Investors weighing the merits of traditional retailers in the face of Amazon's rise should consider the disruptive effect of e-commerce isn't all-encompassing, according to Magellan's Michael Collins.

Jeff Bezos' online shopping behemoth is part of a broader e-commerce disruption of traditional retailing, but it's so far had a surprisingly muted effect at a macro-economic level.

Morningstar's views on how Amazon will affect some of Australia's largest retail incumbents in Australia, including Harvey Norman (ASX: HVN), JB Hi-Fi (ASX: JBH) and supermarket chain leaders Wesfarmers (ASX: WES) and Woolworths (ASX: WOW) have been discussed previously.

But taking a global view, Amazon is often known these days as the ‘Everything Store’. That label identifies that Bezos’s farsightedness wasn’t just about selling books online. His genius was to see that retailing books on the internet would enable him to gather data on people’s spending habits so that he could sell them many other things.

And Bezos sure is doing that. Amazon.com has 373 million products listed for sale, in the latest count that includes items on ‘Amazon Marketplace’, where third-party sellers display their goods.

Shopping on the site is straightforward. Purchases arrive quickly -- Amazon’s logistical empire takes an average 3.4 days to deliver compared with 5.6 days for other US online sites. The ease of online shopping enabled Amazon to sell US$245 billion worth of goods through its website in 2016.

Amazon’s ascent is part of e-commerce’s broader emergence in recent decades over which time online shopping sites multiplied and just about every consumer brand launched a website.

In a compliment to Bezos’s foresight, the term ‘the Amazon effect’ symbolises the disruption that e-commerce has inflicted on traditional, or store-based, retail across the globe. E-commerce is thriving the world over because shoppers like the convenience, greater choice, the ability to compare deals and people associate internet shopping with lower prices. Jack Ma’s Alibaba, for instance, is sweeping through China’s retail industry.

The disruption attributed to e-commerce raises social, economic and political issues that flow from shopping being a large part of household budgets and retail spending comprising a hefty share of economic output -- retail sales were 22 per cent of US GDP in 2016.

The ‘retail apocalypse’ as these connected drawbacks are termed include job losses in traditional retail that employs one in 10 in the US, job displacement that keeps wages low and rising inequality linked to low wages growth and the loss of jobs.

Another upshot is that e-commerce is judged among forces keeping inflation low. How the tech-driven changes in retail unfold across the industry, society and the economy could offer a guide to the broader benefits and disadvantages of technological advances overall.

Muted macro effect

The surprise might be that the macro-level upheavals associated with e-commerce have, so far, been more muted than many might expect.

E-commerce has certainly caused some ripples -- enough to remind people of past jolts to retail that include the appearance of supermarkets from the 1910s and the proliferation of ‘big box’ retailers based in suburban malls from the 1990s.

It is too early to judge the full macro repercussions of e-commerce because sales over the internet are still to peak as a share of retail sales. For all the hype about the Amazon effect, e-commerce accounted for just 15 per cent of US (adjusted) retail sales in 2016, according to US Census data, and has a similar portion worldwide.

E-commerce has nearly doubled its US share of retail sales in the past decade, from 8 per cent in 2006 to 15 per cent in 2016, and without too much disruption at a macro level, online retail’s market share could reach a ‘tipping point’ at which disruption to traditional retailing will accelerate.

And there is no debate that e-commerce will expand: in the US, e-commerce surged 16 per cent in Q3 2017, year-on-year, while total retail sales only rose 4.3 per cent. But at a macro level, the rise of e-commerce so far has come without the disadvantages -- and, perhaps, one advantage -- that many associate with the rush to online shopping.

A jobs apocalypse?

The online retail world that Amazon pioneered entails much less human interaction than visiting a store. Shoppers visit a website, perhaps enticed by ads aimed at them by algorithms. 

People might talk to a robot as they scroll around a site before clicking to buy and pay online. Soon these items might be delivered by driverless transport, perhaps even a drone. Some humans will still oversee websites, monitor robots, build the smart warehouses and design clothes. But this less-peopled world appears to have social, economic and political implications.

Around one in four of the 1,200 shopping malls in the US is expected to close within the next five years as foot traffic drops. Despite favourable economic conditions, store closures are greater than that experienced in the 2008-09 recession.

The social costs of this are real, but can’t be quantified easily, especially for smaller towns -- for instance, mall closures in the US lead to the loss of many public squares.

The economic aspects of the retail apocalypse, however, are more measurable and they fall short of proving a retail apocalypse is occurring.

For example, US retailers will open 4,080 more stores than they will close in 2017, and that number of new stores expands to more than 10,000 if smaller shops are included, according to a study by US research and advisory firm IHL estimates.

Discount outlets, convenience stores, fruit shops, restaurants and cafés are also expanding, while clothing and department chains are shrinking. Some 16 chains account for 48 per cent of stores closing, and five of them are responsible for 28 per cent of closures.

The absence of a store-closing and job-shedding apocalypse makes it harder to blame e-commerce for the wages stagnation that economists lament is hobbling economic growth and leading to wider inequality.

The Progressive Policy Institute in the US says jobs in e-commerce in 2016 paid 29 per cent more per hour than in the physical sector. On top of that, aggregate wages in e-commerce and general retail have risen by US$19 billion (in 2016 dollars) since 2007 and US$18 billion of that rise comes from e-commerce. “Amazon is following the footsteps of industrial giants such as General Motors and General Electric: high-productivity enterprises that can afford to pay higher wages and gradually enable workers to shift to these higher-paying opportunities,” the institute says. “If this new pattern continues, it will … rejuvenate the middle class.”

While the Progressive Policy Institute in the US assumes new warehousing jobs are tied to retail and Amazon could employ far fewer workers in its warehouses in coming years, other evidence supports its findings. The US jobless rate, for example, stood at a 17-year low of 4.1 per cent in November, according to the US Bureau of Labor.

 

Average hourly earnings of all US retail workers (USD per hour)

chart

Source: Federal Reserve Bank of St Louis. ‘Average hourly earnings of all employees: retail trade.’ CES4200000003. Updated October 2017.

 

Average hourly earnings of all retail employees, to cite another barometer, jumped 12.5 per cent over the five years to October to US$18.28, nearly double the US inflation rate of 6.7 per cent over that time.

Amazon, with 542,000 employees now, set a record for a company reaching 300,000 workers by achieving that feat in 20 years. Warehousing is the booming property segment in the US. Anecdotal evidence supports the institute’s conclusions too. US men’s clothing retailer, Bonobos, for example, which started on the internet in 2007, has opened close to 50 stores in recent years. Since 2015, Amazon is even opening bookstores.

Whatever the Amazon effect is, or will be, on prices, the public thinks that lower prices are found online. That will only help Bezos in his relentless quest to sell people everything.

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Michael Collins is an investment specialist with Magellan Asset Management. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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