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Amazon and the future of physical retail

21 September 2017

From veteran publishing consultant Mike Shatzkin:

There are two parallel conversations about the future of retail that are quite active. One is within the book business and it centers around what the future will be — and will there be one? — for Barnes & Noble. The other one is about the future of retail competitors to Amazon in the broader sense, particularly the big retailers that anchor the malls and shopping centers and are depended upon to draw the traffic to all the other stores that share the same parking lots.

Whenever B&N announces financial results, the whole book business pays attention. When a chain with the ubiquity and brand of Toys R Us goes under, as it did last week, everybody pays attention.

Barnes & Noble has been feverishly changing executive management and delivering pretty vague and unconvincing strategic pronouncements in a context of declining revenues and a sliding stock price. Since B&N is both the single stop capable of putting a new title in front of the most bookstore customers and the single biggest retail customer for publishers’ backlists, it occupies a position of singular importance to almost every publisher.

Amazon may already be a bigger account for most publishers but that doesn’t change B&N’s unique importance. So it is not surprising that publishers obsess about the chain’s financial and operational health. And although I am still skeptical that their demise — or even a rapid shrinkage — is imminent, the consequences whenever it were to come to pass would be industry-changing.

. . . .

Of broader interest is the impact Amazon is having on all retailers. So many of them — Sears, JC Penney, Macy’s — are very obviously struggling. This year alone, we’ve seen stories about the death of department stores and other retailers from the Atlantic, Business Insider (citing Warren Buffet as their expert), and Time, among many others. Borders is gone. Radio Shack is gone. And then last week came the word that Toys R Us is filing for bankruptcy. So Barnes & Noble’s struggles are within a context that goes way beyond them and way beyond the book business.

. . . .

The current story attributes Best Buy’s success to the obvious tactic of matching Amazon’s prices and to soft factors like being quiet about cutting costs (so as not to panic the employees) and “staying humble”. But the one single operational change Best Buy made to enhance their competitive position actually demonstrates why Amazon has the advantage over them and everybody else. And why that is not likely to change.

The operational change Best Buy made was to use their distributed store inventory to ship online orders received centrally. The Times piece highlights the reduction in delivery time to customers that can be achieved by shipping from one of the 1000 stores that is closer to the purchaser than a warehouse with the same product. In fact, that’s only one of at least three advantages. The most significant is that they are undoubtedly able to fill orders with stock on store shelves that they would have lost completely by not having stock of the same item in a warehouse. The other is a much more efficient, and therefore profitable, use of their inventory. They effectively need less stock to fill more orders.

Link to the rest at The Shatzkin Files

PG says the history of retail stores in the US is one of more efficient and better-managed upstarts putting established retailers out of business. Why? Because customers liked the newer retail idea better than the old one.

Montgomery Ward, Sears (barely not dead), A&P, Marshall Field, Wanamaker’s, Gimbels, Eaton’s in Canada, Jacobson’s, Bamberger’s, Bullocks,  I. Magnin, Joseph Magnin,  and Carson Pirie Scott immediately come to PG’s mind. They disappeared because their customers went somewhere else.

Since Walmart was founded in 1962, it has put thousands of retailers out of business, including many small retailers in small towns.  And don’t forget how many bookstores that Barnes & Noble and Borders forced to close.

In each of these cases, customers voted with their dollars. Today, millions of people say, “I like Amazon better than Walmart” and “I like Amazon better than Barnes & Noble.” And spend accordingly.

Economic freedom in action.

Amazon, Bookstores

44 Comments to “Amazon and the future of physical retail”

  1. The wonder of Toys R Us is that it didn’t file years ago. I visited the HQ a couple of years after KKR, Bain Capital and Vornado bought it. What was on the TVs that were everywhere? CNBC. What were the thoughts about toys and baby items? Not much from a brand perspective; mainly toys and baby goods were just seen as another kind of replaceable widget to retail. There was no soul to the company left by that time. Without that sensible tie of brand to business and with the company’s high prices, it could not do much to persuade customers of its relevance.

    • If you’ve ever been to a tRus at Christmas-time, you’ll know why web shopping is winning that battle.

