Online gold rush lifts FedEx
Another holiday shopping season has passed, and though the rapid growth of online spending has been a well-told story for a number of years now, it’s worth highlighting the latest developments.
Internet sales rose an estimated 15 percent, to 19 percent, from a year earlier, while those at traditional stores fell 10 percent as the number of shopper visits plunged 15 percent. The appeal of online shopping is only getting stronger as people who came of age using computers and smart phones become a bigger factor in consumer spending.
Remember the 19th Century California Gold Rush? Back then, it wasn’t the prospectors who got rich, but rather it was the purveyors of picks and shovels. Today’s equivalent include United Parcel Service Inc. and FedEx Corp. -- the companies that deliver the bulk of merchandise to homes and offices. The S&P 500 is up 119 percent since the end of 2008 while Memphis-based FedEx has gained 134 percent and UPS 78 percent.
At its core, the ease of comparison shopping online puts downward pressure on retail prices, especially prices of big-ticket items such as appliances and consumer electronics where service is a minor part of the transaction. That helps
explain why inflation remains stubbornly below the Federal Reserve's desired levels. Gone are the days when a store could entice consumers with several low-cost offerings and be assured that they would also buy other items at full list price on that same trip.
E-commerce is exploding because consumers want it, not necessarily because retailers find it desirable or profitable. In many cases, they don’t and stockholders are punishing conventional retailers for sales declines. Almost any good can be purchased online, and often with free shipping and no sales tax. The S&P 500 Consumer Discretionary Index fell 0.11 percent in December, versus a 1.82 percent gain for the market overall.
That doesn’t mean the future for retailing is online. E-tailers and traditional brick-and-mortar retailers can lose -and lose big -- in e-commerce. Retailing is a very competitive, low profit-margin business, and the ease of entry for online sales guarantees that it, too, has similar characteristics.
As for shopping malls, it’s undeniable that consumers like to try out products in person and enjoy the social aspect of a trip to the shopping center with friends. Plus, it’s easier to return unwanted merchandise at a physical store rather than having to repackage undesired goods and arrange for UPS to pick-up. Stock prices of mall properties have risen twice as much as the S&P 500 since the beginning of 2009, thanks in part to historically low interest rates.
Yet, there's no denying that physical spaces are hurting, too. This year through September, some 14 major U.S. retailers from Macy’s to Men’s Wearhouse each closed 100 or more stores. . The Bloomberg REIT Regional Mall Index dropped 0.31 percent in December.
When major retail locations disappear, smaller stores suffer, especially in major malls where jewelers, shoe stores, gift shops and bookstores depend on the big chains to generate traffic. Also, much of what the little guys sell is highly susceptible to online sales.
Online sales are highly deflationary. They cut out many middlemen. Bricksand-mortar facilities are largely unnecessary. Head counts and employee costs are reduced as many retail employees and their benefits costs are replaced by fewer, lower-cost on-demand workers. Small sellers can operate out of their kitchens without office and commuting costs.