E-commerce and the globalization of retail crush distribution channels, wholesalers, local retailers, large retailers, prices, and margins.
Walmart (NYSE:WMT), Macy's (NYSE:M), Best Buy (NYSE:BBY), Home Depot (NYSE:HD), Nordstrom (NYSE:JWN), etc. - they all spend vast sums of money building out their e-commerce sites and their fulfillment infrastructure. And the big lump-sum figures are starting to show up in their regulatory filings.
Other major retailers didn't take the threat of e-commerce seriously, and didn't have the funds to take it seriously, as they were squeezed by the private-equity firms that owned them, and just put up a website, hoping for the best: Many of them have gone bankrupt. This includes notably, Toys "R" Us, Sears (OTCPK:SHLDQ) and Kmart, Bon-Ton Stores, Borders Books, Claire Stores, Sports Authority, Limited Stores, and Payless Shoe Source.
Now the brick-and-mortar survivors are scrambling furiously to get on top of this existential threat that many had blown off for years as irrelevant to their business, thinking that this whole e-commerce thing was overblown, and that e-commerce is only a small part of retail, that it was too small to worry about, etc., etc.
And they're spending vast sums to get on top it, often belatedly as in Walmart's case. Some of them are doing it successfully and have become formidable e-commerce competitors, as their own brick-and-mortar business is more or less gradually falling by the wayside.
E-commerce is not just Amazon (NASDAQ:AMZN). It's every online retailer out there, including the tiniest mom-and-pop operations. It's manufacturers selling directly to consumers. In fact, it's manufacturers in India or China selling directly to US consumers as third party-vendors on platforms such as Amazon, Alibaba (NYSE:BABA), eBay (NASDAQ:EBAY), and others. The entire world is trying to sell directly to US consumers, bypassing classic middlemen, wholesalers, distribution channels, importers, and of course, brick-and-mortar retailers.
How much are brick-and-mortar retailers spending in order to catch up with Amazon and others that have gotten ahead of them in the e-commerce game?
For example, Walmart disclosed that at the end of its last fiscal year, it had 33 dedicated e-commerce fulfillment centers around the country. That's nearly double from a year earlier when it had 17. These are vast modern warehouses where a lot of the work is automated. They're packed with expensive equipment and technology.
Walmart also disclosed that during the year it had invested $5.2 billion in e-commerce and technology. This includes the new fulfillment centers. That $5.2 billion it spent was up 16% from the prior year. And it compares to only $2.5 billion it spent on store remodels and new stores.
In other words, it's investing twice as much in its e-commerce business as it is investing in its brick-and-mortar business. And its e-commerce business is still small compared to the thousands of mega-stores it has around the country - and e-commerce is also still small in terms of sales. We'll get to those sales in a moment.
Walmart also blows billions of dollars on buying e-commerce startups. The most it ever spent on a single startup was $3.3 billion for Jet.com in 2016, a small outfit at the time that had been selling stuff for only about a year.
Last week, Reuters published an investigative report, based on interviews with multiple sources among Jet.com suppliers and consultants advising Walmart on its e-commerce business. And it got some Walmart employees to talk. This report showed how Walmart has been quietly dismantling Jet.com as an entity and absorbing its people into Walmart.com, as sales at Jet.com had been falling and never reached the promised goals.
Walmart came out with a press release, essentially confirming the Reuters report, while putting its own spin on it. But that $3.3 billion it spent on buying Jet.com is gone and won't come back.
Walmart has been warning that the expenses related to its aggressive expansion into e-commerce are big and getting bigger, and are cutting into is profits.
These billions of dollars spent on acquisitions, and the billions of dollars spent every year separately on building out its e-commerce infrastructure and technology show how serious Walmart has become after blowing off for many years the existential threat that e-commerce poses to its own business.
Walmart's e-commerce business is already huge, but it's not nearly huge enough, compared to its other operations. The company started to disclose the dollar figures in its SEC filings in 2018, so we can actually see the dollars involved.
In the last fiscal year, ended January 31, 2019, Walmart's e-commerce sales in the US soared by about 35% to nearly $16 billion! But that was only 4% of its total US sales.
During the quarter ended April 30, Walmart's e-commerce sales in the US jumped by 34% year over year to $4.3 billion. And the share of its US e-commerce business rose to 5.3% of its total US sales. At the current rate of growth, its e-commerce sales in the US will exceed $20 billion this year.
Walmart went from on online-denier a decade ago to the third largest online retailer in the US in 2019, according to eMarketer estimates, behind only Amazon and eBay. And ahead of number four and five, Apple (NASDAQ:AAPL) and Home Depot.
Yes, Home Depot is a huge online seller! Not too long ago, the online-deniers said that people would never buy home-improvement materials, tools, and home appliances online. But they do, just like they're now buying shoes online.
But Walmart is still woefully behind: in Q1, only 5.3% of its US sales came from e-commerce.
