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.