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The secret is out: Amazon.com (NASDAQ: AMZN) is killing Macy’s (NYSE: M), Nordstrom (NYSE: JWN), and J.C. Penney (NYSE: JCP).
The department stores are hoping customers will inevitably return, and that the declines in sales this year were due to seasonal factors like poor weather conditions or a decline in consumer spending. But this is a misunderstanding of the consumer landscape. The U.S. consumer is still spending, they’re just doing it online.
If brick-and-mortar retailers fail to see the writing on the wall, they are going to be sorely disappointed. This is not a cyclical trend or a passing fad; Amazon has permanently disrupted the retail business.
Consumers, particularly younger generations like Millennials, are shifting their spending habits. They do not buy as much apparel as they used to. Instead, they are spending more on experiences. They are happy to do more retail shopping on Amazon, because it saves them time that they can use to do other things.
Amazon Business Model: Unstoppable
There doesn’t seem to be anything that can reverse Amazon’s seemingly unbelievable momentum. Amazon’s revenue increased 22% in the fourth quarter of 2015, and 28% in the first quarter this year. It is rapidly taking share from physical retailers, and it’s not difficult to see why.
Most everything that is sold at department stores can be found on Amazon, often for far lower prices. Plus, Amazon offers the convenience of at-home shopping, and now offers two-day shipping for Prime members.
Because of this, it’s no secret why earnings reports so far this year from the major brick-and-mortar retailers have been so ugly. Macy’s earnings fell 20% last quarter, from the same quarter last year.
Meanwhile, J.C. Penney is losing money. It lost $0.32 per share last quarter. This was due to a 0.4% decline in same-store sales, a critical measure for retailers that analyzes sales at locations open at least on year. Analysts had expected J.C. Penney to grow same-store sales by 3.2% for the quarter.
Nordstrom’s EPS collapsed 64% last quarter, year over year. Earnings came in at $0.26 per share, missing estimates by a mile. Analysts had projected $0.47 per share of profit. Nordstrom’s same-store sales fell 1.7%. This was a surprise, as it was the first time in seven years that Nordstrom reported a decline on that metric.
Making matters even worse, the collapse of physical retail isn’t likely to ease over the course of 2016 at least. Macy’s, J.C. Penney and Nordstrom all cut their full-year guidance.
The biggest warning sign for brick-and-mortar retailers is that they simply can’t compete with the Amazon business model. Amazon is taking share because it is willing to sacrifice margin in order to grow. As Amazon has so bluntly put it, other retailers’ margin is Amazon’s opportunity.
Retailers Need to Offer a Better Experience
Therefore, brick-and-mortar retailers need to offer consumers a better experience. Physical retailers need to give people a reason to go to department stores. After all, why would anyone take time out of their day to drive to a shopping mall or department store, when the same goods are a few clicks away? (And at better prices).
One idea to remedy this could be for department stores to offer alcohol. It might sound crazy, but Millennials are all about socializing and more enjoyable experiences. Apparel retailers could take their cues from other big-box industries such as grocery stores and movie theaters that are now offering alcohol.
One example is Roundy’s hugely successful banner Mariano’s, which is very popular in the Midwest and recently started offering alcohol.
Mariano’s is one of the biggest reasons why Roundy’s was recently acquired by Kroger (NYSE: KR).
The reason why they are doing this is to give consumers a reason to leave the house. Brick-and-mortar retailers need to adopt the same philosophy and do something new, to improve the in-store shopping experience. Otherwise, there won’t be anything that can stop Amazon and the Amazon business model.
Disclosure: The author is personally long M.