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Retail reality is about to bite

business-strategyThere is an enormous amount of hype and propaganda surrounding e-commerce. But all the noise can’t mask the numbers. In the United States – according to the U.S. Commerce Department – online sales now represent 8.1 per cent of all retail sales and last year online sales grew at 14.63 per cent compared to all retail sales growth of 3.3 per cent and US$5.5 trillion in total sales. Amazon alone represented more than 50 per cent of the growth in online sales and their growth rate last year was 25.2 per cent on revenue of US$90 billion. Sounds impressive. Until you compare it to…surprise, surprise – Walmart.

Walmart’s online sales are growing at 63 per cent and year on year online sales for them are up 69 per cent. Their latest numbers show this trend getting even stronger. They make as much in revenue per quarter (US$117 billion last quarter alone) than Amazon do in a year and they are beginning to grow their combined business strongly again. (Walmart’s 2016 revenues were US$485.9 billion compared to Amazon’s US$135.9 billion).

The key to Walmart’s increased online sales growth was nominated by them as increasing focus on low prices and continual widening of the range available online. It closed 154 smaller format stores to focus on the formats that work under its rejuvenated model and it acquired online businesses that also fit its model.

The picture is emerging of a two horse race in online in the United States and a glass ceiling to pureplay online compared to omnichannel retail. Between the two giants there is little room left for the other retailers who are trying to play the price/volume game and Amazon is increasingly being driven to expand its physical retail capability to maintain growth.

The early gains of efficiency of ordering and low cost of doing business translating into lower prices for consumers have been fully exploited and fully comprehended and the consumer behaviours are now clear. As was always apparent, size matters when it comes to the price/volume game and the giants will fight it out to the detriment of everyone else who takes them on at their game.

Which means a great deal of the investment hype for second tier pureplay online is questionable if not dangerous. The pressure being brought to bear by market analysts on retail businesses that in truth will never be able to win on price/volume is short-sighted and potentially damaging not only to market capitalisation but to long term asset value. It all points to a ‘retail tech-wreck’ just waiting to happen with boards, investors and financiers forcing retail operators into decisions which cannot work long term.

Omnichannel is fast emerging as the optimised retail model with ‘location, location, location’ being the critical determinant of success to meet the consumers ‘moment in time’ evaluation of what works best for them regardless of channel. Amazon may eventually crash or crash through. But the advantage still rests with traditional retailers who have already built the hardest part of an omnichannel model – the store network – to better blend e-commerce (in all its forms) and other channels into integrated consumer delivery and trade on a better customer experience beyond cheap price.

Dumbing it down only strengthens the position of giants.

Peter James Ryan is head of Red Communication and can be contacted on (02) 9481 7215 or at peter@redcommunication.com.

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