Amazon isn’t the No. 1 villain in retail sector’s demise

Vitaliy Katsenelson's picture

Retail stocks have been annihilated recently, despite the economy eking out growth. The fundamentals of the retail business look horrible: Sales are stagnating and profitability is getting worse with every passing quarter.

Jeff Bezos and Amazon get most of the credit, but this credit is misplaced. Today, online sales represent only 8.5 percent of total retail sales. Amazon, at $80 billion in sales, accounts only for 1.5 percent of total U.S. retail sales, which at the end of 2016 were around $5.5 trillion. Though it is human nature to look for the simplest explanation, in truth, the confluence of a half-dozen unrelated developments is responsible for weak retail sales.

Our consumption needs and preferences have changed significantly. Ten years ago we spent a pittance on cellphones. Today Apple sells roughly $100 billion worth of i-goods in the U.S., and about two-thirds of those sales are iPhones. Apple's U.S. market share is about 44 percent, thus the total smart mobile phone market in the U.S. is $150 billion a year. Add spending on smartphone accessories (cases, cables, glass protectors, etc.) and we are probably looking at $200 billion total spending a year on smartphones and accessories.

Ten years ago (before the introduction of the iPhone) smartphone sales were close to zero. Nokia was the king of dumb phones, with sales in the U.S. in 2006 of $4 billion. The total dumb cellphone handset market in the U.S. in 2006 was probably closer to $10 billion.

Consumer income has not changed much since 2006, thus over the last 10 years $190 billion in consumer spending was diverted toward mobile phones.

It gets more interesting. In 2006 a cellphone was a luxury only affordable by adults, but today 7-year-olds have iPhones. Our phone bill per household more than doubled over the last decade. Not to bore you with too many data points, but Verizon's wireless's revenue in 2006 was $38 billion. Fast-forward 10 years and it is $89 billion — a $51 billion increase. Verizon's market share is about 30 percent, thus the total spending increase on wireless services is close to $150 billion.

Between phones and their services, this is $340 billion that will not be spent on T-shirts and shoes.

But we are not done. The combination of mid-single-digit health-care inflation and the proliferation of high-deductible plans has increased consumer direct health-care costs and further chipped away at our discretionary dollars. Health-care spending in the U.S. is $3.3 trillion, and just 3 percent of that figure is almost $100 billion.

Then there are soft, hard-to-quantify factors. Millennials and millennial-want-to-be generations (speaking for myself here) don't really care about clothes as much as we may have 10 years ago. After all, our high-tech billionaires wear hoodies and flip-flops to work. Lack of fashion sense did not hinder their success, so why should the rest of us care about the dress code?

In the '90s casual Fridays were a big deal – yippee, we could wear jeans to work! Fast-forward 20 years, and every day is casual. Suits? They are worn to job interviews or to impress old-fashioned clients. Consumer habits have slowly changed, and we now put less value on clothes (and thus spend less money on them) and more value on having the latest iThing.

All this brings us to a hard and sad reality: The U.S. is over-retailed. We simply have too many stores. Americans have four or five times more square footage per capita than other developed countries. This bloated square footage was created for a different consumer, the one who in in the '90s and '00s was borrowing money against her house and spending it at her local shopping mall.

Today's post-Great Recession consumer is deleveraging, paying off her debt, spending money on new necessities such as mobile phones, and paying more for the old ones such as health care.

Yes, Amazon and online sales do matter. Ten years ago only 2.5 percent of retail sales took place online, and today that number is 8.5 percent – about a $300 billion change. Some of these online sales were captured by brick-and-mortar online sales, some by e-commerce giants like Amazon, and some by brands selling directly to consumers.

But as you can see, online sales are just one piece of a very complex retail puzzle. All the aforementioned factors combined explain why, when gasoline prices declined by almost 50 percent (gifting consumers hundreds of dollars of discretionary spending a month), retailers' profitability and consumer spending did not flinch – those savings were more than absorbed by other expenses.

