People crave the convenience that e-commerce offers. As retail continues its transition online, traditional brick and mortar stores will increasingly be left empty-handed.
E-Commerce Industry Overview
In 2019, Amazon accounted for 37.3% of all e-commerce sales in the US. Research provider eMarketer expects Amazon’s share of the e-commerce pie to increase to 38.7% in 2020 and continue growing thereafter.
How is this possible?
In its drive to maintain a competitive advantage over industry rivals, Amazon has zeroed in on two core values:
(1) Amazon’s Marketplace has a wide variety of offerings.
Thanks to Amazon’s third-party Marketplace, the company sells more than 353 million different products.
As of July 2018, the Marketplace accounted for 68% of Amazon sales, and eMarketer also projects this share to increase over time.
(2) Amazon focuses on convenience.
The development of Prime Same-Day delivery for eligible customers represents the next big leap forward in retail convenience. It has demonstrated that consumer-centric innovation fuels success in the e-commerce industry. Traditional brick and mortar outlets struggle to compete with this level of convenience. Why would a consumer get up, drive to the store, park their car, walk through store aisles, interact with other humans at checkout, then travel back home when the entire process could be done in less than one minute from the comfort of your bed?
Through 2023, total retail sales are expected to grow by roughly 4.4% year-over-year, but e-commerce sales are estimated to grow at roughly 17.5%. E-commerce retail sales accounted for just under $3 trillion of the $23.95 trillion in total retail during 2018, equating to roughly 12.2% of all retail sales. By 2023, e-commerce sales could make up about 22% of total retail sales. E-commerce’s increasing share of the overall retail industry and rapid yearly growth rate highlight how quickly online shopping is becoming a larger part of our consumer lives.
McKinsey reported that it is highly likely for there to be “a billion new middle-class consumers in emerging markets” in the next decade. Furthermore, 75% of Chinese urbanites are expected to attain “middle-class” status in terms of purchasing-power-parity by 2022. In 2000, only 4% of Chinese citizens living in urban areas were considered middle-class. Maintaining this view that the global middle-class is expanding, the Brookings Institute suggests that, on average, 160 million people worldwide will enter the middle-class each year through 2022.
The e-commerce industry is now expanding more aggressively into previously untapped areas like China and emerging markets like Brazil, India, South Africa, and Russia. Companies seek new growth opportunities, plain and simple. Capitalizing on the global megatrend of an emerging consumer class with increased disposable income seems like low-hanging fruit.
Challenges in the US E-commerce Industry
Not every company will equally share in the gains of the expanding e-commerce industry. Obstacles like regional differences in consumer behavior and uneven balances of corporate power will determine who the winners are in the Age of Convenience.
The Need for Global Product Adaptation
The low-hanging fruit of emerging markets may ultimately be a forbidden fruit for US companies. Regional product adaptations are necessary to gain consumer trust and loyalty. China’s consumers already flock to Amazon’s Eastern Hemisphere counterpart, Alibaba, and the same situation could play out over and over again for other US e-commerce players.
A 2007 study explored differences between US and Chinese consumers’ online behavior by tracking where their eyes focused on search results page results. The image below displays the contrasting behavior. Chinese users tend to look at more results, click on more links, and stay on the page longer than their US counterparts.
However, Amazon is essentially a non-player in China. As of 2019, Alibaba enjoyed a 55.9% market share of the Chinese e-commerce industry. The company is listed on the New York Stock Exchange and has a market capitalization of over $520 billion. As the Chinese e-commerce market continues to grow, Alibaba will have reign over a widening base of consumers while Amazon watches from the sidelines.
Similar challenges will persist for Amazon and other US companies looking to expand across borders. The “one size fits all” approach that many US companies employ at home may not cater to different consumer behavior tendencies from one country to the next. Foreign e-commerce companies may simply play to the desires of their respective customer bases better than US companies can.
The United States is home to seven of the top ten companies based on market capitalization. China has two of the top ten in Alibaba and Tencent. Governments around the world understand that their respective levels of global influence are at least partially due to the top-level economic success such large companies generate.
