Amazon’s Retail Apocalypse: The Day Ahead

This morning, Amazon revealed its Q3 results for this year, showing an 11 percent increase in sales, $35.8 billion, and an EPS of $0.92. On a consolidated basis, the company’s EBITDA, or earnings before interest, taxes, depreciation and amortization, increased 20 percent over the same quarter last year. Both figures make for an impressive debut from the king of e-commerce, and analysts are largely positive on the numbers.

This is somewhat surprising given the current state of consumer sentiment. Sales at traditional retailers, including Costco, Kohl’s, JCPenney, Macy’s, Bed Bath & Beyond, Dillard’s, Target, and Walmart all tumbled in September. Wal-Mart recently revealed a disappointing quarter that also saw sales slides, with the troubled department store chain reporting lower-than-expected same-store sales. They also issued disappointing guidance for the rest of the year.

That trend in retail has caught the attention of congress. The House Ways and Means Committee is preparing a bill designed to give the department stores and others more time to adapt to changing consumer behavior. It’s estimated the measure would save the American public a collective $140 billion in higher taxes.

Industry analysts have also argued that Amazon will eventually be boxed out of the market. As local commerce becomes more a part of how we do business, traditional retailers look to enhance their own omnichannel presence, but Amazon’s so powerful it can take one look at where things are going and influence the direction.

Not only is Amazon still growing, but they are not surprising experts. In a report, Cowen & Co. titled “Amazon’s Ad Growth Catches up With Offline At 9,000%”; the firm found that the e-commerce giant’s ad revenues grew 12 times the growth rate of the industry itself.

Furthermore, according to Leichtman Research Group, the U.S. digital advertising spend reached $102.6 billion last year. The retail advertising market was only about a billion dollars; however, online ad spending is projected to hit $153 billion by 2020. That growth has allowed Amazon, and other digital advertising firms, to snatch up a larger and larger share of the advertising pie.

The company recently began to test digital shopping receipts. Instead of keeping them in a shopper’s physical shopping bag, these digital receipts are placed in a shopper’s smart phone when they’re done at the store. This is making it easier to capture shoppers and also encouraging them to purchase more packages when it’s their turn to shop on the fly. Amazon’s increased marketing clout now means they can push products into people’s homes, and even on their Facebook and Twitter profiles. This leaves offline stores on the defensive.

This last fact is concerning for retailers. Retailers, and other companies that sell directly to consumers, are increasingly turning to digital advertising to capture a larger share of sales. After all, their sales will no longer show up in department stores like Macy’s, but on the website of Amazon. This, of course, has the potential to place even more strain on the tight margins that retail companies continue to struggle with.

But as Amazon ventures into new product categories and reaches ever-larger platforms, the retail industry will have to adapt or face years of fewer sales, and higher taxes. While the repercussions of this digital revolution have yet to be felt on an economic scale, you can be sure there will be some reverberations soon.

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