North America

Like Night and Day

The e-commerce vs bricks-and-mortar debate never stays out of the headlines for long, it seems. It has surfaced again this past week, prompted by the discussion of whether or not Calgary can compete to host Amazon’s planned second headquarters. This has left Canadian investors to mull yet again what the state of retailing will become in the near future.

One of the crucial questions is what the extent of retailing and e-retailing’s convergence will be. Will the line between retailers and e-retailers blur, such that there will remain few differences between them? Or, will they stay distinct?

Lately the argument for convergence has never looked stronger. Amazon’s acquisition of Whole Foods, the eighth largest grocery chain in the US by market share, will give it 470 new brick and mortar locations in North America and Britain. Walmart, meanwhile, bought Jet.com for $3.3 billion in cash and stock at the end of 2016, in what was at the time the largest ever acquisition of an e-commerce firm.

“They’re meeting in the middle right now,” says Chieh Huang, chief executive of Boxed, an e-commerce start-up. “If you think of a mountaintop, on one side you have the tech folks trying to figure out retail, while the retailers are trying to figure out technology. Amazon said screw this: we’re going to figure out physical retail faster by paying $13bn [for Whole Foods].”

Interpreting Valuations

This question of convergence can inform even how market valuations may be perceived. If, hypothetically, we knew for certain that retailing and e-retailing will converge fully, then Amazon’s position would appear dominant: its market capitilization is twice as large as Walmart’s.

If, on the other hand, we knew for certain that retailing and e-retailing will remain more distinct than they become similar, then it may instead be Walmart that seems the better positioned of the two. Walmart, after all, is the dominant retailer; it towers over the next largest retailer (Costco), grocer (Kroger) and brick and mortar outlet (Home Depot) in terms of market capitalization. Amazon, in contrast, lags behind four of its fellow tech giants—and is barely ahead of Alibaba—in market cap.

If, in other words, we consider Amazon a retailer, then it is the leading retailer in the world (at least, in terms of market capitalization; Amazon trades at a notoriously high price-to-earnings ratio, so its earnings trail its valuation). Yet if we consider Amazon to be “only” a tech firm, not a retailer, then Walmart would continue to be viewed as the world’s leading retailer, whereas Amazon would still not be its leading tech firm.

Strategies and Imperatives

It is extremely difficult to predict the future level of convergence between retailing and e-retailing. While it is obvious that brick and mortar retailers will continue to make their products more easily available online, the more significant and difficult to predict question is how many of their brick and mortar outlets they will get rid of—and, conversely, how many brick and mortar outlets e-retailers like Amazon will purchase. Without knowing this, we cannot answer the convergence question.

Still, we can make two statements with relative confidence. First, the recent trend towards convergence is by no means a definitive one. For one thing, they were not actually such significant purchases, once you take into account the gigantic size of Amazon and Walmart. This was particularly true in Walmart’s case, where the acquisition of Jet.com accounted for just 1.4 percent of the retailer’s current market cap. But it was also true for Amazon’s Whole Foods purchase, which, though more than four times larger than the Jet deal in absolute terms, still represented only 2.9 percent of Amazon’s current market cap of $474 billion.

The Whole Foods deal, moreover, does not even necessarily signal a strategy shift towards brick and mortar retailing. Rather, because grocery deliveries are bulky and frequent compared to deliveries of other categories of goods, groceries act in effect as “liquidity” in the goods-delivery market. In other words, the acquisition of a grocery chain does not have to indicate a desire to gain brick and mortar market share, but instead can be intended mainly to buttress e-commerce services in areas that would otherwise have low liquidity in the delivery market; i.e. in low-density suburbs where most Americans live.

Second, we can state that, if convergence does not occur, then the business imperatives of retailers and e-retailers will not merely be opposing, but opposite. The imperative of e-commerce retailers is to deliver cargo to consumers. The imperative of brick and mortar retailers, in contrast, is to deliver consumers to cargo:

Bricks, Mortar, and Pavement

The one asset that brick and mortar retailers have which their nimbler, higher-valuation e-commerce rivals lack is real estate—buildings and parking lots—located in urban and suburban areas where most people live. Walmart alone has 3522 supercentres within the US. Most, when combined with their parking lots, occupy roughly 17 acres (larger than twelve football fields). Over 90 percent of Americans live within 16 km of a Walmart-owned store.

Absent convergence, brick and mortar retailers will have to find new ways of enticing people to their stores. This will be a difficult task, given consumers will have the option of ordering from e-commerce firms instead.

One method of enticement brick and mortar retailers will attempt is likely to be via an involvement in the transportation industry. They might, in effect, use their large buildings and enormous parking lots to become modern, “liquid” transportation marketplaces, by offering bus, ride-sharing, or even autonomous parking services at their stores. In other words, to remain competitive with e-commerce, the retailers may also have to compete (or collaborate) with transportation services like Uber, Car2Go, Greyhound, or even Tesla. Only by becoming transport hubs could they continue to compete as commercial hubs.

