The rise of Amazon.com (NASDAQ: AMZN) has many people wondering about the future of brick and mortar retail for a good reason. That company is growing by leaps and bounds while traditional retail giants are struggling.
On June 30, 2015, Amazon reported TTM revenues of $95.81 billion (€84.37 billion) that were growing at a rate of 19.88% a year. That makes Amazon America’s fifth largest retailer by revenue. Only four retailers—Walmart Stores Inc. (NYSE: WMT), drugstore operator CVS Health (NYSE: CVS), Costco Wholesale (NASDAQ: COST) and grocer Kroger (NYSE: KR)—reported more revenue than Amazon in recent months.
For the record, Walmart reported a TTM revenue of $485.62 billion (€427.64 billion) on July 31, 2015, CVS reported revenues of $145.58 billion (€128.2 billion) on June 30, 2015, Costco reported revenues of $115.94 billion (€102.10 billion) on May 31, 2015, and Kroger reported revenues of $108.56 billion (€95.6 billion) on April 30, 2015.
Amazon’s Incredible Rate of Growth
Amazon’s revenue is now larger than that of a number of historic American retailers, including Target (NYSE: TGT) and Walgreens Boots Alliance (NASDAQ: WBA). Target, which is considered America’s third or fourth largest brick and mortar retailer, reported a TTM revenue of $72.71 billion (€64.03 billion) on July 31, 2015. Walgreen reported a TTM revenue of $93.98 billion (€82.23 billion) on May 31, 2015.
Yet it is not Amazon’s size that is worrying brick and mortar retailers. It is two other factors: the rate at which it is growing and the amount of cash float it is accumulating. Amazon reported a rate of revenue growth of 19.88% on June 30, 2015, while Kroger’s revenue were expanding at a paltry rate of .27% on April 30, 2015. Walmart’s revenue growth rate was an anemic .09% on July 31, 2015, and Costco, once one of America’s fastest growing retailers, reported a rate of 1.19%.
Amazon’s Cash Advantage
To make things more interesting, Amazon has figured out how to accumulate large amounts of cash that it can use as float to finance more growth. On July 31, 2015, Walmart reported cash and short-term investments of $5.751 billion (€5.06 billion), while Amazon reported having $14 billion (€12.33 billion) in the bank on June 30, 2015. Costco reported $6.805 billion (€5.99 billion) in cash and short-term investments on the same day.
This means that Amazon has a far greater ability to expand than traditional brick and mortar retailers. It can either finance more expansion through cash or take on more debt to expand. This is why Amazon is able to build all those new fulfillment centers that give it such a huge advantage over traditional retailers. Part of the reason for the success is that Amazon is willing to sacrifice income for growth; it reported a negative income of -$188 million (-€166.33 million) on June 30, 2015.
Another advantage is that Amazon can engage in much deeper discounting and offer a higher level of customer service. This enables it to compete effectively with both deep discounters like Kroger and Walmart and higher end retailers such as department stores on their own terms. That’s also the reason for those incredibly low prices and free shipping deals that you often find at Amazon.
Amazon can also use that cash to constantly expand into new areas and new markets, such as jewelry. This helps it capture market share and raises the intriguing question of how brick and mortar retailers are supposed to compete against such an aggressive and innovative competitor that is willing to sacrifice income for growth. The answer is simple: Become more like Amazon.
Amazon Shows Us Brick and Mortar’s Future
The future of brick and mortar retail, at least in the United States and Europe, is to become more like Amazon; that is, for traditional retailers to copy aspects of Amazon’s operation and integrate themselves into their businesses.
This competition with Amazon has given rise to six interesting trends that are shaping the future of brick and mortar retail. These trends are:
- Constructing Online Infrastructure. Walmart has plans to open four giant fulfillment centers—specialized warehouses designed to ship orders directly to online shoppers—in the United States in mid-2015, The Wall Street Journal reported. Each of the centers will contain one million square feet (305,000 square meters) in space and up to 500,000 items. The idea is to beat Amazon at its own game by matching its logistics capabilities. Walmart was not alone; The Wall Street Journal reported that Target was planning to spend $1 billion (€880 million) on online infrastructure and open two new, large fulfillment centers in the United States.
- Offering Subscription Services. Amazon has managed to generate a significant amount of float through its Prime subscription service. Float from subscriptions is attractive to retailers because it generates constant cash flow and a steady source of income they can tap at any time. Subscription float allows retailers to generate revenue without purchasing merchandise or using vendor credit. Business Insider reported that Walmart has plans to offer a $50 (€44.24) subscription service that would provide free shipping for online customers. Not to be outdone, eBay Inc. (NASDAQ: EBAY) is testing a Prime-type service called eBay Plus in Germany, The Wall Street Journal reported.
- Offering Click and Pull Services. Click and pull or click and collect is a service in which a customer orders merchandise online but picks it up at a brick and mortar store. It is called click and pull because store employees pull the merchandise from the shelves and have it waiting for the customer to pick up. Kroger is experimenting with a click and pull service at its stores in the Cincinnati, Ohio, area. Walmart allows customers to pick up online orders from it is stores. Click and pull can also be used to turn stores into small-scale fulfillment centers in which goods are pulled from the shelves, packed and handed off to delivery services such as UPS. Walmart has also experimented with lockers where customers can pick up click and pull orders they have paid for online at its British supermarket subsidiary Asda.
- Same Day or Next Day Delivery Services. The next frontier of online retail is same day delivery, in which merchandise is brought directly to a customer’s home within a few hours. Google Inc. (NASDAQ: GOOG) is partnering with a wide variety of retailers in its Google Express experiment, in which goods are delivered within 24 hours of an order by a contractor. Kroger and Walmart are also experimenting with their own in-house delivery services in the United States. Kroger offers both delivery and click and pull in Colorado.
- Diversification. Amazon tries to generate a tremendous amount of revenue by offering as wide a variety of merchandise and services as possible, which gives rise to the popular nickname “Everything Store.” Some retailers, including Walmart and Kroger, are following suit; Kroger now operates over 2,000 filling stations and 326 jewelry stores in the United States. It also operates larger stores that sell items such as electronics and clothing. Walmart has experimented with a variety of non-traditional services, including auto insurance.
- Deep Discounting. Even though it is not always recognized as such, Amazon is very much a deep discounter; its search results always emphasize the lowest price. Amazon’s success has put pressure on other deep discounters, notably Walmart and Target. Walmart now has a well-publicized policy of matching the prices of major online retailers, including Amazon. It has also put pressure on suppliers to lower prices in order to counter fast-growing brick and mortar deep discounters such as ALDI and Dollar General (NYSE: DG). Dollar General reported that its revenue was growing at a rate of 7.87% on July 31, 2015.
The future of retail is an ecosystem that integrates online and brick and mortar shopping. This system is still very much a work in progress, but the six trends outlined above show us that it will look a great deal like Amazon.com.