Understanding that online sales (when we say this we really mean Amazon) are not the only culprit responsible for horrible retail numbers is crucial in the analysis of retail stocks. If you are only solving "who can fight back the best against Amazon?" you are only solving for one variable in a multivariable problem: – Consumers' habits have changed; the U.S. is over-retailed; and consumer spending is being diverted to different parts of the economy.

As value investors we are naturally attracted to hated sectors. However, we demand a much greater margin of safety from retail stocks, because estimating their future cash flows (and thus fair value) is becoming increasingly difficult. Warren Buffett has said that you want to own a business that can be run by an idiot, because one day it will be. A successful retail business in today's world cannot be run by by an idiot. It requires Bezos-like qualities: being totally consumer-focused, taking risks, thinking long term.

Vitaliy N. Katsenelson, CFA

I am the CIO at Investment Management Associates, which is anything but your average investment firm. (Seriously, take a look.)

I wrote two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (Polish is one of them – go figure.)

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.” (They must have been impressed by the eloquence of the Polish translation.)

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Zorba's idea's picture

Ha! What could possibly go wrong with discreationary income while HC premiums exceed mortgage/rent expense...add deductibles exploding  and whoopie doo, what do you expect people to do. oh, btw, how did you miss the continuing degradation of our stinking fiat. stick around, its only going to get better. :/

harleyjohn45's picture

I'm spending 176.00 per month on bundled internet, tv cable and land lines.  If I delete 1 of the three, the bill will still be 176.00.  The twenty dollar oil change is gone, tires and batteries are out of sight.  Verizon did cut my cellphone and data bill this last month to 50.00.  I do agree with cellphones, they have become necessary in our lives.

theprofromdover's picture

Does the Bureau of National Statistics -or whatever they are called- not do a monthly update on what it costs the ordinaryJoe to survive,oris it all too ploiticized now.

The big bills are obvious, but how much are they changing between themselves year on year.


Other debt repayments

Property taxes & insurances

Health insurance


Home Food







DemandSider's picture

Oh, kripes. I better get one pretty quick. I haven't had one for 5 years. Magic Jack is getting pretty exhorbitant, though. It's $20.00/year, now!!

aliens is here's picture

Well, I don't shop at Amazon, malls or have the latest smart phones. I am happy with my 3 year old Morotora smart phone. I save as much as I can and when I do need clothes I shop clearance and only buy what I need. :)

aliens is here's picture

Well, I don't shop at Amazon, malls or have the latest smart phones. I am happy with my 3 year old Morotora smart phone. I save as much as I can and when I do need clothes I shop clearance and only buy what I need. :)

Atam Gits's picture

I remember when I used to buy a lot of stuff on eBay, then Amazon stole most of my business.  In the last year I find myself going back to eBay more and more often.  Amazon fulfilled orders takes forever to ship something I need and most eBay merchants will ship the same or next day.  Frequently I receive things from an eBay purchase sooner than Amazon would even ship it.  I'll even pay 1-2% more to buy something on eBay just to get it sooner.  If I'm in a real hurry, sometimes even more.

Michael Musashi's picture

Amazon started this new "Amazon Now" and they're really pushing it. The unintended consequences of this won't be felt yet. But it looks like it's going to kill some businesses. You can almost get anything same-day delivered now. Why would the obese masses need any other store? Get home from work, or work from home, ask Alexa (while you're watching Amazon TV) to get you some groceries, maybe a new XXL t-shirt of your favorite sports team... you're set! Here's the kicker, they're paying 40-year-old dudes who can't find work to deliver it in their 15 year old Japanese car. What could go wrong?

DemandSider's picture

Amazon must throw alot more money around for promotion to major networks and newspapers, etc, as everything I have bought the last few years has been cheaper on eBay.

harleyjohn45's picture

I buy more on ebay, Walmart is a good source.  You can generally ship it to the store and pick it up and save shipping.

NoWayJose's picture

Great point. I haven't found Amazon to be significantly cheaper for the past couple years.

