Shifting Fundamental Trends
The number of page views from mobile devices (smartphones and tablets) surpassed the page views from desktops globally in August of 2016. And in March 2017 Android surpassed Windows as the most popular operating system worldwide.
As a result, retailers that are mobile first focused are experiencing rapid growth. By contrast sales in physical retail stores has plummeted by more than $100 billion dollars in the US over a decade (from 2006 to 2016) – and are predicted to continue to fall.
Christmas is the biggest sales season of the year for retailers – both for traditional retailers and e-tailers. Amazon’s dominance of online retail sales during the weeks running up to Christmas 2016 should terrify traditional retailers. The chart below is for all eCommerce sales. Amazon sold 15 times more than its nearest competitor (45.5% vs. 2.9%)!
And it’s not just retailers who are terrified, but investors. In February 2017, Warren Buffet announced that he had sold $3 Billion of stock in Walmart, because, in his opinion, the rise of Amazon was unstoppable. (https://www.businessinsider.com/warren-buffett-drops-walmart-stock-2017-2)
When you look at how the market cap of traditional retailers has fared against Amazon over the last decade, it’s staggering:
As of June 2017, Amazon is worth 50% more than Walmart, Target, Best Buy, Macy’s, Kohl’s, Nordstrom, JC Penney and Sears COMBINED!
When you look at the changes in valuation from 2006 to 2017 for these nine retailers, the results are shocking:
Sears which is teetering on the brink of bankruptcy, it has seen its market value plummet by more than 99% over the period;
JC Penney has fallen 92% in value;
Kohl’s value is down by 74%
Macy’s by 71%
Target is down 39%
Nordstrom is down by 30%
Only Walmart has held its own, growing by a mere 1% in value over 11 years.
By contrast, Amazon has seen its value explode by more than 2,673% over the same period.
Now Amazon began by selling books. A book is a book is a book. It makes sense to buy books over the web. There’s no difference in quality between a book bought at one store and another. So it was a logical place to begin. The impact Amazon has had on bookstores is profound, in fact, Amazon will replace nearly every Barnes & Noble in 2017 alone. (https://qz.com/943870/amazon-amzn-will-replace-nearly-every-bookstore-barnes-noble-bks-closes-in-2017/).
Since Amazon was founded in 1994, there has been a decrease of over 15,000 bookstores in the US.
Statista reports 38,539 bookstores in 2004 falling to an estimated 24,611 in 2017 https://www.statista.com/statistics/249027/number-of-bookstores-in-the-us/. These figures are significantly at odds with US census data reporting 10,200 bookstores in the US as of 2002. http://oedb.org/ilibrarian/12-stats-on-the-state-of-bookstores-in-america-today/
What people don’t understand is that you only need to facilitate a small shift in consumer behaviour to radically, profoundly, and completely change the market. Here’s what I mean: my wife reads a book a week. The average in North America is about 4 books a year. All the books she reads today are digital. It’s an extreme example of the Pareto principle (the 80/20 rule). (https://www.irisreading.com/how-many-books-does-the-average-person-read/)
Shifting just 2% of market to digital – the heavy book buyers – means moving 25% of the market. And shifting just 5% of the market from physical books to digital ones all of a sudden means that the majority of books purchased are digital – and just like that, physical bookstores go out of business.
By the middle of 2010, Amazon’s sale of digital books had already exceeded the sales of physical books. Think about the business advantages this confers: no shipping costs on initial sale, no cost for returns. No overprinting and unsold stock – a problem that used to plague the book business. As recently as 2009, an estimated 30-40% of books were returned by bookstores annually and 65-95% of these are pulped.
Do you remember, a decade ago, when you used to go on holiday for a couple of weeks, and the better part of a suitcase was dedicated to the books that you were taking to read? Well now all the books you take are on your Kindle, iPad, Kobo or large smartphone.
So Amazon began by selling books – but didn’t just stop there. The company continued to expand the range of products it sold. Today, it is expanding aggressively into fashion. The following is from the Globe and Mail showing the dramatic decline in apparel sales in physical stores and the rapid rise of etailing for fashion. I find this fascinating. But a medium T-shirt is, after all, a medium T-shirt. It’s not bespoke.
And look at the predicted relentless rise of Amazon’s apparel sales:
Amazon has begun a service called Merch by Amazon, where you can customize a T-Shirt and have it custom printed and then shipped to you. Does this mean that Amazon is both a manufacturer and an etailer?
