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 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 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.









North America

Should Hockey Fans Be Keynesians?

One of the most common things NHL players tell the media during the playoffs is that, when on the road, they want to play well during the first period in order to “take the fans out of the game early”.

If we assume that the players are correct in thinking that the fans can have strong influence over the game — even though, notably, home-team advantage has been quite a bit less significant in the NHL than in the NBA, and is arguably more to do with biases in officiating than anything else  — it begs the question of whether some teams’ fans are better at cheering than others.

Usually most of the focus here gets put on sheer loudness: the louder the fans, the better (or so the thinking goes).  In this year’s playoffs, for example, sportscasters have been talking a lot about how the Rangers’ struggles at home may be due in part to renovations that have made Madison Square Gardens a quieter arena to play in than it used to be.

But what might, perhaps, be lacking in these discussions is a focus on the timing of fans’ cheering. In the NHL, most cheering tends to occur when the home team is already playing well. When a team is doing poorly, however, it is more likely to hear only a brief, classless “Refs You Suck” chant, rather than the more sustained, energizing, and joyous “Go Leafs Go!”

It is not, or at least it does not  appear to be, the fans as a whole who tend to shift the momentum in the game. Rather it seems more often to be individual achievements that do so: a timely goal to get the home team back in the game, a big hit being landed or power play started, or a super-determined (and probably drunk) fan who just wont give up cheering until everybody sitting around him — and then, ultimately, the entire arena — joins in too.

The way fans cheer may be the worst nightmare of the honest, god-fearing Keynesian. Rather than provide stimulus during teams’ recessions, and restraint during their boom times, fans cheer when teams are already playing well, and are often quiet when things look grim.

This raises questions that are usually more associated with economics and politics than hockey. Can stimulus lead to mistakes borne of overconfidence? Is stimulus always equally good, or does it succumb to diminishing returns — and if so, how soon after it begins? And how much better are some governments (or fans) than others at doling out stimulus at the ideal time?

Obviously, these are contested, and more or less unsolved, or even insoluble, questions in economics. In sports, though, we cannot even begin to approach the question, since nobody (as far as I know) has gathered the data that would be necessary to make a start of it. If we want to know more — and yes,  I admit it: this is obviously not really an issue of burning importance — we’re going to need a hockey-loving economist who possesses the skill and resources to do so.

Malcolm Gladwell, if you’re out there somewhere, get to work.

North America

Captain Compromise: An All-Star Weekend Mini-Tournament in South Korea

Like many who heard the hockey news last week, I feel the decision not to have NHL players attend next year’s Olympics is bittersweet.

On the one hand, the Olympics should, of course, almost by definition, feature the best athletes in the world.

As a Leaf fan in particular, I can’t help but lament the storylines that may now go untold. Matthews and Van Riemsdyk getting even with the Russians for hacking John Podesta’s e-mails. Frederik Andersen standing on his head so much that the Danes end up acheiving their first-ever trip to the podium, beating their historic rival Sweden in a 1-0 octuple-overtime bronze medal game. Or even Zach Hyman, leading an Israeli team manned almost entirely by North American Jews, teaching them how to scour the boards, kill off penalties, and desperately try to help Matthews convert.

Who knows what wild Olympic action we will miss!

On the other hand, one must also respect the owners’ inclination to spend tons of their own money to earn tons more money within a free society. Why should they risk their stars being injured? And anyway, it will be exciting to see more amateur players—and Datsyuk—compete instead.

Also, it’s just sports, so who cares?

Well, alright, I do care. And so do plenty of other sports-crazed hockey lovers, who would also prefer the best players to play. Really, apart from the owners, and Gary Bettman, and some of the stars in the KHL, SEL, and OHL, and their families, and perhaps Kim Jong Un, there isn’t anybody who stands to benefit from players like Kane, Karlsson, Crosby and Ovechkin staying home.

Luckily, there may be a compromise available that would please both owners and fans, which could be used if the NHL does end up going through with the prohibition it announced earlier this week.

The compromise is this: All-Star Weekend in Daegwallyeong-myeon.

It’s pretty simple actually. Instead of only having one hockey category in the Olympics, in 2018 you have two: European Hockey and American Hockey. The European Hockey event will work the same way Olympic hockey tournaments always do, only without any active NHL players in it.

The American Hockey event, however, will be a much shorter, 2-day tournament, involving just 8 teams and playing by NHL rules (smaller ice, hybrid icing, etc. ). The teams will be Canada, the US, Russia, Sweden, Finland, Czech Republic, Slovakia, and World. (The World team might in fact have the fewest NHL players on its roster…though solid goaltending). The twin Hockey events will not be held on the same week, so non-NHL star players will be able to compete in both.

The 2-day, 8-team American Hockey event will work as follows. On Day 1, two rounds will be held, each round consisting of one 20-minute hockey game, plus sudden death overtime if needed. The first overtime will be 5-on-5 for 20 minutes, the second overtime 4-on-4 for 5 minutes, and all subsequent overtimes 3-on-3 for 5 minutes at a time. There will be no friggin’ shootouts.

It is likely that, at the end of Day 1, the four advancing teams in the tournament will each have played around 40-90 minutes of hockey; probably closer to 40 minutes. The four losing teams could easily wind up playing only 20 minutes of hockey. Matchups for Day 1 will be selected by lottery.

On Day 2 of the event, the final round will be held: the Bronze Medal Game and Championship Game. Both games will be played by playoff rules: 60 minute regulations and 20-minute 5-on-5 OT’s.

There you have it. The whole thing is over in one action-packed weekend. Canada’s stars grab gold, then head back home to celebrate before the jet-lag even has time to kick in. The players are not so likely to get injured, since, barring a wild series of sudden death overtimes, teams in the event will only play 20-200 minutes of hockey. And fans will not be forced to watch some poor athlete from Latvia or Slovenia try to defend Connor McDavid—or catch a last, peripheral glimpse of Brent Burns’ beard flying at them if they finally do succeed in carrying the puck over the blue line.

So, nu, what do you think? Nothing like a good compromise, eh?