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I come at this from the other point of view: I used to work as an equity analyst (analysing companies), and I ended up gravitating towards retail. The issue, a

I come at this from the other point of view: I used to work as an equity analyst (analysing companies), and I ended up gravitating towards retail. The issue, as you imply, isn't only that Amazon is very good but the experience at many physical retailers is very poor. It is difficult to simplify this down to one thing imo. Managers in physical retail are unusually bad. Retail used to be ludicrously profitable, so most companies have a dense layer of MBAs who have no real idea how to adapt or innovate. I recently read The Secret Life of Groceries (not great tbh, but did cover some useful themes) and towards the end of the book (paraphrasing), it is framed as grocers all "compete" to be the best version of the same thing. They strip all the difference out of their product, usually compete solely on price, and (ofc) someone eventually comes in and undercuts them. That is a failure of incentives and management. This varies by industry, and is not limited to incentives/management. One reason for the lack of innovation in sports apparel is that there are basically two suppliers, and one of them is moving heavily into DTC. Every sportswear shop is just a Nike distributor, so there is no real differentiation there (the only innovation in the sector has been distributors moving up the chain like Sports Direct and Decathlon in Europe). So the reason why you can't find shoes cheaper is actually because of Nike, not distributors (and those distributors lack any capacity to innovate, management is mostly composed of MBAs who likely have worked at Nike or Adidas at some point). But the solution is counter-intuitive: keep buying from Amazon. There is nothing structural or inevitable about Amazon's success (compare them with the large Chinese retailers, they actually look quite blundering and incompetent, they have made mistakes in distribution already that are going to choke them). Physical retail needs more innovation which can only come through firms dying, and entrepreneurs thinking about what consumers want (this happened with WMT, there was consolidation then competition as WMT got overrun by MBAs and they lost their edge...Tesco in the UK is a very extreme example of this too). I wouldn't be pessimistic either: the distinction between online and offline retail really doesn't exist. Look at restaurants like CMG, they are taking most of their orders online...but that doesn't change the product. It is the same with retail: taking an order online doesn't change the fact that the retailer is holding some product somewhere, and is distributing that to you (this is the mistake that Nike is making, they are going into DTC thinking they just can just cut everyone out, and jam up prices...it is MBA, day one strategy, and idiotically wrong). The real difference with offline retail is actually the cost of property, which is going to narrow over time. Ofc, this isn't universal...some verticals like hardware stores are ready-to-go already, others like clothing probably aren't (there isn't much value-add at consumer contact, and they pay v high rents)...but the innovation will come. I don't think physical retail is dead at all though. If anything the weakness of physical retail is that MBAs stripped all the life out of it which left them open to competition from online. Online is just delivering the message that consumers have had enough. EDIT: I will add that personally I think a lot of the stuff on Amazon is terrible. A lot of retailers in the 2000s were just innovating by going deeper into China, and closer to factories. Amazon just took that to it's logical conclusion. It works for some products, not for everything. Branded stuff also tends to be fake.