I was recently at an event in Frankfurt where HP announced a partnership with a sports retailer. You will walk into the sports store, take off your shoes and socks and stand on a specialized plate which will scan your feet – and as you walk will determine whether you pronate, where the foot rolls inwards and the arch of the foot flattens, or supnate, when your weight rolls onto the outer edges of your feet. Your file will be electronically transferred to a central location HP 3D printer that will produce a custom orthotic, slip it into a mass market shoe – and presto a customized running shoe experience.
While you’ll pay $500+ for medical orthotics, here you’ll be getting orthotics and running shoes for less. But more importantly for the retailer, the image of your feet – called a digital twin – will reside with the retailer. So when you want your next pair of customized shoes at a slightly above mass market price, which retailer are you going to turn to?
For $99 a year you can subscribe to Amazon Prime which gives you unlimited free one or two-day shipping (depending on where you live). It’s like an all-you-can-eat buffet of free shipping.
Now, this is my favourite brand of toothpaste:
You can’t buy it at very many stores (it’s all organic, no fluorides, or nasty things to kill my good gut bacteria ), but you can buy it on Amazon. Now, why would I buy a $5.95 tube of toothpaste if it costs me $7.95 in shipping? I wouldn’t. It’s just not logical. Most people would wait until they had all sorts of things to order before placing the order.
But if you’ve already paid $99 for a whole year of shipping, why would you wait? Amazon is working to remove every barrier to transacting and every friction point of shopping.
Americans have been subscribing in the millions to Amazon prime:
In June 2017 the number of subscribers has grown to 85 million according to Business Insider – a staggering growth of 21 million new Prime subscribers over 16 months.
Now the kicker with this is the purchases of Amazon Prime subscribers compared to other Amazon shoppers. The average family with an Amazon Prime account buys almost $2,500 a year while a non-Prime family buys just over $500. That’s an almost 5X difference.
Just think about it. If you’re an Amazon Prime subscriber you think about Amazon first for everything – because you want to get your money’s worth of free shipping.
This graph should terrify traditional retailers – because Amazon Prime acts as a barrier to exit – it locks customers into thinking about Amazon before considering any other option.
So when I am buying my toothpaste – why drive out to the natural food store? Why drive around to find a parking spot in the mall – or pay for on street parking? Only to get into the store and find they’re out of my favourite flavor? And who wants to come back to their car only to find it dented by a shopping cart? What part of this experience is in any way enjoyable?
Amazon Echo is a speaker you can normally buy from Amazon for $US179. You hook it up in your home to your Wifi. The Echo comes with an artificial intelligence (AI) called Alexa. So you can say – Alexa, what is the weather like today? And she’ll tell you.
Or you might say “Alexa, what is the best recipe for Beef Bourguignon?” while you are cooking in the kitchen.
Or you might say – “Alexa, can you please put a Logitech mouse clicker with a laser pointer on my shopping list?”
“Of course,” she’ll reply.
Now think about this – every other retailer in the world only knows what I want when I go to the store to buy it. But if they’re out of stock they may never know what I wanted.
Because of Alexa, Amazon knows what I intend to buy before I’ve actually placed the order. And the company can apply algorithms and artificial intelligence to my behaviour over time – and come to know that I order 72.5% of everything that I place on my shopping list, while my wife buys 99% of everything she puts on her list and my neighbor down the street buys only 32% of what’s on her list. Then, across a metropolitan area, it can apply all these factors to Alexa owners’ shopping lists – and predict exactly what quantities of items we will order before we order it – and have it waiting in the nearest warehouse – ready to fulfil orders with a surprisingly fast delivery.
Some people have compared the prices that you get online and those that you get through Alexa, and here is a surprising finding: you get lower prices through Alexa. Why would that be? Well think about it. When I am shopping online at my PC – I will open a few different browsers and compare prices on a few different sites. But when I use voice to shop using Alexa, how many different retailers do I price comparison shop at? None.
So Amazon wants to reward early adopters and heavy shoppers to make Alexa their go-to without-questioning shopping assistant, to get them in the habit of using Alexa. (Just like shifting only 5% of the book buyers to digital shifted the majority of Amazon’s sales to digital books over physical ones).