DonaldTrumpHSA's picture

To have single payer the Democrats would have to win an election.  

NOW, Democrats lose elections and still want their way.  Democrats feel so entitled.  

Ali Tarpate's picture

"Polish is one of them – go figure."

Fuck you. They probabvly didn't buy it - Poles are smarter than to go for garbage like this.

1.21 jigawatts's picture

"You want to own a business that can sell KFC to idiots."

-Warren Buffet

Honest Sam's picture

Total bullshit.  Amazon has saved me from ever having to enter a retail store, but as a last resort. 

I don't think I'm alone in spurning brick and mortar.  


aloha_snakbar's picture

I broke down and bought an iPhone recently, and the most compelling things I do with it are...check the weather, check an earthquake app, and play with an app that has a drumset that makes fart noises (that was a big hit at the DMV the other day)...pretty sure I can live without those life changing apps...back to the flip phone next. I will miss the fart noise app though...

WhiteErmine's picture

My husband uses an older iphone, and I still use a flip phone.  Neither of us use apps like the average person and we don't want to either.  I hope we aren't the only ones resisting the tide.  It'd be refreshing to see a wave of consumers reverting back to the initial use of a cell phone.

U4 eee aaa's picture

and I thought it was because they wanted to sell jeans for $100 that would be rags in six months

sam site's picture

Great analysis

I was going to open up a video game arcade once and went to talk with a local arcade owner. 

He told me how local attractions like moster truck shows affected his walk in traffic from teenagers being drained of funds to play video games.

That's what talked me out of it.  His LAN parlor business folded up years ago.

williambanzai7's picture

Pretty soon smart phones will be taking out loans and going to college.

U4 eee aaa's picture

if they don't have a PhD, what makes them so smart?

Honest Sam's picture

Even if they had a PhD. That would make them even dumber. 

tangent's picture

Customer's are the focus of Amazon? I don't feel like the focus of Amazon when they always take at least a week just to ship off my packages. Or when they lobby the government to have my sales tax increased... that doesn't give me a warm fuzzy feeling either.

lucyvp's picture

I am skeptical of  the use of the word deleveraging in this article.


RubyPetunia's picture

Great points and great info. Thanks for pointing out the big increase in health care expenses.

oncemore's picture

150 bn market per year with wityh 330m people, let me say 300, that makes usd 500 ler person per yar, what is app. 40 ler person per month.

If the author thinks, that this destroys retail, then what........

BrightBlueSkies's picture

Good article, thank you

Jeeves's picture

Malls packed with loitering teen congoloids. Consumers stay away in droves.

Goldennutz's picture

Chimp-outs in the malls here about once a week. Most go unreported in the news, naturally.


I'll have my products delivered to my front door thank you.

shadow54's picture

The cell phone is a dog of a computer that pales in comparison to a high end laptop or desktop. I tend to view cell-phone-only people as the ignorant tech-challenged plebs. How do you write a book, or do graphics or business work on a cell phone????

As the cell market becomes saturated people will more and more buy used or keep their old phone longer. Saturation will mean the amount spent in those markets will decrease.

Laptop sellers now refurbish and sell laptops somewhat dated as they moved in to steal the used market and this should also happen to cell phones to a degree. Laptop sellers were the smartest as they expanded to take in every niche when cell phones took sales. There are all sorts of high end laptops you can draw on or tablets with keyboard cases and tons of mid range and refurbished machines. Even old gaming laptops can be refurbished for standard use. New gaming laptops drive the high end as do things like xps, mac and surface pro.

It is in desktop computers where there has been no market sense in areas other than gaming. It costs more for a medium range desktop now than for a laptop. If they want to keep the desk top market alive more price cuts are needed.


DemandSider's picture

You get a lot of power, relative to laptops and cell phones, if you assemble your own PC.