China’s leader Xi Jinping fully understands this, and to spur Chinese innovation and boost global influence, he is directing the construction of what he hopes to be China’s new business and innovation hub: Xiong’an. Other countries may pursue similar strategies to boost their technology industries and bolster global influence; while the growth of the global e-commerce industry is obvious, it would be naïve to assume Amazon and others will simply steamroll their way to global dominance. Perpetual innovation must take center stage.
An Uneven Playing Field
In the US, new entrants to the e-commerce industry compete on an uneven playing field. Amazon, Walmart, and eBay are ahead of the pack, and ambitious startups may want to simply carve out a niche in the hopes that industry titans acquire them.
Consider Jet.com. Jet.com was viewed as a hot, growing startup with tons of promise, and in 2016, Walmart paid $3.3 billion to acquire the company. Walmart acquired the startup with the stated hopes of boosting its grocery sales and increasing its market share in urban areas. The Jet.com acquisition, to date, has ultimately failed to help Walmart achieve these goals.
However, Walmart is salvaging the value of Jet.com by merging the former startup’s technology, analytics, and marketing prowess with its own. Walmart was either short-sighted in establishing that first set of goals, or it wanted to mask the driver of Jet.com’s true value: well-organized and pre-established technology including logistics analytics that could optimize Walmart’s own business. A simple acquisition would boost Walmart’s capabilities quicker than in-house development could ever accomplish.
The story of Jet.com is an example of a new entrant making a splash only to be absorbed by the second largest competitor in the industry. Larger companies are willing to pay premiums to carve out an additional slice of their industry’s pie, and e-commerce is no different. Companies like Amazon, Walmart, and eBay simply have more resources and industrial clout than any new entrant can hope to achieve.
A Wealth of Opportunity
As e-commerce continues to boom, businesses will seek competitive advantages however possible. The push toward convenience plays a major role in businesses’ e-commerce strategies, and if a company believes it can improve its process of getting its products into consumers’ hands, then the company is going to make that investment.
Online Grocery Shopping
In 2017, Forrester estimated that by 2022, 41% of in-store retail sales would be digitally influenced. If you’ve ever first looked online to see if your local Dick’s Sporting Goods had the specific running shoe you wanted before you went to try it on in-store, then you are part of that 41%. If you’ve ever checked Best Buy’s website to make sure the television you wanted to buy was in stock at your local outlet, then you’re also part of that 41%.
A prime example of this shift toward ultimate convenience is the growth of one booming e-commerce segment in particular: grocery shopping. As of 2017, Amazon led the pack with an 18% market share of this $10 billion industry segment. Other notable players in this space include pioneering yet faltering Blue Apron as well as Peapod. Walmart is also looking to enter the game of same-day grocery delivery included with its soon-to-rollout Walmart+ subscription service to compete with Amazon’s Prime Pantry.
In the online grocery segment, convenience is the second key driver for consumers (affordability is king). Speed, availability, and reliability are also major factors for consumers when purchasing groceries online. A 2016 McKinsey survey of consumers in China, Germany, and the US showed that 27% of respondents ultimately did not purchase groceries online because they were faced with long delivery times.
Nielsen estimates that online grocery sales might constitute a $100 billion segment of the e-commerce industry by 2022 when 70% of consumers may regularly conduct their grocery shopping online. Look for more competitors to enter the industry as companies seek to capitalize on a growing segment. Also, look for acquisition attempts from pre-established giants like Amazon and Walmart.
Companies are making the collective bet right now that consumers will increasingly desire the convenience that e-commerce provides. A 2015 Pew Research study indicated that all things being equal, 64% of Americans prefer shopping in physical stores rather than online. However, that same study points out that 65% of Americans compare in-store prices to their online options and simply choose the cheaper offering.
To adapt to the consumer demands in the Digital Age, companies are investing in technologies like warehouse robots, autonomous trucks, drone-based package delivery, and even humanoid robots designed to hand deliver packages to customers’ front doors. The hope is that these technologies will provide cost savings throughout the e-commerce order fulfillment process, thereby pricing out physical retailers.
In 2012, Amazon acquired robotics company Kiva Systems for $775 million. Now, vast fleets of Roomba-like robots transport products throughout fulfillment centers as large as 1.25 million square feet. Amazon’s robot army grants the trillion-dollar company unparalleled scalability.
