Amazon (AMZN) has always been known as a market disruptor. Its unique model two decades ago was unseen by the world and as the Internet expanded across the globe, the ability to shop from one's home went from a luxury to a norm. In 2016, nearly 20% of all retail was done online. The evolution of retail has rapidly changed within a generation and brick and mortar retail outlets are being tormented.Malls are more vacant and retailers are closing up shop. Stock prices of retailer are down and margins are thinning. There are more self-made millionaires opening up businesses in their homes and using their garages as a warehouse than millionaires making money through traditional retail. 2017 is proving to be the threshold for many companies that find ways to either survive or fade away in history like ESPIRIT.
In the US, Bebe Stores (BEBE) announced in the spring of 2017 that they would be shutting down all worldwide stores and focus solely on providing retail businesses online. It was the first international brand to make the switch. Other American companies are on the brink of bankruptcy or being bought out by private firms who will no doubt alter business models to maintain profitability. American Eagle Outfitters (AEO) recently sparked rumours it would be bought out. Nike shares have come under pressure as sales show lacklustre growth. Foot Locker (FL), Nordstrom (JWN), Michael Kors (KORS), and Target (TGT), just to name a few, have seen shares tumble this calendar year.
In Canada, long-time standing retailers like Sears, Ben Moss, and HMV went through major overhauls. Target's attempt to expand in Canada failed to penetrate market share from Wal-Mart.
But, most of the pain is only coming from American and Canadian stores. LVMH, better known as Louis Vuitton, has seen its shares rise almost double in the last 52 weeks, a stark contrast to its peer. And European retailer are showing little negative effects to online shopping. So, what's the reason?
Canada and the US, with exception to a few pockets of high-density urban areas such as Manhattan, have one major luxury that most nations do not offer: land, a lot of land. During the rise of retail, it was obvious that companies built large shopping centres which offered hundreds upon hundreds of products. The American (and Canadian) market is over-served and ready to correct. Forbes reports that organic growth in retail averages 3% annually, but during retail's expansion in North America, land for retail surged significantly more than 3%. In fact, the USA has more retail space per 1,000 people than any other country.
The US has more than twice as much retail space per capita than Norway, which is second on the list. Yet most people in Europe and Asia do not feel under-served by their choices. Businesses needed to built upwards instead of outwards. Urban sprawl is not as significant a problem in Asia and Europe as it is in North America.
Imagine a 7-Eleven situated underneath a 20-storey condo unit. If each floor contains 25 residents, the 7-Eleven has access to 500 residents living above it alone. However, if this 7-Eleven is located in a suburb or a low-density city such as Edmonton (my home town), 500 residents would take up over 4 square kilometres. That is 40 times more than the average 125 square metres per city block. For many people, a 30-minute walk to the convenience store might not be convenient enough.
Amazon offers something that malls do not and that is the ability to shop for multiple types of brands and products from our couch while also offering discounts on all the total cart and free shipping. Shopping online is so convenient. It has caused such large problems in Canada that inbound items from China sit at the border for months as security needs to screen items. Backlogged by huge shift in consumer spending, Canada Post and Canada Border Services are falling behind.
A correction or collapse in retail is highly needed in North America to find equilibrium. If Norway can maintain a strong retail sector with current space, that means that the US could expect to see a reduction of 60% of stores closing. However, if the happy medium in a post-Amazon ruled world is closer to Germany's size, that would mean 90% of retail space would need to close up in North America.
The love for urban sprawl coupled with online shopping means that most malls may start to look like warehouses for FedEx and UPS. Amazon has done something magical for the world at the cost of brick and mortar retailers, but the gains have been seen by delivery and courier companies. Over the next decade, it is apparent that major consolidation will come about. Amazon's recent purchase of Whole Foods (WFM) indicates that perhaps Jeff Bezos sees the same potential in food as he did with tools, books, and teddy bears.
