Via Wolf Street

The costs of surviving in ecommerce.

By Wolf Richter for WOLF STREET.

Online retail sales during the holiday shopping season, from November 1 through December 24, soared 18.8% compared to 2018, according to Mastercard SpendingPulse report today. Over the same period, sales at brick-and-mortar department stores, which have been falling dismally since 2001, fell 1.8%.

This growth in ecommerce sales “depends on ever faster and more convenient modes to reach the final mile and yard in suburban and urban markets, as well as share in rural areas,” said IT consultancy ABI Research forecasts in its 54 Technology Trends to Watch in 2020, released today. “This includes the increase of one-day delivery and seven-days-a-week delivery in 2020 to reduce ‘click-to-door’ time and combat the Amazon effect.”

“Retailers need to address their increasing costs and consumer expectations through new business models and optimized transportation and logistics methods,” ABI Research said.

“Amazon already felt the financial pressure in 2019, with North American margin compression, as it grew investments in its next-day Prime delivery, expected to impact Walmart as well. Other retailers have been pushed into offering expanded shipping options and reverse logistics in order to compete.”

And the sums involved in trying to not get run over by Amazon are huge.

Walmart, Macy’s, Best Buy, and other major retailers that don’t want to get crushed by Amazon have all been spending vast amounts to keep up with Amazon drive to push same-day and one-day deliveries.

These retailers have been announcing these efforts and the costs in their quarterly filings. This includes adding new fulfillment centers where orders can be processed, filled, and shipped with delivery on the same day or the next day. These fulfillment centers are being automated to an ever-larger extent, and this is a huge investment each time too.

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Walmart, for example, disclosed in its third quarter 10-Q filing with the SEC earlier in December that its allocation of capital expenditures in the US to “ecommerce, technology, and supply chain” rose to $3.9 billion over the first three quarters in 2019. This was over twice as much as its capital expenditures on store remodels and new stores ($1.9 billion) over the same period.

Walmart is still woefully behind Amazon, in terms of ecommerce. But Walmart US’s ecommerce revenues have been soaring at a rate of around 40% year-over-year in recent quarters, to $5.0 billion in Q3. Over the past three quarters, ecommerce revenues totaled $14 billion. Just revenues – not counting the costs of the products, the cost of shipping, the costs of returns, etc. And over the same period, Walmart US has spent $3.9 billion – 28% of revenues – on capital expenditures to advance its ecommerce technology and infrastructure.

Then there is the delivery infrastructure itself. Amazon, over the last few years, has pioneered a whole new armada of delivery vehicles that it totally controls, but that are owned by 800 delivery companies whose sole customer is Amazon, and they’ve come into existence by the grace of Amazon, and that totally depend on Amazon. They’re Amazon’s way to reduce its dependence on UPS, the US Postal Service, FedEx and other carriers – and to push the new frontier: same-day and one-day delivery and seven-day-a-week delivery.

In its post-holiday shopping season hoopla announcement today, Amazon said that “Over 100 million items” sold by the independent third-party sellers on its platform “were shipped with Prime Free One-Day Delivery over the holidays in the U.S.”

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And it added that during this holiday shopping season, “the number of items that were delivered with Prime Free One-Day and Prime Free Same-Day Delivery nearly quadrupled compared to the same time period last holiday season.”

And this is the new challenge: same day delivery, one-day delivery, seven days a week, and building out the huge infrastructure and logistics system necessary to accomplish this. This is an entirely different ballgame from brick-and-mortar retail, and there is not a lot of overlap outside of pick-up and drop-off locations. And in terms of pick-up and drop-off locations, conveniently located automated lockers (access via code sent by text message) would and already do that job just fine too without all the costs of a huge store.

Amazon has shown the way, ranging from increased automation at fulfillment centers to cloud-based software that runs the whole thing, from the initial order to routing the delivery vehicle to the customer’s home.

Retailer budgets are going to get further refocused on advancing the system, as ecommerce becomes an even tighter business proposition with thin profit margins due to global competition and easy price comparisons online, and with the increasing trends to cut out the middlemen, including the retailers themselves, by connecting manufacturers directly to consumers via platforms such as Amazon, eBay, Alibaba, and others. And this system comes with investments that are gobbling up billions of dollars year after year, by each of the top ecommerce retailers, such as Walmart, if they want to continue to play.

On a personal note: The result of all this is my ability to not ever have to go into another brick-and-mortar store (outside of buying groceries) only to waste time and get frustrated. Even before the internet came along, I used to buy much of my stuff by mail-order (calling their 800-numbers) for those reasons.

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I bought my dress shirts, some furniture, and many other things that way. It was slow and cumbersome, and price comparisons were tough to make. Furniture delivery could take months. Even shirts took weeks. But it beat the waste of time and frustration of driving to the mall and then going from store to store to find what I was looking for. For me, there were always better things to do in life that shopping – and in that respect, ecommerce has improved the quality of my life. And as these numbers show, I’m likely not the only one.

Amazon takes over the last mile and everything else. Read... How Amazon Gains Control & Domination

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