    • I have this weird aversion to toystores (or toy departments in retail stores) due to a childhood thing: we were poor and I felt that asking for toys would be a burden, so when my mom would offer to take me to the toy department, I always said no. That “no” habit sort of became an aversion. Hubby loved toystores. He was always going to Toys R Us…without me. It’s been several years now since his last visit there. He might get a wee look of interest if we drive by, but he just doesn’t go.

      We order stuff for the family kids online. Or he goes to a game store (kids like games more than toys, it seems) and gets something, though a gift certificate seems most welcome. As games become more about downloads or streaming, I assume GameStop might find itself in quite a bit of trouble in terms of B&M stores. (If they are not already.)

      • Nintendo is still mostly physical media. Maybe that will change as the Switch gets more popular (except that Switch moved back to cartridges, away from discs), but there are still a lot of gamers that don’t like to deal with downloads and like to own copies of things. Also, GameStop sells a lot more than games. There are consoles, controllers, etc., as well as a lot of toys.

        I think if GameStop finds itself in trouble, people downloading games aren’t likely to be a major cause.

        • Yeah, but consoles, controllers, and packaged games can be bought online, just like books and computers. 😀

          • Not to mention at stores like Best Buy where they’re only one of many things available.

            I wouldn’t be surprised if GameStop goes out of business. I just don’t think it’ll be primarily (or even significantly) because of downloadable games.

  2. Heh, and before internet there was mail-order.

    My dad helped put up his mother-in-law’s mail-order Sears house.

    I don’t think I can order a house for delivery from Amazon just yet, I’ll give them a little more time. 😉

    • Pre-fabricated houses that the owner assembles on-site make regular appearances about once every other decade. The best known example was the Bauhaus. I don’t understand why they never caught on.

      • Not a lot of repeat business?

        And today you’d have so many different rules and inspectors depending on the location …

  3. Well, I haven’t been to a grocery store in weeks, cuz Amazon Fresh. I really like Amazon Fresh.

    So, while I will still go to farmer’s markets and Publix from time to time for things Amazon Fresh doesn’t have or prices poorly, having my groceries dropped at my door is very, very nice. (I tip generously.) For folks with chronic conditions, this is a godsend. I don’t have to email hubby a list and hope he gets it right. 😀

    I bought books online. Then I bought clothes online. Then I bought electronics online. Then I bought non-perishable foods online. And now, perishable foods.

    This is not looking good for retail’s normal operations if I’m any sort of indicator.

  4. Years ago, I had some bad experiences at Best Buy due to their then poor performance when it came to returns and restocking charges. In the past year, I returned to buy a computer. I ended up hating the computer, but Best Buy took it back for a full refund and with no argument. That change has to be result of folks like Amazon breathing down their neck. I also had dealings with the Geek Squad, wiping three computer of all data/info, and installing new operating systems in two more. They did the work overnight, in-house. In the past, I’d taken a sick computer to them and they were going to have to send it elsewhere for about two weeks. I think someone waved a magic wand over them.

    • I used to buy amiibos (Nintendo toys) from Amazon when I could, because for a while there you could pre-order them and you got the 20% Prime discount. Now neither of those are true. Amazon’s gotten pretty awful about amiibos, especially the exclusives. Best Buy, OTOH, lets you use the 20% gamers club discount (if you have it) on amiibos. So I switched to Best Buy as my main go-to for those. An odd situation where Amazon took a couple huge steps back in terms of being the most appealing retailer to buy from.

      I’d never take a computer to Best Buy for repair, though. I hire local computer repair people for that. People tend to be better motivated to do a good job when they’re the ones seeing the bulk of the profit and aren’t just low-paid employees with no stake in the transaction.

  5. “Barely not dead”. Is this the same as “Not quite dead’ or maybe “Only mostly dead”?

    Either way, I’m sure I’ll find a way to wedge that into the next book. Thanks, PG.

    As for Mikes post; its not hard to predict the inevitable. He should try it sometime.

  6. Lost my Sears card a few months back due to lack of activity. They even sent me a letter, asking me to make a purchase within a specific period, and I mislaid the letter. Really, I only think about Sears in terms of major appliances (washer & dryer, etc).

