Will the High Street Survive an Amazon Takeover?

In-DepthWill the High Street Survive an Amazon Takeover?

Will the High Street Survive an Amazon Takeover?

Earlier this year, Amazon launched Go. The futuristic convenience store uses sensors and computer-vision technology to track when customers walk in, what they put in their basket and bills them automatically — eliminating the checkout and queues.
Amazon Go opened to the public in January 2018 and it is the ecommerce company’s latest move yet to reshape the future of physical retail.

Reshaping the Future of Retail

Despite being founded by Jeff Bezos in 1994 as an online bookshop, Amazon has pushed aggressively into brick-and-mortar retail, dismaying a sector under pressure on many fronts. Amazon’s first foray into groceries was 11 years ago when it established its Fresh home delivery service in Seattle. Today Amazon runs a handful of grocery pick-up points, 13 physical bookshops, and hundreds of Whole Foods stores, as it acquired the upmarket retailer last year for $13.7bn.
And Amazon is scanning for some 200 locations for Amazon Go in the UK — a country whose food market, at £190bn, accounts for half of total retail sales.
Analysts say the Amazon push will pile pressure on a reeling high street, on which stores and jobs are vanishing at a rapid rate, and which accounts for a tenth of the British economy. Several retail giants across the world, including Poundworld, Maplin and Toys ‘R’ Us, have gone into administration this year.
In 1950 there were 600,000 stores in the UK, in 2012 this fell to 290,000 and only 220,000 will survive by 2020, according to The Centre for Retail Research. The number of retail workers, meanwhile, has plunged from 3.2m a decade ago to fewer than 3m today. And the British Retail Consortium forecasts that a further 900,000 jobs will be lost by 2025 as retailers close costly stores or end long leases.
“Half of existing stores may disappear by 2023 — that’s largely down to the impact of ecommerce. It’s more efficient, greener and comes with better protections for consumers,” says David Jinks, head of consumer research at ParcelHero.

The Amazon Advantage

A customer walks out of the Amazon Go store, without needing to pay at a cash register due to cameras, sensors and other technology that track goods that shoppers remove from shelves and bill them automatically after they leave. (image: REUTERS/Jeffrey Dastin)
A customer walks out of the Amazon Go store, without needing to pay at a cash register due to cameras, sensors and other technology that track goods that shoppers remove from shelves and bill them automatically after they leave. (image: REUTERS/Jeffrey Dastin)

He says the convenience of Go — the stores let customers shop and pay for goods as quickly and as seamlessly as possible — gives Amazon an advantage over traditional shopkeepers. The sensors that enable customers to immediately pay for goods, also remove the option of them changing their minds and putting purchases back on shelves, which could increase Amazon’s sales.
And Go stores will provide Amazon with valuable and sometimes personal consumer data. Through its tracking technology, the company may be able to predict future purchases. For example, it could know a family is expecting a child when it buys folic acid — data which could be used to provide tailored product recommendations online.
The company’s vast digital customer data already give it an edge over brick-and-mortar retailers. “What they are trying to do is understand what will sell where and when [in-store with online data]. That can help determine the logistics and pricing of goods more quickly than physical stores can,” says Matthew Hopkinson, co-founder of data advisory firm Didobi.
Amazon’s foray into physical retail highlights how the boundary between online and offline shopping is blurring, as customers now expect to seamlessly switch between both.
Amazon has increased the number of short trips to Whole Foods by 8.7% since the acquisition — largely thorough installing Amazon Lockers in most of the stores, according to InMarket. Analysts say the lockers, which let consumers pick up their online Amazon purchases, encourage more sales from people who may otherwise have not come into the store.

“For Amazon, it’s not necessarily just about being able to sell goods in-store; the part of the online retail market growing fastest is click and collect,” says Richard Lim, chief executive of Retail Economics. “The future of retail is not just online or offline; it’s about providing a seamless omni-channel proposition for consumers.”
Analysts say that Amazon’s retail offensive is about boosting its Prime subscriptions. Whole Foods stores have exclusive discounts for Prime members, for instance, plus two-hour home delivery if they live nearby to US stores.
“People see Amazon as providing all of their needs,” says Didobi’s Hopkinson, which reduces the appeal — or need — of going to a competitor. “It’s the ‘platform effect’.”
Amazon Go is launching at a time when UK consumers are spending nearly £60bn each year on mobile devices, or over £1 in every £6 spent on the high street — a boon for Amazon’s checkout-free stores. The digitisation of retail is expected to accelerate further, as online sales are forecast to reach nearly £100bn annually by 2021, according to Retail Economics.
This mirrors broader consumer trends, with the proportion of British adults using the internet every day increasing by one-quarter since 2010, according to the Official for National Statistics.