Pinche Caballero's picture

Retail trends, and changing consumer habits, are interesting to follow. For decades now, I have watched each year at Christmas time as retail stores rolled out a newly minted Santa, all prepped for the upcoming holiday season's fashion. Sometimes Santa is garbed in more traditional clothing, sometimes his sleigh has chrome exhaust pipes, sometimes skinny, sometimes fat, short, tall, white, "dark-skinned" (?), jolly, stern, etc. Every year I have wondered, who is wasting their money on all this cheap, useless, shit?

The same applies to footwear, whether running shoes, tennis shoes, sandals, etc.

The same applies to pants, whether pleated, cuffed, loose-fitting, or tapered, I.e., skinny

The same applies to ball caps, to cars, trucks, computers, sun glasses, smart phones, purses, damn near anything offered by the retail sector. The base functions of items never really change, just the appearance of the items.

Everyone wants to be hip, and trendy, especially in their youth. As you get older, or as happened to me, I'll just keep my slacks hanging in the closet until pleats are fashionable again. And, at some point, what do you really need to buy when you finally have reached the point of saturation and have damn near everything? Maybe every couple of years I refresh the sock drawer... Otherwise, I'm not wasting money on more useless shit just for the distraction...

Could it be the deck was stacked against retailers in terms of cyclical demographics? As the population increased from the depression-era generation through to baby-boomers, then decreased to gen-X, and now scaled back down to millenials, retailers have been chasing spending habits of a diminishing population of consumers spending far less money on just so much more useless shit.

Maybe I am seeing it through my limited perspective, but I'm still waiting for penny loafers to make a comeback. In the meantime, I'll just keep wearing my 10 year old plus work boots. Chances are good I won't outgrow them...

snblitz's picture

If memory serves, there was a book written in the 1950's titled 'The Waste Makers'.

In it the author laments that in the automobile industry "style" had supplanted "function".

The author was also taken-a-back by the public's willingness to purchase worthless "do-dads".

11b40's picture

She stood in the showroom staring at a wall of products.  The latest fashions for the dining room table were on display, but she did not move to pick anything up.  I was busy with another customer, but acknowledged her presence and told her someone would be with her soon.  When I approached her a few minutes later, she still had not moved, and when I asked how I could help, I thought she was going to start crying.  "I don't know what to buy", was her opening sentence.  She had been in business for 25 successful years on Main Street USA, but now she was at a trade show about to spend her money to stock her store for the critical 2nd half sales, and she no longer understood what her customers wanted.  This took place around 2002 or 03.

I started working for a Department Store in College, and was offered a job to their corporate office upon graduation as a Buyer.  I later left and started a sales agency representing multiple vendors to the retail trade in the early 80's.  This was just as China was really starting to open up as a viable supplier of more and more products, especially the kind I was selling - Housewares, Tabletop, Gifts, and Decorative Accessories.  After merging with another agency and expanding the geographical reach, we opened a showroom in America's Mart in Atlanta, which we kept for over 20 years.  Life was very good all through the 90's, and at the high point, we had almost 2500 accounts across the South.

But, in reality, change had been in the air since the 80's, as importers were replacing the goods that American factories produced.  I had 2 major ceramic lines produced in CA that went out in the mid 80's, then the domestic glass producer, who a few years before had heavily invested in state of the art high speed machinery, shut down production and sold the equipment to China.  Soon after, my plastics factory in Texas (Texasware) had to fold.  This was in the early stages of hollowing out America, and I watched the Furniture Factories and Textile Mills across the South stumble and fall one by one.  Other industries struggled and died, too, of course.  

Retail was changing too.  The local Department Stores and the regional Mas Merchants were facing new competition from Catalog Showrooms...and from another menace creeping across the land - WalMart.  The next big change was happening, too.  The category killer Super Stores were cranking up, as were Warehouse Clubs.  The death bells were ringing for most Department Stores and Regional Discounters by now, and after them, the Catalog Showroom industry completely disappeared.  Computerization was driving efficiencies for the big guys, and the smaller, or more cumbersome business models, were no longer able to keep up and stay competitive, and retail consolidation was off to the races.  I hate to think of all the bankruptcies I went through with my account base as the insanity played out.  Many of these retailers filed Chapter 11 twice, something that made me start scratching my head over banking and bankruptcy rules. 

