Luckless retailers are getting it in the neck

Retailers are taking a beating. But after 20 years of growing, Amazon is now big enough to cause problems for the entire retail industry.

Industry

On Friday I wrote about a strange new trend: Young people seem to be foregoing things like houses, designer gear and cars in favour of experiences like travel, events, food and drink.

And it’s not just cod sociology – European and American retail stocks are way down, relative to leisure stocks. Surveys by academics and the investment bank Goldman Sachs seems to confirm that youngsters aren’t spending like they used to.

There are two takeaways from all this – one mildly interesting, one earth-shatteringly profound. Mildly interesting: retail, luxury and auto stocks could be headed for trouble. Profound: without a new generation of materialistic consumers, capitalism will collapse.

Let’s take a look!

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Decadent late-stage capitalism

I mentioned “Say’s Law” last week. Say’s Law is an old pillar of economic theory which says supply creates it’s own demand. It basically means that capitalism has a tendency to balance itself out and keep everyone employed.

If someone invents a new labour-saving device, like say automatic checkouts at the supermarket, some supermarket workers will lose their jobs. But the company which creates the “unexpected item in bagging area” machines will spend its money on something else, and new employment will be created somewhere else in the system. Say’s Law says that as long as everyone greedily spends the money they have, the system balances out.

So what about this new trend among young people to shun material wealth? If they’re not buying things, does that mean that Say’s Law is now defunct and decadent late-stage capitalism is collapsing under its own contradictions?

… Well, probably not to be honest. If young people are spending their money on experiences rather than things they’re still spending their money. It might mean fewer workers in factories and more workers in restaurants. But in theory, the show should still roll on. Say’s Law lives to fight another day!

That might not be much consolation to retailers though. They’re still getting it in the neck.

YOLO, FOMO, and Amazon.co.uk

I’ve already talked about the millennials with their YOLOs and FOMOs. And in Friday’s email I showed some charts showing how retailers are taking a beating relative to leisure stocks.

But that’s not even the worst of it. Because after 20 years of growing, Amazon is now big enough to cause problems for the entire retail industry. One number shows this very clearly: Amazon grabbed 24¢ of every extra dollar of US retail sales last year.

Think about that for a second: Amazon, which is one company, now accounts for a quarter of all growth in the biggest retail market in the world. Online, it took 51¢ of every dollar of sales growth.

That growth is being driven by Amazon Prime – Amazon’s $99/year membership scheme which entitles members to free delivery and other goodies. Once a user signs up to prime, their spend goes up by 150%.

(Speaking as a Prime member I can attest to this – there’s no item so mundane or small that I won’t buy it on Amazon.)

Right now, 25% of American households are signed up to Prime. And Macquarie investment research analysis reckons that by 2020, that number will rise to 50%. Fifty percent!

This shouldn’t be a surprise to anyone who’s been following Amazon. From the very start Bezos said he was building an everything store. (In his words: “Your profit margin is my opportunity”.) He’s always intended to take over the retail business, and he’s been investing on that basis. Most people just didn’t believe he’d do it.

And by the way, I’ve been citing American data in this piece because that’s the market Macquarie focused on. But all of this applies to the UK (with a short lag). The UK is one of Amazon’s best performing foreign markets. Note the giant Amazon warehouses popping up on the outskirts of big UK cities.

I don’t think it’s a coincidence that big retailers all over the US and UK have been reporting disappointing numbers over the past year. All that extra Prime spending has to come from somewhere (Say’s Law anyone?).

In the US, JC Penny, Macy’s and Nordstrom have struggled, and the Retail Select industry index is down 21% since April. Here in the UK, the General Retailers Sector Index is down 18% since June.

If I were running a retailer, especially a big one which relies on low prices, I’d be terrified. Even the biggest of them aren’t big enough to go toe-to-toe with Amazon.

The best hope may be to sell fancy, differentiated gear at a big markup. And hope millennials discover a taste for the finer things.

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