Brick-and-Mortar Retailers Fight Back

Sainsbury’s, bought catalogue retailer Argos and has begun placing Argos outlets in some of its stores. Argos combines physical shops, ecommerce and home delivery. (image: REUTERS/Neil Hall)
Sainsbury’s, bought catalogue retailer Argos and has begun placing Argos outlets in some of its stores. Argos combines physical shops, ecommerce and home delivery. (image: REUTERS/Neil Hall)

Brick-and-mortar retailers are fighting back, however. Supermarket group Sainsbury’s, for example, bought catalogue retailer Argos last year for £1.4bn and has begun placing Argos outlets in some of its stores. Argos proved a successful business model, as it combined physical shops, ecommerce and home delivery — providing a convenient and multi-channel experience for consumers.
Other retailers are investing heavily in “experiences” to lure shoppers back to the high-street and off their smartphones as monthly footfall continues to fall year-over-year, according to Ipsos Retail Performance data. Dixons Carphone, for example, has dedicated space to let customers try out devices such as vacuum cleaners, or test the effectiveness of noise-cancelling headphones — things they cannot do online.
But Richard Perks, director of retail research at Mintel, is sceptical. “Dixons Carphone massively improved in-store service, but it hasn’t improved market share,” he says. “It’s still a very challenging time as they are faced by an online sector growing very fast and they are constrained by the number of outlets they have.”
Brick-and-mortar stores are struggling for a variety of reasons not related to ecommerce. UK inflation is a huge concern, as it reduces consumers’ spending power and raises import costs for many shops selling goods such as clothing and electrical items. Low margin, fixed-price discounters like pound shops are also suffering as they cannot pass cost increases on to the consumer. That was one reason why Poundworld failed.
“Retailers are faced with an increasingly hostile cost environment,” says Lim at Retail Economics. “With the falling pound, the national living wage, apprenticeship levy, business rates and utility bills, operating costs are rising by 3% year-on-year, outpacing sales growth for many retailers. This is a toxic mix of pressures.”
Before the 2016 Brexit vote battered sterling and spiked inflation higher than the rate of wage growth, consumers had enjoyed two decades of falling prices as retailers relied on cheap imported goods from Asia. The annual increase in the consumer price index may have fallen slightly to 2.4% in October, from 2.7% the month before, but the growth signals that consumers are still more cautious about loosening their purse strings, especially given the economic uncertainty caused by Brexit.
At the same time, consumers are allocating more of their disposable income to leisure and entertainment activates, such as hotels, bars and restaurants. The proportion of UK consumer spending devoted to retail has fallen from one-third in the 1960s to fewer than one-quarter today, with analysts expecting further falls. “It’s down to an abundance of material possessions, the value of which has diminished over time,” Lim says.

Budget Relief

Philip Hammond: "A £1.5bn package of high street relief could ease some of the pressure on brick-and-mortar retail". (image: REUTERS/Christopher Furlong)
Philip Hammond: “A £1.5bn package of high street relief could ease some of the pressure on brick-and-mortar retail”. (image: REUTERS/Christopher Furlong)

A £1.5bn package of high street relief announced by UK chancellor Philip Hammond in October’s budget could ease some of the pressure on brick-and-mortar retail. The plans include £900m in business rates relief for nearly 500,000 small businesses and £650m on transport, infrastructure and building improvements, plus planning rules to allow shops to be converted into offices or homes.
But the changes to business rates will do little to help larger retailers, which have been paying higher rates since the government reevaluated property in 2017.
Across the UK, rates have increased in line with inflation. But advisory firm Altus Group found the average bill for department stores, which are lumbered with long leases and often in locations where footfall is falling, grew 26.6% in 2018/19 compared with the previous year. Large high street shops, many of which are heavily indebted, were hit with a 10.8% increase in business rates.
Helen Dickinson, British Retail Consortium chief executive, says: “While we welcome the temporary support being given to small businesses, these measures alone are not sufficient to enable a successful reinvention of our high streets.
“Retailers are currently in the midst of a perfect storm of factors — technology changing how people shop, rising public policy costs and softening demand.
“Rather than tinkering around the edges, struggling high streets require wholesale reform of business rates in order to thrive. The issue remains that the business rates burden is simply too high.”
Also included as part of the budget was a reduction in the amount small businesses pay for apprenticeships, from 10% to 5%. But Dickinson says retailers need further reform of the levy before their funds expire.
“The levy is not fit for purpose as retailers are unable to fully utilise funds,” she says. “Businesses need the lifetime of funds to be extended while standards are finalised, and more flexibility to use levy funds to cover the cost of backfilling roles while apprentices are off the job.”
The budget may be bad news for Amazon and other ecommerce giants, as the UK chancellor also announced a “digital services tax” of 2% on UK revenue for technology giants that make global annual revenue of at least £500m.
Paul Martin, UK head of retail at the professional services firm KPMG, says the tax “holds the greatest potential to rewrite how the retail game is played. Online marketplaces have often been able to rise above the problems faced by traditional legacy players”.
But the Office for Budget Responsibility forecasts that the companies could end up paying just £30m more each year under the new tax, which would do little to dent the brick-and-mortar assault of global giants such as Amazon.
Jinks, at ParcelHero, adds that the tax could also hit UK suppliers: “It doesn’t put things right for the high street.”
Amazon faces other challenges, however. The launch of Go was delayed by glitches with the technology that automatically charges customers when they leave the stores instead of checking-out at the tills. The method is more convenient, but Amazon’s sensors struggled to track more than 20 people in the store at any one time, highlighting the challenges of forecasting and managing footfall in a physical space. Amazon may have ironed out such kinks by now, however.
Another problem may be getting British consumers familiar with adopting a new shopping habit — several Go shoppers have said it feels weird to walk out of a store without paying.
The bigger concern for consumers is privacy: Amazon has patented technology that would allow it to block comparison shopping in its stores. “That will turn consumers away. Any [retailer] that doesn’t enable full transparency has a problem,” says Didobi’s Hopkinson.
He adds that Amazon will face increasing competition from other retailers adopting automation technology, such as Walmart, which began testing such stores last year. “The first mover advantage will start to peter away over time. The winners will be the ones with the greatest relationship with customers, who are increasingly disloyal,” Hopkinson says.
Amazon is trying to reshape retail. But the future of the industry — and the high street — is far from clear.