Traditional Retail will Continue to be Damaged by E-Commerce*

I recently had a “shopping” experience that has caused me to really question the economics of big box retailers.  Like many men when it comes to shopping I am more of a hunter than a gatherer.  When I need something I find my prey, I hunt it down and metaphorically kill it.  I do not spend any time looking around for other bargains or do much comparison shopping.  Until now.

With the advent of the internet, comparison shopping that once took hours can now be accomplished in minutes, from the comfort of your home or office.  My recent experience involved the purchase of a cordless phone system for my home.  Specifically we needed a two-line cordless phone system that would support multiple handsets.  I found myself at Staples for another reason, and the phone display in the store triggered me to recall our need and take a look.  A sales associate quickly approached me and asked about my needs.  Of the two options I was considering he gave his opinion and helped me make my choice.  In the process I was thinking I should check on Amazon to see what the price differential was, but I decided to buy first and then check.  In this day and age how much different could it be?  Everyone on the planet is aware of online commerce, right? Retailers have their own online capabilities, and are certainly aware of the price competition.  I decided that if it was $10-15 difference the convenience of the store would be worth it.  I also had 14 days to return the items.  Boy was I wrong.

The items I purchased from Staples for $230 ended up costing me $168 on Amazon.  Part of the difference was taxes, most of it was price.  As an Amazon Prime member shipping was free, so you might add some small shipping cost to compare apples-to- apples.  No matter how you slice it the difference is dramatic.  My cost was $62 less on Amazon for the identical items.  Put another way, the cost at Staples was 37% higher than Amazon.  No contest.  The items were returned to Staples before noon the next day.

The full impact of the shift to e-commerce has not yet been felt.  As time goes on, the first place people will look for items will be the internet, rather than as an alternative.  Granted, the online experience is not appropriate for all types of purchases.  If you are uncertain about size or fit, returning items can add to the cost and be a hassle.  But ultimately the lower cost will erode the already thin profit margins of big retailers.  Big box retailers will require less floor space and possibly fewer locations.  Retail real estate will need to adapt.  Investors need to consider this with every potential purchase.

*This discussion should not be construed as a recommendation to buy or sell Staples or Amazon.

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