July 12 just might have been the day on which the retail sector as we have known it here in America came to its end. If not its end, surely the beginning of its end. Amazon has an estimated 54 million Prime customers in the U.S. who pay $99 per year, and millions more around the world who pay about the same "free delivery." Ignore pedants who ask how something for which you pay can be "free". Customers love it. They have items shipped to them in one day, and in one hour in cities from New York to London. On July 12, Amazon's second annual "Prime Day", these customers could order kitchen, dining and bar items at 86 percent off usual prices; treat themselves to a 55-inch television set for $650, a $350 discount; buy watches at discounts of up to 60 percent, and snap up new deals that were offered every ten minutes. The result was a flood of orders, with Prime Day sales topping those on last year's first Prime Day by 50 percent in the US and 60 percent worldwide. And beating Black Friday, the day after Thanksgiving, for many years the biggest shopping day of the year.
Amazon says this Christmas in July was its "biggest day ever." Some 200,000 headphones, 14,000 Lenovo laptops, and hundreds of thousands of boxes of Cascade and Tide rolled out of its warehouses, capturing sales from all sorts of existing retailers -- electronics stores, supermarkets, jewelry shops and department stores. The latter, of course, are already hard-hit by the growth in online purchases of apparel and accessories, estimated to rise to $71.8 billion by year-end from $48.5 billion as recently as 2013, an increase of 48 percent.
Amazon, with a range of its own-brand apparel such as socks and trousers, is now the second largest apparel seller in America behind Walmart, another chain that is no friend to department stores. According to Morgan Stanley, Amazon will account for one-fifth of all US apparel sales by 2020, biting into the business not only of department stores but of Walmart, which is closing 154 stores in America. As The Economist put it, Walmart "has strived to help Americans save money, [whereas] Amazon is obsessed with helping them save time". Walmart is running up against lots of stores that match its savings, while Amazon is benefitting from the fact that millennials (born between around the mid-1990s through the early 2000s) want the hassle-free experiences of on-line ordering and free delivery, an Amazon feature that few can match, especially in the range of goods on offer.
The rise and rise of Amazon and other online sellers is only part of the traditional department stores' problem. Nipping at their heels are discounters such as Ross, TJX's T.J. Maxx and Marshall's, and agile fashion chains such a Primark and Inditex's Zara that can copy a design, produce thousands of "knock-offs" and get them on store racks while department store executives are planning their next television and print ad campaigns aimed at consumers who are increasingly more interested in what their social media and online reviews are telling them about what is hot and what is not. And what is hot is likely to be some small brand not available in department stores. A consumer survey by the Deloitte consultancy finds that one-third of American consumers would pay a premium of at least 10 percent for a "craft" product as compared with a big name brand. "The department stores were built for a different decade," says Jharonne Martis, director of consumer research for Thomson Reuters.
Long gone is the day when visitors to New York City made Macy's huge iconic department store on Herald Square a place to shop until they dropped. Mallory Schlossberg, of Business Insider, toured the store's 2.2 million square feet (twice the size of London's famed Harrods) and found "disarray… discounts… the magic seems to have been lost." So fast have sales, profits and prospects fallen—and Macy's is not the only department-store chain to be struggling—that the one-time golden-boy of mass retailing, Terry Lundgren, has had to step down as CEO in favor of Jeff Gennette, a long-time aide known as a "trend spotter". It is not clear whether Gennette will continue Macy's policy of widespread discounting. Mark Cohen, director of retail studies at Columbia Business School, says such discounting "is poison", at least as executed by Macy's. "They've created no motivation for consumers to respond to their promotions, since if you've missed this week's sale you just need to wait around until next week."
The effect of this accelerating revolution is not confined to the retail sector. The ripple, some would say tidal effect is causing angst in the commercial property market. Historically, malls sought big chain stores—Macy's, Dillard's, Saks, Nordstrom—as anchor tenants to lure shoppers who would open their purses not only in the department stores but in the shops of other mall tenants. No longer. Get thee gone is the message from mall owners to department stores. At the Florida Mall in Orlando, Nordstrom has been torn down and replaced with a Dick's sporting goods store—all those biker's outfits, running clothes, workout machines and gadgets so beloved of millennials. The Saks Fifth Avenue and Lord & Taylor stores (owned by 91ÆÞÓÑ's Bay Company) were demolished to make way for 23 restaurants and Zara, American Girl, H&M and others that are expected to generate more foot traffic. The Wall Street Journal reports that General Growth Properties, a big mall owner, has taken back space from 65 department stores, or 15 percent of its anchors, and filled the space with restaurants, Wegmans Food Markets, 24 hour Fitness and other retailers. One mall owner says that the definition of an anchor store has changed, that the Cheesecake Factory does as much business as Sears once did.
None of this will come as a surprise to students of capitalism, especially those who remember that the late, Joseph Schumpeter wrote that capitalism continually innovates in a process he called a "perennial gale of creative destruction". In less elevated jargon, competition produces winners and losers. In the case of the changes in the retail sector, consumers are the clear winners, employees and investors in incumbent firms are the losers.
Unless they adapt. Some, like Nordstrom, are setting up cut-price chains to attract price-conscious customers and acquiring firms such as DS Co., a cloud-based firm that enables Nordstrom to ship on-line orders directly from manufacturers to customers, bypassing its bricks-and-mortar stores. Others, like Walmart, are using stores to compete with Amazon's delivery system—90 percent of Americans live within fifteen minutes of a Walmart store. And Amazon isn't standing still. More good news for consumers who, thanks to Google's search engine, tips on social media, and the rapid responses of innovative retailers, now have more choice than ever.