There has been a persistent line of thinking in the general media and trade papers that e-commerce would strike a death knell to the brick-and-mortar stores. The headlines tend to read, “Retail Apocalypse”. Nothing could be further from the truth.
But you say, “Look at all the retail stores that are closing – Amazon is killing them.” It is true that many retail locations have closed over the past few years. Most have been mall-based stores located in bad malls. The fact is that less than a third of U.S. malls control over two thirds of the mall retail sales. This means that two thirds of mall-based stores are chasing less than one third of the business. Can you see what is wrong with this picture?
This is primarily a case of overexpansion and cannibalization. Too many previously successful retailers found it very easy to keep opening stores due to the low cost of money and ignored the fact that their formulas did not work in marginal locations. There were other retail stores more recently that closed due to the inability to withstand the conditions imposed by the recent pandemic.
However, there are more stores opening than closing. Look at the incredible growth of Aldi, Burlington, Citi Trends, Dollar Tree, Five Below, Lidl, Meijer, Old Navy, Ross, Target, and TJ Max. What is the common thread of all these brands? They are the value brands and the low-price leader in their category.
The fact is that the retail store has the low-cost advantage over the pure e-commerce retailer. Physical stores can aggregate the best sellers in the mass market, buy in container and truck load quantities and drive down both product and logistic costs.
In contrast, the pure e-commerce retailer is often at a cost disadvantage. They may be offering SKUs that go beyond the best-selling items stocked in the physical stores. This puts a pressure on working capital tied up in slow turning inventory. E-commerce involves massive investments in warehousing and systems, so these retailers do not avoid the necessary investment in brick and mortar that is so often mentioned in relation to e-commerce. Additionally, the workers in these warehouses tend to make fifty percent higher hourly wages that the traditional retail salesperson. This is another cost disadvantage. Then there is the cost of shipping individual products to the customer’s home as opposed to the truckload shipments possible to the physical stores. There is a quantum difference in transportation costs with negative implications to the e-commerce retailer. Finally, there is the increasing cost of customer acquisition which is escalating due to the number of online companies vying for attention through the limited options of Facebook, Google and Amazon which can dictate significant cost increases going forward.
There will be a continuing growth in online and off-line sales. However, the myth that e-commerce would become dominate over physical stores has proven to be an exaggeration and the true value leaders for mass market consumer goods will be the technologically savvy physical store.