In Manhattan, where I spend a considerable amount of time, a reasonable rule of thumb is that household goods and food both cost about twice what they would in nearby suburbs. Part of this premium, I’m sure, has to do with high rents and the logistics of getting inventory into the city. But I also think that if we could see into the management control books of the firms involved, we’d see that these urban locations are extraordinarily profitable.
Online is changing this situation in two ways. Anyone who is able to wait a day or two–and who has a way of accepting delivery safely–has been shifting away from bricks and mortar. Just as important, fringe areas in the city, which have few (if any) drugstores/supermarkets, become more attractive as neighborhoods because traditional infrastructure is no longer as crucial as it once was.
On the other end of the population density spectrum, the Wall Street Journal recently reported that in rural areas online ordering is also supplanting supermarkets–at least for non-perishables–in much the same way that Wal-Mart disrupted mom-and-pop retailers a generation ago. The Journal cites a Kantar Retail study that shows 30%+ of rural shoppers are now members of Amazon Prime and almost three-quarters are online shoppers of some sort.
What had once been protecting the margins of local rural retailers is the cost of shipping items to out-of-the-way locations. But with the near-ubiquity of free/membership shipping (meaning the bargaining power of, say, Amazon to lower shipping costs), this barrier has been substantially reduced.
My guess is that the biggest winners from this rural trend are local convenience stores. Since these are typically linked with gasoline stations, which have long benefited from lower oil prices, I think they’re no longer hidden gems. The idea that locals will have more money to spend may mean the convenience stores will run for longer than the consensus expects. During a correction maybe, but right now I’m not a buyer.
Amazon has deep pockets, but given the losses to the providers on some of these rural shipments as per the WSJ, is this sustainable long run?
Thanks for your comment. I think this is a very interesting topic.
Amazon must believe that shipping is a key issue, since it’s trying to cut costs by reconfiguring its warehouse system and by developing its own transportation network, including trucks for same-day delivery and a container ship fleet …and of course there are its drone experiments.
It’s also working on the revenue side. It’s no longer the low-cost seller for many items; it uses dynamic pricing to change selling prices; it sells a lot of stuff for third parties, collecting a fee for services while achieving scale to secure discounts from shippers.
As to the magnitude of the problem for AMZN, I don’t think the WSJ is particularly helpful. It cites Kantar Retail as its source for shipping costs. Their numbers seem high, at about $11 to send a tube (?) of mascara to a customer, or almost $20 for laundry detergent. I’d imagine that includes packaging and processing as well as delivery, but I think I could do just as well by taking either item to the post office or UPS.
Kantar seems to have mostly supermarket clients. Maybe this is what it costs them. If so, it’s understandable that Wal-Mart is paying $3.3 billion to get management expertise in this area through jet.com.