ARTICLE ORIGINALLY PUBLISHED 17TH SEPTEMBER 2018
The online retail business is 11% of the total world wide retail sales and 16% of the UK’s. In both cases it seems to be growing at about 1% per annum but with signs of a slowdown in the more mature markets. There is no doubt that some businesses like bookshops have suffered grievously from the growth of online. But overall the long view suggests the retail industry has been going through a period of adjustment rather than a revolution.
By the time Britain’s first supermarket opened in 1948 it had already been shown in America that it was more cost effective for people to collect their goods than for goods to be delivered to the people. All that was needed were large shops where customers helped themselves and paid on their way out. Previously, the Victorian developments of postage and railways had seen home shopping grow into a huge industry. Most of a family’s needs could be delivered by the butcher, the baker, the fishmonger, the cataloguers, and the milkman every day with his horse. Their swift decline was brutal but not generally mourned because of the popularity of the alternatives which provided wider choices of cheaper goods. By 1990 home shopping was limited to providers of specialist products and a few top end shops who would do home delivery at a price.
In the last twenty years or so what had become the accepted method of shopping in stores away from home has been challenged by businesses who are using the internet and new technology to persuade customers that they can shop from home without the penalty of higher prices. At a touch they can see vast ranges of goods and arrange their orders to be delivered the next day at no extra cost. There are now three types of online business: first, the small specialists selling online often from their homes; second, established shops who offer delivery of goods straight from shops; and third, businesses delivering from large warehouses. Amazon is by far the largest of the third category and in terms of market capitalisation is the second largest company in the world. It is valued at three times Walmart, the world’s largest retailer.
But there are problems. Amazon is being blamed for retail closures in America and for the difficulties in the high streets of the UK .The issue is becoming political. It is claimed that online retailers have an unfair advantage in regard to business rates. The chancellor has promised a review. It is widely perceived that Amazon avoids corporation tax not withstanding the millions it pays in VAT and employment taxes. The real problem, however, is not any of the above. It is that after nearly twenty five years Amazon has made no meaningful profit on its online business (neither has Ocado after 18 years). The business model is fundamentally flawed. There is no intrinsic difference between Amazon and the storage and delivery businesses which lost out to the supermarkets in the last century. It all comes down to costs. The process of unpacking goods and then packing them up for delivery is so labour intensive that Amazon now employs 575,000 people worldwide. The costs of the packaging can be more than the cost of the goods. The expense of thousands of white vans and and their drivers is enormous and not conducive to efficiency savings. And then there is the burden of returns which online retailers are legally bound to accept. A man can order five shirts, try all of them on and send four back. Amazon has high level of variable costs which simply increase as sales rise.