Amazon last week celebrated its 20th anniversary of going public. Today, according to several reports, half of U.S. households subscribe to the company’s Prime service offering free shipping and other perks for $99 a year. Its stock, which on Monday was priced at about $970, is trading at about 490 times its split-adjusted price of $1.96 on its opening day. Amazon has earned fortunes for its founder, Jeff Bezos, who Forbes listed this year as the world’s third-richest person.
Instead of blowing out candles to celebrate Amazon’s anniversary, Bezos has figuratively blown up his brick-and-mortar retail rivals. The decline in traditional retail stores has occurred despite the growth of U.S. gross domestic product over the past eight years and increased wage growth for all of America’s income sectors.
Almost all analysts who study the retail sector believe that America has too many big-box stores.
“Retail square feet per capita in the United States is more than six times that of Europe and Japan,” Richard Hayne, CEO of Urban Outfitters, told analysts. Hayne predicted that the decline in stores will continue and may even accelerate. During 2016 and so far in 2017, nine retailers have filed for bankruptcy. In addition, J.C. Penney, RadioShack, Macy’s and Sears each announced more than 100 store closings.
Challenger, Gray and Christmas, a job-placement firm, calculated that traditional retailers have announced more than 200,000 layoffs over the past four years and 38,000 already in 2017. The Progressive Policy Institute found that the e-commerce sector added 355,000 jobs from 2007 to 2016.
Jobs in e-commerce tend to pay some 25 to 30 percent better than traditional retail jobs. Companies such as Amazon are able to produce the same amount of economic activity as traditional retailers with many fewer hours of work.
America’s traditional brick-and-mortar stores have suffered for many reasons, but here are four that might be the most significant:
1 – Online shopping is far larger than just Amazon. Cowen and Co. reported in a research report, “Mobile Commerce Shares of Total Digital Dollar Spent,” that sales grew from 2 to 20 percent from 2010 to 2016. Easy return policies have made online shopping risk-free for consumers buying clothing, which is the largest e-commerce category.
2 – We now benefit from a new shopping experience. Instead of repeated visits to showrooms, buyers are now buying items such as chairs and living room couches after viewing them on their screens.
3 – Rising wages can hurt low-margin retail stores that rely on cheap labor. At the low end of the scale, the increase in minimum wages and the tight labor market has pushed up wages for the poorest workers.
4 – Consumers are shifting spending away from clothes toward traveling and eating out. According to the St. Louis Fed, food services and drinking places” have grown twice as fast as all other retail spending since 1992.
In an article entitled, “Life After Amazon,” Barron’s identified retail stores that are likely to reward investors: Costco and Wal-Mart in the big-box category, Lowe’s in home improvement and Party City, a party-goods supplier.
In 1942, Joseph Schumpeter in his book “Capitalism, Socialism and Democracy” coined the term creative destruction to describe innovators destroying longtime enterprises. Schumpeter recognized that the economy changes constantly because of innovation and competition. For every winner like Amazon, there are losers such as Sears, Borders, Macy’s, J.C. Penney and Radio Shack.
For many years, Wal-Mart forced many competitors to close their doors. Now, Amazon has a market value that is double Wal-Mart’s.
Creative destruction can disrupt the status quo and ruin many companies.
On the other hand, it can be profitable for innovators. It stimulates economic progress and can result in a higher standard of living.
Amazon has indeed pioneered a better mousetrap. Happy Birthday, Amazon!
Originally published in the Sarasota Herald-Tribune
