't merchandise well. ... There's a creative element that they're lacking and Target does a good job of it."
After getting it wrong this year, Munster said he won't predict a specific time for a deal between Amazon and Target. "We've established a three-year outlook," he said. "That is a safe balance between making it clear we think this is going to happen while recognizing these things take longer than expected."
But he noted that monetary considerations, such as the amount it takes to buy a company and the availability of funds to make a deal, would play a relatively minor role for Amazon and Target.
For much of 2018, the value of both companies rose sharply, hitting record highs this fall, before dropping amid the broader decline of the stock market since October. Target shares briefly went above $90 in September, giving the company a market value of around $47 billion. They now trade around $65, making the company worth about $34 billion. Amazon is 20 times more valuable with a market capitalization of around $720 billion. In addition to its stock, it has a $20 billion cash pile and easy access to capital to finance a deal.
"We think about" valuations and financing, Munster said. "But in the context of Amazon and Target, I don't think it was a contributing factor on us being wrong in 2018. I think they'd be willing to pay a lot more for Target than it's currently trading at."
Evan Ramstad • 612-673-4241