Of course, we shifted our mix of lines to go with the times, and I made my first trip to the Orient in 1990.  No mater how much I hated replacing domestic production with imported goods, there was no viable choice if you wanted to stay in business.  So, by the turn of the Century retail was a hodgepodge of slowly dying industry segments.  The country was seriously over-stored, and had been for more than 20 years, and now a totally new way of shopping was on the horizon - the Internet.  

It was computers that allowed the efficiencies that enabled the expansion of new retail channels and the grow of giant retailers.  It was also computers that sucked out the billions and billions of dollars once going to other products, just as the author correctly identifies.  It is hard to deny that changing demographics and tastes drove many retailers out of business, but it is also undeniable that tech drove many of the shifts.  When you get a computer, it is kind of like getting a pet.  The purchase prices is just the beginning.  It has to be tended and fed a steady stream of dollars - printer, ink, paper, software & upgrades, Internet connectivity, routers, cables, cameras, etc.  Then there is the Smart Phone with it's own monthly bill.

Do people's tastes change due to economic circumstances?  Of course they do.  Today's youth have no interest in fine china, crystal, or silver for the dining room.  They don't even want a dining room.  Everything has gone casual.  So, why is that?  I say it is simply that most can no longer afford life's simple luxuries and keep up with their electronic gizmos as well.  The gizmos have clearly won.  The question is, is society losing?  We have become ever more self-absorbed and course.  Kind of hypnotized as we stumble through life by a constant barrage of entertainment, advertising, and government propaganda.

Sorry to ramble on.  I could write a book about retail, but it's time to get on with the day.  I'll soon be 70, and still at it, but instead of over 2K accounts, 2 showrooms, and offices in 4 states, I now work from home and only with about 25 accounts.  

Guess what one of my strongest categories is?  "As Seen On TV" products.  Cheap shit for suckers.  That is America today.

vealparm's picture

Great read........thanks for the insight.

Centerist's picture

Thanks for the insider's perspective on retail.  It does reinforce what the article discusses by covering other aspects.

It begs the question, though.  If Main Street is in such rough shape, then why does Main Street blow so much money on crap?  Maybe much of Main Street America's trouble is self inflicted.  If they didn't buy all of that "as seen on TV" junk and used things until they fell apart, maybe they'd have more money to save to buy houses and not live on credit for everything else.

yarpos's picture

I used to spend a lot of time in the US travelling, and living for short periods,  on business from 1995 to 2005.    When I went shopping I was amazed at the excess of "stuff" and ridiculous levels of choice, even for basic supermarket goods.    The thought kept going through my mind ,  who is buying all this crap?

It was great for me and mine as I just bought loads of stuff at half price or less than home ,  as everything was overstocked and perpetually on sale.    Seems like reality has finally caught up.    My wife could never get over simple things like coffee or salad dressing becoming a convoluted discussion,  until she honed her ordering skills.

Mile High Perv's picture

Ummm ..... asked and answered ...

The thought kept going through my mind, who is buying all this crap?

It was great for me and mine as I just bought loads of stuff at half price or less than home ,  as everything was overstocked and perpetually on sale.

Stan Smith's picture

While the smartphone factor is certainly true,  I'd argue that the smartphone dollars are siphoned off the desktop and laptop dollars.    Let's face it,  a smart"phone" is a small personal computer at this point.    While I have an aging, creaking laptop to post on ZH,  my house has multiple desktops which are collecting dust,  or an occasional game machine for the kiddos.

My wife has a laptop which she never uses either, she simply does what she needs (which isnt much) from her phone.

I'd argue as well, that the level of time consumption on these devices simply takes away from where it was before -- much of which was consumption of retail products.    It's not that that doesnt exist,  but as the article points out,  it's simply not a priorty for more and more people.   Which is ironic since there's more and more useless retailers popping up -- and closing as well -- than I can ever recall previously.  

