Recently, there was news that Amazon (AMZN) passed the market cap of Walmart (WMT). This is big news since Walmart has been the heavy weight retail player for many decades now and Amazon has only been around for 20 years. Some are calling for the demise of brick and mortar retail and others contend that they will be around to say. We have already seen the bankruptcies of Circuit City, Radio Shack, and Borders and we see Target, Best Buy, and Walmart struggling to increase sales. I will offer 3 observations for the future and supporting reasons.
1) Physical retail stores will stay relevant for many years.
This is true because humans are fundamentally a social species. While online commerce competes well on cost and is efficient and convenient, it is very unsocial. It reduces it’s cost since it eliminates inefficiencies in the market. These efficiencies are store displays, labor costs, transportation, among others. However, by eliminating these costs and people, it eliminates the human connection that shopping in stores provides. You are connected to your friends, family, and store employees. Online retail cannot duplicate this.
2) Brick and mortar retailers and shopping malls that compete on cost will go out of business while those offering an experience will stay around and expand.
I see the low cost retail stores and malls going out of business, but others will expand. For example, why is that the Mall of America is expanding at a time of retail consolidation? This is because the Mall of America offers a multi-sensory experience. It is beautifully designed, has a large variety of stores, restaurants, a movie theater, and a indoor theme park– all things that cannot be replaced by online shopping. Malls like the Mall of America all around the country will continue to thrive.
For retailers to remain relevant, they have to play to their strengths. Rather than try to compete with Amazon online, they should offer an experience in their stores that gets people to shop there. Some ideas for retailers like Target include a shoppers club for people to meet and go shopping together, a daycare center, spa/massage, and a lounge area for reading and getting coffee. In addition, for retailers like Best Buy why not offer game watching nights to bring people together? They can do this and also sell TVs, surround sound packages, and the latest in electronics gadgets. I see stores like the Apple Store that offers an experience for people to come in and see the products and Apple is the most valuable retailers per square foot and the largest corporation in the world.
Of course, ideas like these for Target and Best Buy are difficult to scale. But if Starbucks, Disney World, and Apple can scale experiences why can’t the retailers.
3) Amazon is poised to remain the category leader
Due to the fixed costs, Amazon is poised to remain the leader in retail. For many things that I buy, Amazon is quite convenient for me and I do enjoy the speed and the site’s ease of use. I am an avid reader and I do enjoy the 2 day shipping offered to Prime members. However, I see the weakness in that e-commerce is less personal and lacks the multi-sensory and social experience that you get shopping with friends and family.
So all in all, 1) physical retail will not die, 2) physical retailers have opportunities to re-invent themselves with experiences that cannot be duplicated online, and 3) retailers and malls that do this successfully will outperform.
Any thoughts on this? Do people agree or disagree.