    Got a stereo from Best Buy a few years back. They were actually my first choice, as I wanted to see/touch the various models.

    Overall tho, I agree w/ @Mirtika: so much of my shopping has shifted online, whether via AZM or other retailers (clothes, books, computers/accessories) that the brick & mortar version is struggling.

    • A credit card I received via my bank (unrequested, never used, never even activated) was pulled back recently — same reason: lack of activity. They gave me a window during which to use it, but I didn’t. I’d had it for about nine or ten years, with renewals along the way when they’d send me a card with a new expiration date. I use my Amazon card for everything. Love those reward points every month.

  7. Was the implication that Toys R Us going bankrupt is Amazon’s fault, rather than digital devices and media taking up more of kids time?

    • I believe the implication from Mike is that Amazon is causing a catastrophic upheaval in all areas of retail, even big box stores like Toys R Us. We have only a handful of electronic chains left, like Best Buy; they’ve all gone by the wayside. Now you have other types of retail businesses that see their business slipping away as Amazon’s business is continuing to grow and even dominate further into new markets like supermarkets.

      • Not just Amazon, though they are the Big Big One. I used to go to a local GNC store for vitamins/supplements/etc–for years and years. Now, I order from Vitacost. Prices are better for similar or same products. I also order a good amount of non-perishable groceries from them, as well as now and then from JET and THRIVE and WALMART online.WHichever online site gets me stuff faster, fresher, and with good prices, they get my business.

        I even go out to eat less often. I patronize places nearby that are willing to deliver or use Grubhub or Eat24 or, soon, UberEats. I was using Instacart earlier this year to buy from local groceries; now I’m using Amazon Fresh.

        I think the trend to wanting stuff to come to us–which Kindle succeeded in doing with books with fast, easy downloads–rather than going to get stuff may continue to be a big trend, especially for those of us who hate crowded malls, lines in stores, or who have health issues where going and getting stuff is a problem, or even being around folks with germies is a problem.

        Case in point: I was able to order a lot of water and some traveling snacks (we evacuated) before Irma hit us, doubling our supply by ordering online. We didn’t have to battle crowds and parking lots and tempers. Just had it brought while we packed our suitcases. 🙂

      • I believe the implication from Mike is that Amazon is causing a catastrophic upheaval in all areas of retail,

        I agree he implies that, but I don’t accept it.

        Let’s not forget that consumers are a big part of the consumer market. Consumers are making choices. Amazon can only offer things. It can’t make consumer choices.

        Consumers have found they get two things when they order online: goods and leisure time.

        And catastrophic? I can’t say. We have heard the same thing each time we went through market changes. Seems people adapt and prosper.

        • I think that the upheaval that retail is seeing is a seismic change compared to anything that has happened in the past. There are very few large retail businesses that haven’t been affected by Amazon. Apple is an exception that comes to mind. But clothing retailers, electronic retailers and just about every other type of retailer is suffering. Time will tell how they will compete. Physical retailers can compete by showing off product and letting people touch them, but if it’s a commodity item consumers don’t need to do that.

          • Department stores displaced lots of small vendors. Very few businesses weren’t effected.

            Assembly lines displaced one-off craftsmanship. Few workers were unaffected.

            In 1900, 42% of Americans lived on farms, and by 1915, it was 30%. Now it’s 2%. Few farmers were not affected.

            Starting in 2000, productivity shot up while employment stagnated. (Robots) All manufacturing workers and firms are affected.

            This, too will pass. It’s seismic today because nobody knows how it will resolve. The same thing happened in the past. It was seismic then because nobody knew how it would resolve. But, since it resolved, it’s no longer seismic, and the next thing down the line will pick up the seismic banner.

            • Time will tell of course. And then there’s the question if the government is going to look into antitrust issues because of their size.

              • What the government does is pretty much irrelevant. Short of closing down the Internet, online retail is only going to become more pervasive, before it pretty much disappears as local manufacturing makes shipping things around the world obsolete.