Logical (read: Extreme) Conclusions

The goal of e-retailers, on the other hand, would remain the cheap, efficient, quick, and plentiful delivery of goods. As Amazon is not shy of saying, this will involve the automation of delivery vehicles, intended not just to save on labour costs but also to utilize all 24 hours of the day. Overnight deliveries benefit from there being little road traffic, and they are crucial if e-commerce firms are to be able to deliver goods as quickly as possible.

As a result, if retailers and e-retailers do not converge fully in the years ahead, their differing business imperatives will be likely to lead them down divergent paths. The retailers, to remain competitive, will attempt to control consumers’ transportation patterns during the daytime. But the e-retailers, to become even more efficient, will focus on dominating the transportation of goods at night.

 

 

 

 

 

 

 

 

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2 thoughts on “Like Night and Day

  1. Ahh, the ‘transport hubs’ again, I was wondering where you were going there!

    I’m no expert, but some opinions:
    – of course there will be consolidation in the retail sector. Different retailers selling the same products are in direct competition with one another – to the extent that regulators allow (which is to say completely) they will seek to avoid competition by buying their competitors. Already there’s really no such thing as a ‘bricks and mortar’ retailer – all the large retailers have huge online presences.

    [and hybrid presences. Maybe it’s not happened in Canada yet, but here there’s been a big push toward ‘click and collect’ – order online, collect in store. It reduces the time people spend in stores, and the number of staff required to deal with them, while increasing the shop’s control over stock (they don’t need as much stock just hanging around on site just in case someone wants to buy it).]

    – there is little future for brick-and-mortar shops, outside of the very high end and the occasional ‘retail village’ (and immediate-consumption retailers like cafes). Shops are sitting on prime urban land, the price of which is soaring, but for most customers offer relatively little actual advantage compared to a website. Rising rents will drive shops online. An intermediate stage might be what we might call ‘catalogue shops’ – small storefronts that advertise goods and help guide customers to buy what they want through terminals, with helpful sales staff and some sample goods in the window.

    – I don’t see how car parks can save them. In urban locations, shop car parks are an unsustainable luxury – largely, indeed, have not been sustained. In out of town locations, there is no need for a ‘transport hub’, because nobody wants to go there other than customers of the supermarket. There may be one or two locations where a big out-of-town shop happens to be near a railway station, but that’s not a sustainable business model for the industry as a whole. After all, fundamentally, if the car park makes more money than the shop, the shop will eventually be paved over to extend the car park…

    [Besides, looking at existing ‘transport hubs’ (we call them ‘train stations’), they are indeed a good place for retail, but they aren’t a good place for big retail. They specialise in immediate-consumption food and drink shops, with the odd newsagent or tie shop thrown in. Big stations have grown to include a few knick-knack shops for passers-through. But if your model is built on people passing through on their way too or from work, bulk retail isn’t going to appeal to them…]

  2. Haha yes exactly, I really only have like three ideas, so I have to keep on looking at them from different angles in order to write anything.

    Clearly the market agrees that online retail is the future. It has Amazon’s value at twice Walmart’s, even in spite of the fact that Walmart’s yearly revenues are nearly quadruple Amazon’s.

    The question is what Walmart is going to do next. Obviously it is going to continue offering more “click and collect”, and probably will even have a deliver-right-to-your-door option too. But even if it does this, it is still likely to remain uncompetitive, since it will still have to bear the operating costs of its brick and mortar, which others like Amazon will not have. And its real estate – both store and parking lots – would become much emptier as more people “click and collect” or order deliveries.

    Walmart could then try to start selling off a lot of its properties in order to remain competitive, but that is hugely risky, because as the market gets wind of it, it could lead to “fire sale” conditions in which the value of retail real estate plunges and Walmart does not get a good return on its buildings and land.

    The only other alternative — besides doing nothing, which would not bode well for Walmart either — would be to double down on brick and mortar, by turning its stores into the type of ‘retail village’ you mentioned. Its only competitive advantage here (assuming it has any) would probably be its huge parking lots, since travel by car is so dominant in America.

    Maybe this is all a huge stretch, but what I’m envisioning is a situation in which American strip malls (often Walmart, but often not) become high-tech bus stations: you drive your car a few hundred metres from your home to the nearest one; it has a valet autonomous parking system so that you don’t have to walk far across the lot in the heat; you get into a bus/minibus/carpool that is going either to exactly your destination, or else to the nearest train station, or else to another strip mall that is near your destination (from which you can reach your destination either by taking a car2go-style car, or switching to another carpool, etc.).

    In other words, it uses the thing America has in abundance — parking lots and air-conditioned brick and mortar next to them — which may otherwise be becoming redundant because of e-commerce, and, at relatively little cost, uses it to overcome one of the worst things about America: its over-reliance on car-only transport.And, from Walmart’s point of view, people who are using their parking lots as transport hubs would then find shopping there — either directly or via “click and collect” — quite convenient.

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