Surviving the Amazon effect

E-commerce was disrupting retail sales long before the pandemic, as Amazon changes consumer behaviour. However, certain bricks-and-mortar retailers have held their own amid the Amazon effect.

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“I don’t believe traditional retail is dead,” said Chase Bethel, an equity analyst at CIBC Asset Management, in a March 23 interview.

At the same time, he was clear about the sector’s sobering stats.

“From about 2010 to 2015, we saw an average of about 4,000 store closures per year in North America,” he said. “By the time we were exiting the decade, store closures were increasing to 5,800 in 2018, and then to over 9,000 in 2019.”

The closures were the result of competition from Amazon and other platform companies like Shopify, which have relatively low startup costs.

“Amazon has completely changed the consumer’s definition of convenience, and [their] expectation of the timeframe and two-way cost of delivery,” including returns, Bethel said. As a result, traditional retailers incur costs as they’re forced to invest and adapt to compete.

Companies that have adapted best include Walmart, Best Buy, Nike and Kering, which owns luxury brands including Gucci. Target has also gained traction, he said.

Certain retailers in off-mall locations, like shopping plazas, have also thrived, he said, such as off-price retailer TJX, which owns Marshalls, TJ Maxx, Winners and HomeSense. Part of their appeal is likely the thrill of the bargain hunt. In fact, retailers such as Ross Stores and Burlington Stores have business models that are successful in part because they don’t have an online offering, Bethel said.

Dollar-store retailers are also “flying under the radar and continuing to grow their physical store footprint,” he said.

In contrast, he expects malls with lower levels of sales per square foot — Class B and C malls — to face significant pressure.

Up against the Amazon effect

Amazon will continue to attempt to capture a greater share of the consumer wallet, which will further shift consumer expectations and challenge other retailers.

“I look toward a future where Amazon tries to compete more aggressively in fresh grocery,” Bethel said.

He also expects that new technologies — voice command, autonomous vehicles, machine learning and augmented reality — will remove some of the consumer friction that still remains in the online shopping process.

Further, the growth of Amazon’s higher-margin businesses, including cloud, advertising and subscription services, will allow the e-commerce giant to increasingly fund investments in retail, he said.

Amazon also benefits from an investor base that trusts the firm’s leadership to test new concepts, even if they fail.

“Many traditional companies do not have this luxury,” Bethel said. And competition from Amazon likely motivated some companies to make poor strategic and capital allocation decisions they couldn’t afford.

To stay competitive, he expects retailers will build platforms with “multiple consumer touch points,” instead of just meeting transactional needs.

Bethel also said he’ll be watching the political landscape for potential legislative changes affecting retail.

“It will be interesting to see […] whether governments begin to change laws or force large dominant companies like Amazon to split into parts in order to level the playing field for more small businesses,” he said.

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