By: Lauri Brunner, Senior Equity Research Analyst, Thrivent Asset Management May 23, 2017
Even as the retail industry goes through a seemingly endless wave of store closings and bankruptcies, a different kind of retailer continues to crank up its sales, profits and market share. As the world’s leading ecommerce site, Amazon.com now accounts for about 2.1% of total U.S. retail sales and 20% of ecommerce sales – a market share that continues to climb.
More than a dozen retail chains have filed for bankruptcy in the past year and major retailers such as Macy’s, Kohl’s and JCPenney have announced intentions to close hundreds of stores.
But while the growth of ecommerce is sometimes blamed for the flood of brick and mortar store closings, many of the troubles the traditional retail industry currently faces are problems of its own making.
Driving Themselves Out of Business
Although the recent splat of store closings might give the impression of faltering consumer spending, retail sales have actually been one of the strengths of the economy in recent years. Over the past year, total retail sales are up 4.5%, according to the May 2017 retail sales report from the U.S. Department of Commerce. Since 2000, even excluding ecommerce, retail sales have increased by 75%.
But department stores and many other traditional retail outlets have not participated in that growth. Department store sales were down 3.7% year-over-year, and sporting goods, hobby and book store sales dropped 2.4%. Shopping mall traffic has declined 12 of the past 16 years and now represents only about 75% of the mall traffic of 15 years ago.
To save themselves, brick and mortar retailers need to eliminate new store growth and accelerate store closings – a solution they’ve stubbornly rejected so far. Despite the seemingly endless string of store closings over the past decade, the total number of stores in the U.S. remains virtually unchanged. The U.S. Census Bureau reported 1.04 million retail stores in 2000 and 1.04 million retail stores in 2017.
As one shop closes another opens.
But the retail squeeze will continue to intensify as online sales grow from about 10% of total retail sales currently to 20% to 30% in the future, as we project. In the meantime, you can expect the wave of brick and mortar store closings to continue unabated.
What’s Driving Amazon?
Since opening for business as an online bookseller in the mid-1990s, Amazon has focused on three primary tenets – price, selection and convenience. The company now offers hundreds of millions of products, including about 50 million items available for 2-day delivery.
Amazon’s meteoric rise has encountered some bumps along the way. In 2000, Amazon controlled about 8.6% of U.S. ecommerce sales, but that steadily declined through 2006, when the company’s sales comprised only 5.1% of total online sales. But its sales have climbed steadily since then to about 20% of total U.S. online sales.
Amazon’s North American retail division, at $76.9 billion in revenue in 2016, accounts for a little more than half of the company’s total revenue ($136.0 billion).
While its bread and butter are goods and services produced by other companies, Amazon has created some innovative products of its own, including Echo, a voice-controlled device that can order goods and services, play music, answer questions, and control lights, locks, thermostats, and other household devices.
The company is also experimenting with a new check-out-free retail store concept known as Amazon Go. In its beta test store, app users can walk in, pick up some items and leave without going through check-out.
But its most prominent initiative now is Amazon Prime, a fee-based service with a standard membership charge of $99 per year. Prime began as a delivery service for paid members that focused on free 2-day delivery of select items, as well as music streaming, photo storage, reading, movies and TV shows.
Since then the product selection has ballooned to about 50 million items, and Prime membership has grown to more than 60 million members, with an estimated 40 to 45 million in the U.S. By comparison, Costco has about 47.6 million paid members globally, including an estimated 35 to 40 million in the U.S.
Amazon has also supercharged its delivery speed to same day service and even two-hour delivery in certain metro markets. Two-hour Amazon Prime Now is currently offered in about 45 cities worldwide, including more than 40 U.S. metro areas.
The next frontier may be delivery drones. Although the concept has drawn skepticism, Amazon made its first drone test shipment December 7, 2016, in Cambridgeshire, England with a 13-minute delivery of a small package to a rural customer. The company has more similar tests planned for some outlying areas, but we don’t expect delivery drones to be blanketing the skies of urban areas anytime soon.
Culture of Innovation
Amazon is known as a tough, hard-driving corporate culture, still led by its founder, Jeff Bezos. It is also considered an innovative culture that challenges employees to generate and implement new ideas to move the company forward.
The firm assembles small teams of employees who are encouraged to develop business concepts with the potential to deliver significant long-term growth. Each team is asked to write a 6-page document outlining their idea, and then present their concept to a business development committee. If the committee approves the idea, the team receives all the funding it needs to develop the business – and it assumes 100% accountability for the success of the business.
That’s a sharp contrast to the rest of the retail industry, where companies are designed to operate from the top down, with the decision-making concentrated at the executive level. At Amazon, ideas can flow to the top from anywhere in the organization. It is management’s willingness to consider ideas from throughout the organization that has contributed to Amazon’s unprecedented success across a wide range of consumer and business segments.
Big Chunks of Big Markets
Amazon’s quest for innovative solutions has led the company into several trillion dollar markets where it has been able to carve out billion dollar stakes. In the $3.7 trillion U.S. retail industry, for instance, Amazon is up to about $80 billion in annual revenue.
The company has also become a major player in the $1 trillion-a-year cloud computing business, bringing in $12 billion a year in revenues from that segment. B2B (business-to-business marketing) may be the next trillion dollar market Amazon tackles, which could be a natural extension of its consumer retail success.
We expect Amazon to continue to grow at a relatively rapid rate as consumers and businesses turn increasingly to the internet to purchase goods and services. If ecommerce ultimately accounts for 30% of all retail sales – which we believe is very likely – Amazon’s online retail business could reach about $200 billion a year in revenue.
But that doesn’t mean Amazon will rule the ecommerce world forever. Times and technologies change – and so do the buying habits of consumers. Sears was once the dominant retailer in America; now it’s on life support. Someday an online retailer with a better concept could dethrone Amazon. But in the meantime, Amazon continues to tighten its grip on the ecommerce market while exploring promising opportunities in a variety of other fertile markets.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Past performance is not a guarantee of future results. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on ThriventFunds.com.
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