How the Shift to E-Commerce Is Transforming the U.S. Retail Market

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Investment Week

September 26, 2017

Despite positive macroeconomic conditions (consumer confidence is at its highest since 2004, while household debt obligations are near their lowest since 1980, c.2.5% wage growth), the traditional U.S. retailers are in turmoil. Footfall in shopping malls is declining and department store closures are accelerating.

A structural shift to shopping online is a key driver behind this and Amazon, for example, is clearly disrupting the market.

Amazon, in a nutshell, looks to provide customers with a high level of convenience, is price aggressive and provides a wide spectrum of products and services.

As a result, U.S. department stores’ clothing sales have declined by $5.7 billion since 2011, while Amazon’s has increased by $15.4 billion.

With e-commerce representing only 8% of total U.S. retail sales (in the U.K., this is 16%), we expect this trend to accelerate to more than 40% in the long term.

Investment in technology and logistics should assist this. As sales shift online, and the number of stores decline, U.S. retailers have already shed 9,000 jobs each month this year.

Furthermore, Amazon’s recent acquisition of Whole Foods has sent shivers down food retailers’ backs, as pricing pressure in an environment of low margins is a key concern.

How much bigger can Facebook, Google and Amazon get?

In reality, it is too early to really know what Amazon will do in the food sector and how successful it can be.

We do still believe there is a need for bricks and mortar. It just needs to be for the right products, in the right store format and size, and in the right location.

Companies with minimal threat from Amazon, such as hardliners (for example, The Home Depot and Lowe’s), due to their large and bulky items, are better positioned to enhance their earnings.

Home improvement retailers have several layers of defense that have proven to be effective, including a high percentage of professional sales, sophisticated supply chain, click and collect, as well as controlled pricing and leading omni-channel capabilities.

Amisha Chohan is an equity research analyst at Quilter Cheviot.

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