Today, e-commerce fulfillment can be enacted anywhere from your desktop, to five blocks away to 5,000 miles away. Each segment of e-commerce enables certain strategies and challenges to the consumer and retailer. Along with these benefits to consumers come additional corporate disadvantages in an increasingly polarizing retail and consumer goods market. Below is a brief outline of the characteristics of various distance retailers:
We will see two long-term trends in distance retailing. First, exemplified by Amazon’s $13.4 billion purchase of Whole Foods, we see the further reduction of the distance to the customer and its effort to compete at all levels. While also making a push into the food industry, Amazon is disrupting distance retail through its push into brick-and-mortar businesses with the acquisitions of bookstores across the country. From a few central distribution centers to dozens of regional distribution centers, to hundreds of Whole Foods, Amazon has been shortening the time and distance to its customers.
Amazon’s attempt to consolidate the entire supply chain, from order to distribution, would be revolutionary for the e-commerce industry, as prices and delivery times would be much more favorable for the consumer and the entirety of Amazon’s operations would be completed internally. Currently, Amazon’s marketplace enables a broad array of services to consumers, ranging from cross border shipping to downloading and streaming music, movies and TV shows. They essentially dominate the full spectrum of distance retail—from the desktop to international trade.
Second, and equally as exciting, is the growing cross-border trade and growth of online marketplaces domestic and abroad. For example, at the recent IRCE conference, the Richline Group highlighted their growing China business—with goods shipped from the U.S. The projected compounded annual growth rate of the international e-commerce marketfor 2017 to 2022 now stands at 17%, which is higher than the growth rate for e-commerce overall.
Internationally, online marketplaces control half of the e-commerce market. For example, the Alibaba Group, headquartered in China, has made incredible progress in online retailing as well as groundbreaking achievements in online payment using their platform Alipay. The advantages to consumers of a cross-border environment are the greatest possible selection at the lowest possible product cost; however, it is hindered by shipping time and costs to the consumer. The ever-improving global supply chain will alleviate concerns surrounding distribution. Of course, the disintermediation of distributors will consistently lower prices, but create other impediments.
With China’s e-commerce market growing rapidly, there is still much uncertainty surrounding the Trump Administration’s stance on international trade, which bears the risk of strained trade tensions with China and the possibility of a trade war. With Trump’s imposed tariff on steel and aluminum imports, the business-to-business and business-to-consumer international trade markets will surely be affected. Additionally, it is still uncertain what the White House plans to do with the $800 level of duty-free imports.
With the recent Supreme Court sales tax ruling, a key advantage of e-commerce companies of the “500 mile” range—the exemption from collecting local sales tax—has disappeared. The decision, in South Dakota v. Wayfair Inc., was a victory for brick-and-mortar retailers who have long complained of their disadvantage against online retailers. This will undoubtedly lead to higher effective prices or lower margins for e-commerce players—depending on whether they pass on or absorb the sales tax. Either way, it will necessarily slow the growth of e-commerce sales, as profits will suffer.
As Amazon already had conceded this point, they will suffer the least among large e-commerce players. Since almost half of Amazon’s online sales consist of independent merchants who post goods on the website, the merchants themselves are responsible for paying any taxes they owe in the states they operate in.
All in all, the world is getting smaller and ever more interconnected, with higher speeds and ground-breaking technologies shaping the distance retailing market. It is in part, however, returning to earlier ages. I recently read colonial Americans, including George Washington, had London factors who would procure and ship the finest luxury goods from England to the U.S. Ordered by mail and shipped by boat, these purchases took months to arrive. Now, with the click of a button, you can receive custom clothing from China in 5-14 days.
Mirus Capital Advisors is an investment bank.