These robots have helped triple or quadruple productivity in certain fulfillment centers. When humans try to match robot efficiency, they experience an increase in serious workplace injuries. After Amazon implemented the warehouse robots in its Tracy, California facility, the serious-injury rate rose from “2.9 per 100 workers in 2015 to 11.3 in 2018.”
Humans have the manual dexterity that robots lack when loading shelves. Robotic arms currently cannot take this task from humans; however, Amazon CEO Jeff Bezos says robots will be able to do this task by 2030.
In Amazon’s quest for peak operational efficiency, human employees simply cannot keep up with robots. Their backs give out after 12-hour shifts of bending and lifting. Their propensity for requesting higher wages and unionizing cuts into their employer’s bottom line.
E-commerce demands scalability. Companies need to fulfill orders, and the demand for e-commerce is growing. COVID-19 has forced many to “shelter in place,” leading many to rely on e-commerce for their shopping needs. In fact, US online retail orders are up 83% in the past week compared to the same period in 2019.
E-commerce companies need to scale up to meet exploding market demand. Developing bases of new consumers in maturing countries only exacerbates this rising demand. Automation seems to be the long-term answer to accommodate such high volume as it proves more cost and time-effective.
Look! Up in the Sky!
Drone-based package delivery presents another technological advancement that aims to both disrupt and aid the e-commerce industry. In 2015, Walmart asked the FAA to loosen regulations so that the company could test drone deliveries. At the time, Amazon and Google talked up their visions for drone delivery.
Although this sector has historically been hampered by regulatory measures, the Federal Aviation Administration (FAA) in 2016 issued the “Small UAS Rule” (14 CFR part 107) which it says provided clarity to the commercial drone industry. The FAA then estimated that the growth in the number of commercial drones will increase tenfold in the five years from 2016 to 2021, likely resulting in over 420,000 units by the end of next year (p. 32).
In 2017, McKinsey reported that the commercial drone industry had grown $1 billion, up from just $40 million in 2012. PwC estimates that commercial drones can address a total value of $127 billion across all business applications.
That same PwC report breaks down the cost of “last-mile delivery” for Amazon’s Prime Air. The company’s drones can “reach a destination in 30 minutes whilst carrying a small parcel. Sending a 2-kg package [~4.4 lbs] within a 10 km [~6.2 mi] radius in the US by ground transport costs Amazon $2 to $8, compared with just 10 cents using a drone” (p. 8). Drone delivery can be a massive source of savings for companies seeking to drive down operational costs in any way possible.
Long-haul and residential self-driving trucks will provide cost savings for companies by cutting driving jobs. Regardless of whether an online retailer outsources shipping or vertically integrates to incorporate its own fleet of delivery trucks, the cost savings of autonomous trucks will be significant. Morgan Stanley estimates that, in a scenario of full public embrace and implementation within the trucking environment, self-driving trucks will produce $168 billion in savings in the freight industry (p. 86). These savings come from reduced labor costs, reduced fuel waste, decreased accidents, and increased productivity.
Autonomous long-haul supply trucks are closest to widespread adoption. In December 2019, Plus.ai engineered a self-driving truck that delivered Land O Lakes butter from California to Pennsylvania, a 2,800-mile trip, in three days “primarily [in] autonomous mode.” This proof of concept shows that the technology currently works, and based on the potential $168 billion in savings it could generate, businesses have a major cost-to push the envelope and embrace the transition to a driverless industry.
While self-driving technology is currently best at straightforward, uncomplicated roads — long-haul trucking on interstate highways is the best example — the technology will only get better. Residential self-driving trucks will roll out soon enough, and the United States Postal Service (USPS) has even invested in and tested self-driving trucks in Arizona. Should the efforts prove successful and cost-effective, the technology will likely enter the winding side streets of suburbia and busy intersections of cities.
Autonomous trucks will be great for productivity and bottom lines as operational costs shrink. The advent of this technology will increase economic uncertainty and job displacement to over 1.7 million Americans who drive trucks for a living.