Among the other brick-and-mortar retailers that now disclose actual online sales are Best Buy, Nordstrom, and Neiman Marcus (NMG), and they're all ahead of Walmart.
Most brick-and-mortar retailers still only brag about how fast their online sales are growing in percentage terms but don't disclose online sales in dollars because it would show how terrible their brick-and-mortar stores are doing.
Nordstrom, and Neiman Marcus both get over 30% of their total sales from e-commerce. But sales at their brick and mortar stores are in decline.
Nordstrom's online sales rose 7% year over year in its last quarter, to just over $1 billion, while its brick-and-mortar sales fell 7.5% to $2.3 billion. Nordstrom has a great online business, but its brick-and-mortar business is dying.
Best Buy's online sales last quarter rose by 14% to $1.3 billion, and accounted for 15% of its total sales. But its brick and mortar sales declined 1.3%.
Macy's net sales in the quarter fell 0.6% to $5.5 billion, despite what it called "double-digit" growth in e-commerce sales. It still does not disclose actual online sales. But you don't need to be a genius to figure out, when overall sales decline while digital sales are soaring, just how bad business must be at its ever-shrinking number of brick-and-mortar stores.
For many years, Walmart had decided that it - as America's largest retailer with thousands of mega-stores around the country - won't be threatened by e-commerce. Americans like to go to the store, the thinking went. They'd never buy shoes, food, clothing, and toys online.
Walmart's initial response was to try to kill the "Amazon subsidy" - the quirk in the law that allowed Amazon and other online-only retailers to sell merchandise across the US without collecting sales taxes, while Walmart had to collect sales taxes, including on its online sales, in all states where it had stores, and it has stores everywhere.
So Walmart teamed up with states that needed the sales tax revenues. In 2012, California became the first big state that compelled Amazon to collect sales taxes. In rapid-fire sequence, other states followed. By 2017, Amazon collected sales taxes in all 45 states that have state-wide sales taxes and in Washington DC.
This had been a true competitive disadvantage for Walmart, compared to online-only retailers. But after this disadvantage was removed, online sales didn't crater. On the contrary, they continued to boom, and some of those sales came out of Walmart's hide, and its brick-and-mortar sales stalled.
So Walmart started throwing money around - many billions of dollars every year - on acquisitions in the e-commerce space and on investment in its own technologies and infrastructure. For a simple reason: to stay relevant, and to remain the largest retailer in the US. It has been hit-and-miss, as the Jet.com acquisition shows.
But the threat is larger and wider and involves the entire world. Manufacturers in China, India, and other places are selling directly to US consumers, by having set up shop as third-party vendors on platforms such as Amazon, eBay, Alibaba, and many smaller ones - thereby going around US retailers entirely.
For example, in 2017, we bought the best set of cotton sheets we've ever bought. We got it online, from the manufacturer in India that was a third-party vendor on Amazon. We paid $79.99 for a four-piece king set, with free shipping. The last time we'd bought sheets before then, we'd bought cotton sheets, also made in India, at Nordstrom Rack, and we'd paid about $250 for the set.
Or the other day, I drove to the nearest surviving sporting goods store to buy some defogger for my swimming goggles. The closest store had already shut down a few years ago. So this store is a good distance away. In the past, the store carried two types of defogger: The one I like, made by a small US company, and the one by a big-name US company that everyone knows that dominates swimming gear. I had tried their defogger but didn't like it.
But when I got to the store, after fighting San Francisco weekend tourist-rush-hour traffic, I found out they don't carry my brand anymore. They only carry the big-name defogger. I'd wasted time and gasoline.
Back home, I ordered three bottles online directly from the small manufacturer in the US, off their e-commerce site. It arrived in my mailbox three days later.
This is what retailers have to contend with. Anyone can now sell their merchandise directly online. The competition is everywhere. It's not just Amazon or Walmart or Macy's.
E-commerce and the globalization of retail that e-commerce makes possible have crushed old distribution channels, middlemen, and local retailers by going around them.
They have crushed large retailers in the US, such as Sears, Kmart, Toys "R" US, Payless Shoes, and Bon-Ton stores.
They have crushed prices and margins because comparison-shopping online is the easiest thing in the world, and consumers can buy from anyone anywhere.
It has opened to door to small manufacturers to sell directly to consumers - via their own sites or as third-party vendors on another platform - if they choose to get smart about this.
This is a historic change in how retail is happening - and it's just the beginning of it. Classic brick-and-mortar retailers will have to get on top of it in an all-out effort, even the biggest of the biggies Walmart, or they will eventually be counted among the retailers, like Sears, that were obviated by events.
My couch, jeans, car, PC, sheets, and phone weigh in on globalization and the internet. Read… My Perspective on the Murk of Official Retail-Sales Inflation, with Some Surprising Illustrations,
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.