By January 18, 2017 more than 11 million Alexas had been sold, and that was before Amazon Prime Day which was on July 11, 2017. (http://www.seattletimes.com/business/amazon/amazon-has-sold-more-than-11-million-echo-devices-morgan-stanley-says/)
It is estimated that in 2017 a staggering 24 million voice assistants will be sold in North America (Amazon Echo and Google Home Assistant).
Once the majority of Amazon customers are addicted to Alexa, the company will be able to gently increase the prices through voice ordering and it will have made the market.
As an aside – in Las Vegas the Wynne hotels are installing an Echo in every hotel room – to serve as a personal concierge service. This is not only an exciting new vertical market for Amazon – but it is also a marketing strategy because it introduces every hotel guest who stays at Wynne to Alexa. (http://www.cnbc.com/2016/12/14/wynn-las-vegas-to-add-amazon-alexa-to-all-hotel-rooms.html) “I have never, ever seen anything that was more intuitively dead on to making a guest experience seamlessly delicious, effortlessly convenient than the ability to talk to your room,” said Steve Wynne.
Amazon Air Prime
Amazon is pioneering 30-minute delivery using drones. It has completed its first delivery in England.
Amazon has filed a patent for flying distribution blimps that can float over cities, dropping drones down to deliver packages in 30 minutes. The home owner just puts out a one-foot square QR code on their lawn, the drone uses GPS and image recognition lands on the exact spot, drops of the package and returns to the floating air ship.
And Lockheed Martin recently produced a blimp that can carry at 20 ton payload.
When I was growing up the craze for young kids was the cabbage patch doll. Desperate parents drove around to every store possible to get one of these must-have dolls for their kids before the Christmas of 1983.
In 2016, at Christmas, the comparable must-have toy for some parents was a Hatchimal. A toy that’s an egg that you have to keep warm or it won’t hatch. You have to nurture and care for the young Hatchimal for it to develop. In one seminar recently a participant mentioned that her desperate neighbour on the street had begged for help with all her neighbours – if you see one please buy it for me.
What part of driving to 20 retailers at Christmas, fighting to find a parking space only to find the retailer is out sounds appealing to anyone? Wouldn’t it be better to sit from the comfort of home, and, as a Prime member, order a Hatchimal that Amazon secures in quantities only for Prime members and is delivered by drone to your yard, no fuss, no muss, no bother?
The comparable toy for boys today is Fidget Spinners. To have tried to get one of those in 2016 in the run up to Christmas was an exercise in futility for parents. But I was talking to one Amazon Prime subscribing parent who was delighted to get their kid one.
You know, my definition of fun is NOT going out to a shopping mall at Christmas with 7,000 other desperate parents searching for the elusive, must-have toy of the season – only to find another store is sold out. I know some parents who, in 2016, drove to 20 stores trying to get a Hatchimal.
Amazon Dash Buttons
Amazon consistently works to make it easy for customers to order – eliminating every friction that consumers experience. Take, for instance, the Amazon Dash Button. This is a button that typically costs $4.99 – like the Tide Button pictured below:
It’s a WiFi enabled button that comes pre-configured with your Amazon account details and ties into your Amazon Prime account. You peel off the wax paper backing and stick it to your washing machine. When you are running low on Tide you push the button and, using your home WiFi network, it yells out to Amazon – “Hey, ship us some Tide” which arrives via your Prime account shortly thereafter.
While it costs $4.99 to buy, you get a credit for $4.99 on your first order of Tide. Now why would Tide do that? Because there is only one Amazon dash button on your washing machine and it only is tied to Tide.
Now there are Amazon dash buttons for all sorts of different products:
Amazon just keeps experimenting with ways to reduce the friction – or barriers to shopping with the site.
There is now a program called Amazon Subscribe and Save – where homeowners can have regular deliveries of things they frequently have to buy – toilet paper, baby diapers, paper towel. Customers can set the volume and frequency: for instance, automatically ship a package of 72 diapers every 24 days.
I was talking with one millennial who doesn’t own a car. (Millennials have been reluctant to buy items such as cars. Instead, they’re turning to a new set of services that provide access to products without the burdens of ownership, giving rise to what’s being called a “sharing economy”) For her, bringing home 72 rolls of toilet paper on public transit is no fun (she’s a value shopper). So she’s an Amazon Prime subscriber. Knowing this, many of her friends come over and order on her Prime account and pay her for what they order.