Once self-driving delivery trucks enter suburbs and cities, a new world of technological opportunity will arise. Companies always look for ways to drive the cost of operation closer to zero, and Ford’s “Digit” aims to do just that. Digit is an autonomous, humanoid deliveryman robot that stows away in the back of a self-driving delivery truck, only to pop out upon arrival at the target destination. Digit will drop off the customer’s package directly at their front door, solving the problem of navigating potentially uneven pavement, obstacles, and stairs.
This sort of innovation goes to show that there’s no part of the e-commerce experience — from pressing “add to cart” to delivery — that companies won’t try to optimize.
The quest for operational efficiency and cost-effectiveness is driving the retail experience online. A handful of companies will achieve unprecedented profits, and consumers will benefit from shorter delivery times and lower prices. It is physical retail outlets — malls, chains, and mom-and-pop stores alike — that will be left fighting over the scraps left in Amazon’s Walmart’s wake.
The Death of Main Street
As e-commerce proves to be the easier, more convenient, more affordable option, many traditional brick and mortar establishments may soon close their doors for good.
Before the COVID-19 pandemic hit full stride, over 2,000 brick and mortar retail stores were already set to close in 2020. Household names like Bed, Bath, & Beyond, Pier 1 Imports, and Forever 21 headlined this list of closures.
Since then, retail staples like Macy’s, J.C. Penny, Kohl’s, GAP, Guess?, and Urban Outfitters have all announced the collective furloughing of hundreds of thousands of employees. After a brief attempt to label itself as “essential” to remain open during “shelter in place” orders, Gamestop has announced the closure of all US retail locations. Movie theater chain AMC may also be close to filing for bankruptcy.
What will happen to all of these business owners and employees once society returns to normal? Will every employee be rehired, or will these physical retail stores seek to cut costs like labor to maintain operational efficiency in the face of the e-commerce revolution?
As these companies continue to leave malls across the country, landlords will be faced with tough decisions as to whether or not they too should leave, offer cheaper rent to entice potential tenants, or re-purpose the now-empty storefronts. 30% of malls could soon close for good, and the departure of major department stores — Macy’s, J.C. Penny, and Kohl’s are “anchor stores” for many malls — will eliminate jobs in struggling communities.
Once these malls and retail stores close, many people will experience increased despair as economic opportunities evaporate.
Increasingly shop-less malls could be repurposed in different ways. Some solutions include apartment complexes, medical centers, and data or storage centers. Whatever their futures may hold, the malls of America may soon look unrecognizable.
What is harder to repurpose and revitalize are the small businesses that sprinkle suburbia with intimate and localized hospitality. The e-commerce revolution is hurting small-businesses too, and COVID-19 related closures have illuminated just how fragile these operations can be.
A 2015 JPMorgan study of 597,000 small businesses in the US found that they can continue operating for 27 days without any revenue if they maintain expenses (p. 6). This cash buffer differs from industry to industry, but it highlights a worrying fact: many small businesses simply don’t have the resources to compete with the bottomless war chests of Amazon, Walmart, and others.
COVID-19 has shuttered small businesses and forced many to shop online. To keep up with this increased demand, e-commerce giants like Amazon and Walmart need to scale up their productivity capabilities; automation is likely the answer to this problem. Bringing in more warehouse robots is cheaper and more efficient than paying humans to try to keep pace with their robot counterparts.
Peter Xing, associate director in technology and growth initiatives at KPMG, suggests that this pandemic presents a premium opportunity for advances in automation and remote delivery of goods and services. With what relatively little money small businesses have in reserve, they will likely be unable to keep up with e-commerce giants’ accelerating improvements in efficiency, productivity, and convenience. Many small businesses may close for good.
“The kind of efficiency that Amazon has to have in order to operate the way it operates now, and also to do what it wants to do in the future… They’ve got to get more and more efficient.
If you’re one of these workers in that environment, you’re truly just going to be kind of a cog in the machine. You’re gonna be sort of a plug-in neural network as a human being that is performing some tasks that right now the robots can’t.”
Many small businesses simply cannot afford to adopt the technological advancements that behemoths Amazon and Walmart can. Industry titans will rapidly increase the scale of their operations. This will be a boon to a select few companies, but it will leave many in the dust forced to look for new opportunities and seek paths to salvage value from what was once their livelihoods. What happens then is anybody’s guess.