Commerce in chaos: Can anyone take on Amazon?

Amazon.com was the best-performing stock last year in the S&P 500. The rest of the retail world is in chaos.

Macy's recently announced 4,500 layoffs and up to 40 store closures. Wal-Mart is closing 269 locations and Finish Line is shutting 150. American Apparel filed for bankruptcy in October. Shares of Staples, Gap and Bed Bath & Beyond have all plunged at least 40 percent in the past 12 months.

Meanwhile, there's a shakeout taking place among e-commerce start-ups. Gilt Groupe was sold to Saks Fifth Avenue owner Hudson's Bay for less than a quarter of its peak valuation. One Kings Lane is struggling to find a buyer, according to Re/code, and women's' retail site Threadflip closed its portal this month.

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All that amid a funding glut: Venture investors poured over $1 billion into retailing and distribution start-ups last year, the most since 2000, according to the National Venture Capital Association.

It's no secret that Amazon has changed the retailing game by selling just about everything imaginable, often at the lowest price, and shipping products with such speed and efficiency that many consumers have simply stopped going to stores.

Amazon's willingness to operate with almost no profit margin makes it virtually impossible for anyone to compete and make money unless they're selling something entirely different.

"Amazon is relentless in taking cost out for the consumer and relentless in that you can find anything you ever want on Amazon," said Anthony Rodio, chairman of Storefront, a start-up that helps smaller retailers find space for short-term pop-up stores. "Traditional retail still thinks about how to sell inventory in their warehouse, not about what the consumer wants."

Amazon's expanding influence will be on full display Thursday, when the Seattle-based company reports fourth-quarter results. Analysts expect revenue growth of 23 percent to $36 billion, according to FactSet.

And Amazon is even managing to squeeze out some profit from its notoriously low-margin operation, thanks to its booming cloud-computing business Amazon Web Services. The company is expected to show net income of $1.57 a share, up from 45 cents a year ago.

The main reason bullish venture investors still abound in e-commerce is that global Internet retail is poised to more than double by 2019 to $3.6 trillion, according to eMarketer. Based on analyst projections, Amazon will command only 6 percent of that.

"Amazon can't own the entire e-commerce space," said Jeff Crowe, a partner at Norwest Venture Partners. "If you come at it with a fundamentally different value proposition, there are enough people that will respond to it positively."

Crowe was referring specifically to Jet.com, perhaps the boldest effort yet to take on Amazon. Norwest is among the firms that have poured more than half a billion dollars into Hoboken, New Jersey-based Jet, which launched last year. The aim is to sell everything that Amazon can at the lowest possible prices, using algorithms to help surface deals and control costs.

Jet founder Marc Lore previously sold Quidsi (parent of Diapers.com) to Amazon for about $545 million. Crowe called Jet a "swing-for-the-fences idea" and said Lore and his team are best positioned to chase it.

Most of the go-big ideas in e-commerce in recent years have failed. Flash sale site Fab.com sold for $15 million in 2015 after once being valued at $1 billion. Two years earlier, ShoeDazzle sold to JustFab for a small sum after raising $66 million.

Hudson's Bay announced in January that it's buying Gilt for $250 million, a quarter of the price investors once ascribed to the flash service.

When Zulily, the e-retailer focused on women and kids, sold to home shopping network QVC last year for $2.4 billion, it was one of the biggest e-commerce acquisitions ever. But it was below Zulily's IPO price from 2013 and came after a dramatic stock slide.

A customer tries on Warby Parker eyewear at the flagship store's grand opening in SOHO, New York.
Anna Andrianova | CNBC
A customer tries on Warby Parker eyewear at the flagship store's grand opening in SOHO, New York.

Still, some categories of commerce are doing well, mostly tied to the creation of unique brands.

Eyeglass maker Warby Parker, shaving start-up Dollar Shave Club and mattress seller Casper started by selling online — with the help of venture funding — and grew by finding loyal customers that promote their brands on social media.

They're all new specialty retailers "creating experiences that can't be replicated on Amazon," said Kirsten Green, founder of Forerunner Ventures, a commerce-focused firm whose investments include Dollar Shave and Warby Parker.

Green is also an early backer of M.Gemi, a retailer that works with small Italian shoemakers and helps them reach a larger market by giving them a Web presence, creating custom designs and developing a supply chain.

Mike Kwatinetz of Azure Capital Partners is still backing e-commerce companies, including Le Tote, a service for renting women's clothing.

Kwatinetz said that for Azure to invest in an e-retailer, there's an equation the company has to get right: The lifetime value of a customer needs to be at least triple the amount it costs to get that person in the virtual door.

In other words, if the ads, promotions and e-mails needed to acquire a customer cost $10, that member should eventually bring in $30 of profit.

It's a challenging formula, because the shipping, packing and customer service components of e-commerce call for costly investments. It's hard to make money even from a paying user.

"There's a huge amount of execution in this thing," Kwatinetz said. "A lot of these guys don't have an economic model."

The washout in the start-up market is expected to intensify this year as venture investors reel in their dealmaking and focus new dollars on companies with working business models.

Global funding to VC-backed companies dropped 30 percent in the fourth quarter from the prior period to $27.3 billion, according to CB Insights. Because of the deal surge in the first nine months of the year, 2015 was still the biggest year since 2000.

As for big box retailers, they have no choice but to retreat. The situation is so dire that investors are in some cases valuing their property over their business.

Activist investor Starboard, which started buying shares in Macy's in mid-2015, said two weeks ago that the retailer's real estate is worth $20.7 billion, or $1.9 billion more than its enterprise value. Starboard is recommending that Macy's spin out those holdings.

"With the real estate market near all-time highs, now is the time to separate Macy's real estate assets and create value for shareholders," the firm wrote.

Physical retail isn't going away, but it's being condensed into smaller spaces where consumers can try out items and use technology to customize the product. That's how Tesla sells cars and one way Casper sells mattresses.

It only makes economic sense.

"The world is really over-stored," said Storefront's Rodio. The emerging model is "less capital intensive and (has) a whole lot less stores but more options to get your product within an hour."