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How Retailers Can Survive in an Amazon World

Bricks and mortar retailers that offer a combination of specialisation, convenience, and experience are best positioned to compete with Amazon 

R.J. Hottovy, CFA 16 July, 2018 | 8:09AM

Amazon e-commerce retail retailer online web tech e-retailer clothing consumer goods

We've long held the belief that those physical retailers that offer a combination of specialisation, convenience, and experience were best positioned to compete in an Amazon (AMZN) world.

It's not easy for a retailer to successfully blend each of these qualities. We believe those players that can combine a specialised product assortment – including retailers that offer unique, often hard-to-ship products and in-store personnel that would be hard to replicate; an integrated, convenient approach to ordering, fulfilment, and logistics across all channels – in-store, mobile, and online; and experiential retail environments are the best positioned to at least keep Amazon at bay, at least over the immediate future.

For this reason, we believe the market had previously overreacted on several names across the retail sector, and not giving credit to those operators who understand how the retail space continues to evolve and will use the potential of competing with Amazon as a way to evolve their businesses. However, we're seeing a rebound in many of the names that have embraced specialisation, convenience, and experience.

Convenience is also becoming as critical as purchase price when consumers are making purchasing decisions. Fifty-eight percent of consumers surveyed by KPMG said that they shopped online because they had the ability to shop 24 hours a day, seven days a week.

Another 40% said that it saved time, while 39% said they used the distribution channel to avoid going to shops. With a study by Harris Group showing that 78% of millennials prefer to spend more money on experiences than on material things, it makes sense that they would want to buy the material goods they do need as efficiently as possible because they derive little pleasure from the activity.

In fact, 67% of millennials and 56% of Generation X prefer to shop online rather than in-store, according to BigCommerce. Shopify, citing a 2016 Walker Sands Future of Retail Study, highlights that 88% of respondents said free shipping was more persuasive than easy returns or same-day shipping. Retailers have heeded customer sentiment, and free shipping availability has been on the rise.

We think that steady growth in the number of retailers offering free shipping will drive further e-commerce purchases, as the most significant price differential is removed. We expect transactions with free shipping to grow 2% on average annually, reaching 70% of transactions by first quarter 2021 from 48% in first-quarter 2013, with the increase in transactions per person contributing to our 15% average annual growth in e-commerce forecast over the next five years. Although free shipping is one of consumers' largest decision factors, other distribution-related conveniences are important.

The Shopify article also highlighted that 69% of consumers would be more likely to shop online with one-day shipping, 68% with free returns/exchanges, 58% with easier online returns, 49% with same-day shipping, and 44% with easier in-store returns.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Amazon.com Inc1,751.60 USD0.64

About Author

R.J. Hottovy, CFA  is a director of equity analysis with Morningstar.

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