As an aside, the CEO of a business I was recently working with admitted that at her company one of the benefits of working there is that staff really appreciate being allowed to received prime deliveries at work.
So, I had just given this TED-like talk at a Canadian conference called Ideacity that began as a joint venture with TED 19 years ago – and the next morning Amazon announced that it was buying whole foods. That morning one of the emcees of the event called me a genius.
In New York City, Whole Foods is jokingly known as “whole pay check” because it charges premium prices. Whole Foods’ more than 450 stores are enviously located in only wealthy postal codes in the US. Whole Foods customers are 1) loyal 2) not price sensitive. (http://fortune.com/2017/06/16/amazon-whole-foods-stores-locations/)
Imagine that Amazon takes a small portion of the square footage of each Whole Foods store to install a device that measures your foot – like the custom orthotic example above. And once your foot is scanned, Amazon has your digital twin of your foot. You could then get customized shoes from any manufacturer that was part of an Amazon custom program.
Or imagine if, in each store, Amazon had installed a measuring device with 100 high-resolution cameras that would encircle you in a changing room. You’d strip down to your underwear and get a 360 degree scan of your body and then have bespoke clothing manufactured for just you at reasonable prices (compared to bespoke prices from an old world tailor).
Perhaps the title of this article is a bit hyperbolic. It’s not the decimation of retail completely. It’s only 25% of current US shopping mall that will be shuttered by 2022. There will still be 75% left. So it’s not the end of physical retailing, but there certainly will be some tectonic shifts.
To begin it will be the D and C properties, the marginal ones, that will struggle the most and go under. But as the D properties are fighting for survival, they will lower prices to attract tenants. This, in turn, will depress net square foot leasing prices for C properties, which in turn will have a cascading impact on B grade properties.
In fact, one participant at a recent seminar shared that a friend of his who works for Cadillac Fairview, one of the largest mall developers in Canada, has made the decision to sell its shopping malls in Canada, exit that business and refocus its portfolio in other areas of real estate!
So how can retailers compete against Amazon?
There’s a company called Stitch Fix, where you get a personal shopper who interviews you by phone about your clothing preferences: styles, patterns, types of clothing (business, casual, beach). They also will look at your Facebook page, ask about what your aspirations are, which fashion icons you most admire – and then this personal shopper will pick out what they think you would like. You pay $20 for the service, and Stick Fix ships the personally picked items to you. You can return anything. But if you keep everything, you get a 25% discount.
So personalization in retail is a trend – whether it’s a personal shopper, custom orthotics, or custom tailored clothing.
A property developer hired me a year ago, along with 29 other global experts in various areas of study. (Due to signing a non-disclosure agreement I can’t tell you what country it’s going to be in, what city – or even the name of the developer. But I can share with you the insights that I shared as it’s my IP (intellectual property).
This particular developer is going to spend $250 million building the shopping mall (in stages). It will be home to 1,000 high end retailers and the final asset will be worth more than a billion dollars.
My advice to the developer was focus on RoIC: Return on Invested Capital. Now I can’t understand a complex concept without a simple story. So here’s how to understand RoIC: When McDonalds brothers opened their first restaurant they only served lunches and dinners. Years later when the chain began serving breakfasts, it increased its RoIC by 50%. Because now it had three meals not two per day to make top and bottom line from – all with the same capital investment (bricks and mortar). So it was becoming 50% more efficient in the return on its invested capital.
When McDonald’s began opening drive through windows in North America it dramatically improved its RoIC – because just by knocking a hole in a wall and putting in a glass window, painting some lines on the parking lot pavement and installing a squawk box for ordering, the chain dramatically increased its RoIC.
Do you know that today more than 50% of McDonald’s sales are through the drive through window in North America? That means that McDonald’s had DOUBLED its sales with next to no capital outlay.
And think about this: when you order through the drive through window, who is paying to provide seating? (answer: you are whether you eat in your car or at home); and who is paying for the garbage disposal? And to clean the washrooms? (you are, you are, you are). And does McDonald’s charge you any less through the drive through compared to buying in store? No!
So not only has McDonald’s more than doubled its North American sales, its increased its profit. This is what RoIC is all about.
So my challenge to the shopping mall developer was: how do you double the mall sales, without any additional expenditure on bricks and mortar.