                There are only a few reasons I buy in local stores:

                1. If it’s cheaper, and the difference in price is worth the hassle of going to the store.
                2. If it’s a local business that I want to support. That generally doesn’t include big chain stores.
                3. If I really want this thing now, and they have it in stock (which is why, when I make the effort to go to your store, you really, really don’t want to tell me ‘yeah, I know we said it was in stock, but turns out it’s not’, as happened a couple of weeks ago).
                4. If I don’t want a permanent record in some big, centralized hackable database that I bought the thing, so the hackers can tell their friends to come and steal it.
                5. If I want to see the thing in person before buying it.

                With drone delivery, and VR to ‘see’ the object before I buy from an online store, two of those reasons are going away, no matter what governments may think.

                • Drone delivery will be fine for five pound boxes but not larger items. And there are major hurdles to overcome including legislative. I could see it working in rural areas; but it would be impossible in a city. It also depends how far you are from the warehouse. Most drones have a short battery life and if they encounter wind resistance that eats up some of that battery power as well.

                  I buy online basically because it’s easier and I’m lazy. And the Amazon free shipping helps too, but other retailers have free shipping as well.

                  As to VR, that would be interesting.

                • Drones will be everywhere in twenty years, though I agree we need battery life improvements to make them viable for large deliveries.

                  Ikea already has some kind of VR app that I installed ages ago, but I keep forgetting to try it.

                • Actually, VR may have an even bigger impact in the longer term, by not needing to buy those things at all.

                  For example, I used to drive sports cars before I moved to Canada (mid-engined, rear-wheel-drive cars are not a good plan in Canadian winters), and keep thinking about buying another one as a summer car. But when I can drive the most expensive sports cars in the world in VR, there’s much less reason to buy one in real life. Right now, it’s not a perfect simulation since I’m not yet willing to spend $20,000 on a hydraulic chair, but it’s only going to get better.

                  Similarly, I can go target-shooting with a .50-calibre rifle in VR as much as I want, without having to pay $5 a shot for the bullets. All it takes is a few bucks worth of plastic pipe from Home Depot to simulate the stock (though the recoil simulation isn’t there yet).

              • And then there’s the question if the government is going to look into antitrust issues because of their size.

                That is more of an issue than it was just a year ago. The big tech firms have chosen to enter the political arena, and they may pay a price. That may push anti-trust actions that had no prior merit.

                Equally important in a changing market is keeping government from stifling economic growth. In the past, displacements were all handled in a relatively unregulated economy. If new business cannot get past government regulations, it can’t pick up the free labor force.

              • Steve, It appears that you misunderstand the reach of the Sherman Anti-trust Act. Company size does not trigger the Act. Market share does not trigger the Act. Monopoly does not trigger the Act. Anti-competitive practice triggers the Act.

                • And the fact that Trump doesn’t like Bezos because of WaPo.

                  That may have something to do with it, but I think the fact that Bezos contributes big to Democrats has more.

                • Yes I do understand that. And predatory pricing can be one of those things that triggers the investigation. I am well aware of what’s involved in an antitrust case. In fact with the Apple case, The DOJ had spoken to me because we were one of the few large publishers that were not on agency pricing at the time, and I declined to be a witness on their behalf.


        • >but I don’t accept it.

          Yeah, I’d look first to debt payments on their 6 billion dollar loan. Six. Billion. dollars. The cash flow requirements to keep up with interest payments alone have got to be staggering. Though I’ll bet those guys structured it so that they come out smelling like a rose.

  8. PG says the history of retail stores in the US is one of more efficient and better-managed upstarts putting established retailers out of business.

    And over all that time, nobody has known what is coming next.

  9. i think that home depot and lowes are the ones really putting sears out….. dont see how amazon factors into sears demise at all.

  10. I still miss Marshall Field and say a pox on Macy’s. As to Carson, Pirie Scott, where I got my first credit card, they’re still in business, just not in the Loop anymore.

  11. I went sniffing around for more details on the Toys R Us bankruptcy thing. Apparently it’s not Amazon killing them–it was the leveraged buyout in 2005. They’re under a mountain of debt that has been killing their business, and filing Chapter 11 will let them get out of that and move forward. Well, in their opinion.

    • It is a combination of the debt they had from Bain and KKR as well as the Amazon hit. Walmart has been hurt in the toy area by Amazon as well.

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