lotsofpulp 5y ago
When was retail ridiculously profitable? The charts for public retail companies going back 2 or 3 decades show sub 5% profit margins. The weakness of retail is that it has a low barrier to entry and does not provide much more utility compared to competitors. Quality control and branding and the internet make obtaining information about good products and being able to trust them much easier than in decades long ago. Some retail companies with upper middle class clientele can afford a little bit of extra margin, but it is a small portion of the population with that kind of disposable income. You put a Target/Costco/Nordstrom/Home Depot/Best Buy/IKEA/Apple/Trader Joes somewhere, and a handful of other stores and you basically have it all covered.
- hogFeast 5y ago
  Margins are the difference between what it cost, and what you earned. But what I would call "profitability" is your actual return versus capital deployed. For example, I know a retailer that earns a 1% margin...terrible? No. They turn over their inventory every week (roughly), so they earn that 1% 56x times a year...that is a very profitable business. Similarly, I can earn a 90% margin but if I can only turn my assets over every ten years (some business are like this) then that business isn't very profitable. Retail provides massive utility. Retail is the link between producers and consumers. Most producers do not have the interest or the ability to sell direct to consumers, it is a totally different (and very expensive) business. And barriers to entry are significant: retail is complex, there are huge fixed costs, and you own the link to consumers (that is why distribution is where all the profit is within most value chains). The internet does make information easier but retailers also do that job, Amazon doesn't but product selection a competitive advantage (most consumers trust retailers more than they trust brands...Amazon's return policy is a prime example, retailers need trust). And there is a difference between providing information and distribution: if that wasn't true Consumer Reports would be the biggest retailer in the world (I actually agree with this a huge amount though, this has never made sense to me...but trust is complex, humans aren't totally logical, and the system we have is pretty good). I am not clear what your point is. But one, small proportions are fine, Ferrari doesn't sell to everyone and they do okay. Restoration Hardware is a more modern example. Two, your point about those stores is my point about why distribution is profitable. Three, and the point I made earlier is that most of those stores (but not all) have essentially become derivative of each other...and that is why physical retail isn't competitive. Most physical retailers essentially threw up their hands, and decided to compete on price alone which suited online retailers very well (as I said though, this happened when retailers took more control over supply chains and started sourcing directly from factories in China, and this largely started before Amazon existed but accelerated hugely in the 2000s). I can consolidate these points by mentioning Restoration Hardware again: no-one knew they needed Restoration Hardware before Restoration Hardware existed, their model is ludicrous, it makes no sense...but it is also very successful and gives consumers something they cannot get online. If you asked consumers what they want before cars were invented, they will tell you they want a better horse (btw, Trader Joe's is also the perfect example of this...they did almost everything you shouldn't do in retail, that is how they succeeded).

lotsofpulp 5y ago

When was retail ridiculously profitable? The charts for public retail companies going back 2 or 3 decades show sub 5% profit margins. The weakness of retail is that it has a low barrier to entry and does not provide much more utility compared to competitors. Quality control and branding and the internet make obtaining information about good products and being able to trust them much easier than in decades long ago. Some retail companies with upper middle class clientele can afford a little bit of extra margin, but it is a small portion of the population with that kind of disposable income. You put a Target/Costco/Nordstrom/Home Depot/Best Buy/IKEA/Apple/Trader Joes somewhere, and a handful of other stores and you basically have it all covered.

hogFeast 5y ago
Margins are the difference between what it cost, and what you earned. But what I would call "profitability" is your actual return versus capital deployed. For example, I know a retailer that earns a 1% margin...terrible? No. They turn over their inventory every week (roughly), so they earn that 1% 56x times a year...that is a very profitable business. Similarly, I can earn a 90% margin but if I can only turn my assets over every ten years (some business are like this) then that business isn't very profitable. Retail provides massive utility. Retail is the link between producers and consumers. Most producers do not have the interest or the ability to sell direct to consumers, it is a totally different (and very expensive) business. And barriers to entry are significant: retail is complex, there are huge fixed costs, and you own the link to consumers (that is why distribution is where all the profit is within most value chains). The internet does make information easier but retailers also do that job, Amazon doesn't but product selection a competitive advantage (most consumers trust retailers more than they trust brands...Amazon's return policy is a prime example, retailers need trust). And there is a difference between providing information and distribution: if that wasn't true Consumer Reports would be the biggest retailer in the world (I actually agree with this a huge amount though, this has never made sense to me...but trust is complex, humans aren't totally logical, and the system we have is pretty good). I am not clear what your point is. But one, small proportions are fine, Ferrari doesn't sell to everyone and they do okay. Restoration Hardware is a more modern example. Two, your point about those stores is my point about why distribution is profitable. Three, and the point I made earlier is that most of those stores (but not all) have essentially become derivative of each other...and that is why physical retail isn't competitive. Most physical retailers essentially threw up their hands, and decided to compete on price alone which suited online retailers very well (as I said though, this happened when retailers took more control over supply chains and started sourcing directly from factories in China, and this largely started before Amazon existed but accelerated hugely in the 2000s). I can consolidate these points by mentioning Restoration Hardware again: no-one knew they needed Restoration Hardware before Restoration Hardware existed, their model is ludicrous, it makes no sense...but it is also very successful and gives consumers something they cannot get online. If you asked consumers what they want before cars were invented, they will tell you they want a better horse (btw, Trader Joe's is also the perfect example of this...they did almost everything you shouldn't do in retail, that is how they succeeded).