While a tech geek at heart, retail has always fascinated me. Many close family members work in apparel sales and brick-and-mortar retail and retail is the bedrock of the American economy. Current U.S. Retail Spending has nearly eclipsed $1,400 trillion (see below).
Additionally, I grew up in the age of Amazon or relentless.com (one of Bezos’ original two names that’s still trademarked — try clicking on it!). In 2017–18, even after Walmart’s push into e-commerce with the acquisitions of Bonobos and Jet.com, Amazon occupied ~36% market share while Walmart held a meager ~2% of online sales. That now stands at ~58% vs. ~4.5%. See Amazon’s growth below:
A Little History:
In 1983, Gap brought on Mickey Drexler where he later became CEO in 1995. He invested heavily in Gap’s brick-and-mortar stores to build a customer experience through big dressing rooms, and fancy photographs on the walls. He believed (and turns out he was right!) that customers build their strongest associations of brands in-store, not on TV ads. His rival at the time, Levi Strauss & Co. made the exact opposite bet. They invested heavily in TV commercials because they believed it would build strong brand equity. Drexler built the best stores, but Levi’s had the best commercials. There was a clear winner in this battle between rivals:
Gap and Drexler ushered in a period where stores were marveled as the holy-grail of retail. Aware of his success at Gap, Apple appointed Drexler as a board member in 1999. He emphasized simple, yet innovative and luxurious brick-and-mortar shops to Apple’s brand and Apple too capitalized on the American consumer’s desire to smell, touch and see goods in person.
What about now:
Two days ago I received a notification that Macy’s (NYSE: M) was dropped from the S&P 500 as its Market Cap dipped below $1.5 billion. The company has lost about 70% of its value since the beginning of the year and about 80% within the last 12 months. This got me thinking: is the paradigmatic shift from brick-and-mortar to multichannel e-commerce occurring before our eyes?
The short answer is yes. On March 12th, Amazon spent $1.15 billion in cash on the former Lord & Taylor Flagship in Midtown Manhattan for an HQ on the east coast. A couple weeks earlier Amazon opened its first Amazon Go Grocery in Seattle on February 25th — a 10,400 square foot full-service grocery (Source: CNBC). These are different from their Amazon Go stores, which are smaller (1,000–2,000 square feet) and have less to offer. That said, as of July 23rd, 2019 there were 13 operating Go stores, while as of February 25th, 2020 there were 25 operating (almost doubling their store count in almost half a year!)
The immediate thought is: what is Amazon doing? Are they not investing in a sector that they have deemed obsolete: brick-and-mortar retail?
What’s to come:
They are investing heavily in brick-and-mortar because the future of zero-click purchasing, perhaps through voice, is nearing. Amazon wants to establish a multichannel retail scheme where you can browse in their stores, but ultimately you will either be ordering through Alexa or receiving goods and sending those that you don’t want back without any communication. This way Amazon can optimize your consumer preferences. In 2017, after having acquired 460 brick-and-mortar retail stores with $13.7 billion (Whole Foods Acquisition), Amazon’s warehouses were within 20 miles of 45% of the U.S. population. Amazon’s brick-and-mortar strategy is to be within striking distance of the vast majority of Americans so they can order through Alexa or minimal clicks and receive whatever they want to hoard in an hour. While Voice as a percent of search was only 16% in 2016 its expected to grow to 50% by the end of 2020 (Source: L2).
So, why does this matter? Because the majority of retail is zero-sum. Instead of value creation, Amazon generally engages in value-capture and that’s how the retail sector works:
Looking at the retail sector today we’re seeing a lot of mixed signals. Americans seem to be hoarding so much that we’re seeing it in the data. In the third week of March traffic fell at three of the largest retailers in the country as shelter-in-place orders were issued by governors across the country: Walmart traffic fell 6.7% year-over-year, Costco traffic fell 8.7% year-over-year and Target traffic fell 20.5% (Source: MarketWatch). However, the prior week witnessed American hoarding like never before, as traffic surged at the three retailers year-over-year: Walmart (+18.4%), Costco (+34.7%), Target (+19.2%). Going forward I see Amazon capturing closer to 70–80% of e-commerce sales and continuing to grow as the retail industry at large remains flat or experiences slow growth. This will lead to one if not both of the following to happen:
- Industry Consolidation
Amazon has shown limited interest in acquiring big retail like Macy’s, JC Penny, Walmart, Costco etc. Rather, Amazon has acquired companies like Kiva Systems ($775 million in 2012) to streamline their warehousing and logistics operations and ultimately limit their workforce. Amazon is focused on doing it better than the aforementioned retailers, not buying them. As a result I see the bigger retailers (e.g. Walmart, Costco, Target) acquiring struggling retailers and try to stay afloat. I see there being far fewer retailers in America after the dust settles from the Covid-19 pandemic.
One that I am more confident in than others is Walmart. They’ve realized the necessity of e-commerce integrated in their business and that has benefited them immensely relative to their peers. Their e-commerce business grew 41% in Q3 ’19 and 35% in Q4 ’19, and as you read in the beginning they’re gobbling up e-commerce market share, more than doubling in 2 years (Source: CNBC).
As a result of the Covid-19 pandemic and the shutdown of the global economy we’re seeing unprecedented unemployment: 6.65 million people filed jobless claims in the week ended March 28th (10x the peak level of the GFC) and more than 10% of American workers are employed by the retail industry (Sources: Bloomberg & Aspen Institute). We’re going to see a massive contraction in retail spending and output as the entire industry will shrink, leaving retail ripe for consolidation.
2. Amazon’s Brick-and-Mortar Retail Presence Accelerates
As they have shown with their acquisition of Whole Foods (a now 500-store footprint used as warehouses for their e-commerce behemoth), and their foray into cashierless stores (Amazon Go and Go Grocery), Amazon is hungry for brick-and-mortar retail presence. This will only continue as the future lies in voice-ordering through Alexa and nearly immediate delivery. It’s clear that this is Jeff Bezos’ vision for the future and it’s even more clear that they’ll have the deep pockets to do so. Unique about Amazon, that no other companies can leverage, is their cloud business.
AWS numbers are astounding:
Revenue: ’19: $34.9 bn; ‘20E: $46.1 bn; with > 30% growth year-over-year
Amazon is able to supplement their e-commerce business with endless reserves from their dominant cloud business (AWS has more market share than the next three largest combined).