Who’s the Real Destroyer of Retail

Julian Morris and Kristian Stout —  26 July 2019 — 1 Comment

Treasury Secretary Steve Mnuchin recently claimed that Amazon has “destroyed the retail industry across the United States” and should be investigated for antitrust violations. The claim doesn’t pass the laugh test. What’s more, the allegation might more rightly be levelled at Mnuchin himself. 

Mnuchin. Is. Wrong.

First, while Amazon’s share of online retail in the U.S. is around 38 percent, that still only represents around 4 percent of total retail sales. It is unclear how Mnuchin imagines a company with a market share of 4 percent can have “destroyed” its competitors.

Second, nearly 60 percent of Amazon’s sales come from third party vendors — i.e. other retailers — many of whom would not exist but for Amazon’s platform. So, far from destroying U.S. retail, Amazon arguably has enabled U.S. online retail to thrive.

Third, even many of the brick-and-mortar retailers allegedly destroyed by Amazon have likely actually benefited from its innovative, cost-cutting approaches, which have reduced the cost of inputs. For example, in its Business Prime Program, Amazon offers discounts on a large array of goods, as well as incentives for bulk purchases, and flexible financing offers. Along with those direct savings, it also allows small businesses to use its analytics capabilities to track and manage the supply chain inputs they purchase through Amazon.

It’s no doubt true that many retailers are unhappy about the price-cutting and retail price visibility that Amazon (and many other online retailers) offer to consumers. But, fortunately, online competition is a fact that will not go away even if Amazon does. Meanwhile, investigating Amazon for antitrust violations — presumably with the objective of imposing some structural remedy? — would harm a truly great American innovator. And to what end? To protect inefficient, overpriced retailers? 

Indeed, the better response, for retailers, is not to gripe about Amazon but to invest in better ways to serve consumers in order more effectively to compete. And that’s what many retailers are doing: Walmart, Target and Kroger are investing billions to improve both their brick-and-mortar retail businesses and their online businesses. As a result, each of them still sell more, individually, than Amazon

In fact, Walmart has about 23% of grocery retail sales. By Mnuchin’s logic, Walmart must be destroying the grocery industry too. 

The real destroyer of retail

It is ironic that Steve Mnuchin should claim that Amazon has “destroyed” U.S. retail, given his support for the administration’s tariff policy, which is actually severely harming U.S. retailers. In the apparel industry, “[b]usinesses have barely been able to survive the 10 percent tariff. [The administration’s proposed] 25 percent is not survivable.” Low-margin retailers like Dollar Tree suffered punishing hits to stock value in the wake of the tariff announcements. And small producers and retailers would face, at best, dramatic income losses and, at worst, the need to fold up in the face of the current proposals. 

So, if Mr Mnuchin is actually concerned about the state of U.S. retail, perhaps he should try to persuade his boss to stop with the tariff war instead of attacking a great American retailer.

One response to Who’s the Real Destroyer of Retail

  1. 

    Some years ago many states used “Fair Trade Laws” to force higher prices on consumers. It worked like this: If a retailer in the state signed up one business who agreed to sell the item (television, appliances, etc) at the manufacturer’s “suggested retail price” then ALL retailers in the state had to sell at that price. When those laws were overturned, many predicted the iminnent demise of most retailers, particularly the mom and pop stores. Of course, the “big box stores” were later blamed for the thing. “Mom and pop,” of course, changed with the times. Instead of trying to sell over-priced televisions they adapted and moved on to selling something else. This cycle keeps repeating as the entrenched retailers bemoan changes to the system that they know well and which allows them to be successful. For every InBev there are 20 or 50 craft brewers. For every Starbucks there are 20 or 50 one-off stores selling coffee. Some products benefit from scale and some do not and this division moves over time for most products. Our best approach is to tell the government to stay out of the game, as they will always tip the balance to maintain the status quo.

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