Meet the US retailer beating Amazon at its own game

Delian Entchev

Aoris Investment Management

2020 was a record year for retail bankruptcies. It's a brutal industry – burdened by high fixed costs, at the mercy of changing consumer preferences, and facing accelerating existential threats from e-commerce.

At Aoris, we own great businesses with durable competitive advantages, including two retailers that stand out from the crowd. You’re probably familiar with Costco, but have you heard of Tractor Supply?

What is Tractor Supply?

Tractor Supply is the largest rural retailer in the US, serving the unique needs of hobby farmers and rural homeowners. Its 1,900 stores sell everything customers need to maintain their farms, ranches, homes, livestock and pets (except tractors!); including animal and pet feed, workwear, trailers, fencing, tools and even chickens. This may seem like an eclectic mix of merchandise but customers value the convenience of a one-stop-shop in a compact store format, compared to driving between 6-7 general purpose stores.

What makes it special?

1. Size is a competitive advantage

Tractor Supply is by far the market leader – it is ten times larger than the #2 rural store chain, competes mostly with small mom-and-pop shops, and has consistently gained market share. The most frustrating thing for a customer is to drive tens of kilometres only to find out an item is out of stock. Tractor Supply can reliably stay in-stock on highly demanded items as it is an important customer for its suppliers and has preferential access to products. This was a very visible advantage in 2020, when COVID-related disruptions affected the ability of smaller competitors to secure supplies. Tractor Supply also works with suppliers to create exclusive products based on customer feedback, with one-third of its sales coming from brands and items that can’t be found elsewhere.

2. Customer relationships

The company is renowned for its exceptional and personal customer service. A 2019 retail survey rated Tractor Supply’s customer satisfaction as the second-highest among all US retailers, after only Costco.

Store staff establish strong relationships with their customers – they even know their pet’s name – and are empowered to do whatever it takes to help. Customers often come into a store to solve a problem and they value the staff’s advice. Its stores are an integral part of the local community where they serve as meeting places, sponsor events, and are typically the employer of choice (in fact, the company loves to hire its own customers).

3. Economic resilience

Tractor Supply sells products that are essential to customers’ lifestyles, which is why they visit frequently (on average 6-12 times per year) and are loyal (90% are repeat customers). This also means the business is incredibly resilient. It has grown its sales in every one of the last 25 years, including the GFC, by an average of over 10% p.a. 2020 was a disruptive year for many businesses but Tractor Supply grew its sales by 27% and its profits by 60%.

4. E-commerce is an opportunity, not a threat

For starters, a lot of the products that Tractor Supply sells are bulky, heavy and expensive to ship, which makes the economics difficult for purely online competitors. This is why for 80% of its online orders customers choose to pick the item up in store, where they are likely to make additional purchases.

TractorSupply.com was rated by US consumers as the top e-commerce experience in 2019 – even above Amazon! Its online store, mobile app and digital marketing have allowed the company to reach a broader range of new customers, including more millennials and women. Meanwhile, smaller competitors have only a fraction of the resources to invest in e-commerce and the infrastructure to support it.

In conclusion

Tractor Supply estimates that it’s currently capturing only 10% of customers’ spend, and we believe it has a long runway ahead of strong sales growth and market share gains.

Here is a short video which takes you through its stores and brings the business to life. On the Aoris website you can find out more about our unique investment approach and the other exceptional businesses we own.

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All data sourced from company filings and Aoris analysis. Views published in this wire do not constitute investment advice.

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Delian Entchev
Senior Investment Analyst
Aoris Investment Management

Delian is a Senior Investment Analyst at Aoris Investment Management. He has over nine years of experience analysing equities, including seven years looking at global companies.

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