Im all for choices, good luck chasing fewer and fewer dollars however.

keep the bastards honest's picture

Youtube advertisers found that youtube watchers did not give a stuff about the ads which were made by presumably snowflakes of various vintages and unusual values which neither impress millennials or the majority of the rest of us. So a blow up on youtube and punishment all round. The old tricks to get people to buy and buy dont seem to work like they did.

IN Aus for example we who live here have huge mortgage debt or are paying life blood in rent for a roof over our heads, then big tax and that about covers it all. Who gives a stuff about competitive dressing or furntiure or knicknacks  or eating if you dont have a home???

yarpos's picture

Thats funny,  I live on my laptop and the small screen experience on the phone shits me.   I would be quite happy with a Nokia brick as long as someone has a smartphone for stuff on the run.   Having a smartphone as my Internet experience would drive me back to the steam driven age.

Zero-risk bias's picture

It's pretty revealing that we call these mini computers we carry everwhere 'smart phones'. Dumb phones with smart systems? Well, it's the end user that I'd attach more importance to when it comes to IQ..

I guess frictionless transactions, vapid language and puerile gameplay are now the hallmark of a generation lost in its own trivialities. 

Silver Savior's picture

But but I spent only $55 on my smart phone, never pay for a plan and don't pay for healthcare. Don't generalize. 

cbxer55's picture

While I do pay for health care, it's not obombo care. Last year was glad I had it, BIG problem with kidney stones. Had to have multiple "surgeries", non-invasive they said, to clear it up. Almost lost my right kidney. 

Otherwise, I jsut deal with it. Went to an optomitrist the other day to get my peepers checked, order new contact lenses and a pair of glasses for when the contacts are out. Spent $784 bucks out of pocket, and I have to pay for the contacts in about a month when they show up. That's okay, this stuff will last me two or three years. So I'm good with it. 

Haven't been to a dentist since June 1987. Still have all my teeth and no problem teeth. At the age of 56, if I ever sit in a dentist's chair again, it'll be too soon. ;-)

My cell phone is a good old flip phone that I've had for 10 years now, still has the original battery. No internet or anything, just call and text. No, I don't walk around with my head stuck in my phone. I ignore it practically all the time. No one can call me except those who are on my Contact List. All other calls get shunted straight to voicemail. LOL

WolfgangCire's picture

health care and smart phones - both will kill you. have a nice day.

LastLegion's picture

I actually don't mind shopping.  I don't like crowded places either, so I usually go to KMart.  Because KMart isn't crowded, they are closing the store.  So, now the only store in town is Walmart, which is the other reason KMart is closing.  I will not go to Walmart!  Instead, I will now drive an hour each way to go to the last KMart in the area.  If that closes, then it will be Amazon for me.

shimmy's picture

Only people who hate Bozos/Amazon and love to find simplistic things to blame actually think Amazon is the #1 killer for retail which I gather means physical retail given last I checked, Amazon is a retail site. 

Farmerz's picture

Your life seems very complicated...

cbxer55's picture

I don't have a "smart" phone, and don't shop at Cramazon. I just don't shop elsewhere very much either. I spend a good amount eating out, but I'm single and don't have a girlfriend. Not looking for one either, because then I end up having to go shopping, which I hate. 

For me, it's pretty simple. If a lot of people go someplace, I avoid that place. I hate crowds, and avoid anyplace where a crowd will be. And thus, I don't spend a lot of money buying crap I don't need. Clothing will last a long time if taken care of. I have like 30 pairs of jeans hanging in my closet, so I won't be buying any pants for a long time to come. Numerous of those haven't even been worn yet, still have the tags on them. ;-)

I prefer sleeveless shirts of the non-cotton variety. These also last a damn long time, and I have a lot of them. Shoes last a long time if you take care of them, haven't bought shoes in several years. 

So, what should I go buy that I don't need? LOL!!!!!