E-commerce's Relentless Rise is Rattling Many Traditional Retail Businesses

But the ‘Amazon effect’ has been less disruptive at an economy-wide level.

Type relentless.com into a browser and where will you end up? At amazon.com. When Jeff Bezos established Amazon as an online bookseller in 1995 he toyed with calling his venture to dominate retail ‘Relentless’.

While that name would be apt, Amazon is better known as the ‘Everything Store’. That label identifies that Bezos’s genius was to see that selling books on the internet would enable him to gather data on people’s spending habits so that he could sell them other things. And Bezos sure is doing that. Amazon.com has 373 million products listed for sale, a count that includes items on ‘Amazon Marketplace’ where third-party sellers display goods.

Amazon’s ascent is part of e-commerce’s broader emergence in recent decades. In a compliment to Bezos, the term ‘the Amazon effect’ symbolizes the disruption e-commerce has inflicted on traditional retail.

The disruption attributed to e-commerce raises social, economic and political questions. The ‘retail apocalypse’ as these drawbacks are termed include jobs losses in traditional retail, job displacement that keeps wages low, and rising inequality linked to low wages growth and the loss of jobs. Another upshot is that e-commerce is judged among forces keeping inflation low.

How the tech-driven changes in retail unfold across the industry, society and the economy could offer a guide to the broader benefits and disadvantages of technological advances overall. The surprise might be that the macro-level upheavals associated with e-commerce have – so far – been more muted than many might expect.

It might be too early to judge the macro repercussions of e-commerce because sales over the internet are still to peak as a share of retail sales and could well reach a ‘tipping point’ at which disruption will accelerate. But so far at a macro level, the rise of e-commerce has come without the disadvantages – and, perhaps one advantage – that many associate with online shopping.

TChart: Average hourly earnings of all US retail workers

Source: Federal Reserve Bank of St Louis. ‘Average hourly earnings of all employees: retail trade.’ CES4200000003.
Updated October 2017. fred.stlouisfed.org/series/CES4200000003

A jobs ‘apocalypse'?

Times are certainly dark for many traditional retailers. More than 20 big US retailers are shutting stores. About one in four of the country’s 1,200 shopping malls is expected to close within the next five years. The social costs of this are real but hard to quantify.

The economic aspects are more measurable and they fall short of proving a ‘retail apocalypse’ is occurring. US research firm IHL estimates that US retailers will open 4,080 more stores than they will close in 2017 and that number of new stores expands to more than 10,000 if smaller shops are included.

Retail jobs aren’t disappearing either. Retail employment in the US grew at an annual rate of 0.3% from 2006 to 2016 to 15.8 million workers, an increase of 467,000 jobs over the 10 years. Studies say these figures underplay the number of retail jobs added because they don’t include storage and distribution e-commerce jobs.

The absence of a store-closing and job-shedding apocalypse makes it harder to blame e-commerce for the wages stagnation that economists lament is hobbling economic growth and leading to wider inequality. The more contentious macro effect of e-retailing is whether or not it is keeping inflation too low.

One side of the debate argues that online shopping increases the competitiveness of the US retail sector and restrains the ability of firms to raise prices. Others respond that the cost advantage of e-retailing is overstated, online prices are not noticeably lower, many e-retailers run on such low margins they can’t afford to discount, and that the big falls in prices are coming from energy, food and rents, not goods sold online.

The evidence so far says that e-retail has a muted deflationary impact. This could change as the productivity boost linked to today’s technological gains – including from e-commerce but especially, say, from artificial intelligence’s ability to automate services – is expected to become increasingly deflationary.

Whatever the Amazon effect is, or will be, on prices, the public thinks that lower prices are found online. That will only help Bezos in his relentless quest to sell people everything.

Michael Collins, Investment Specialist, Magellan Group