From a small northwestern observatory…

Finance and economics generally focused on real estate

Retail and the Internet

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First, if you can only read ONE magazine every week, it must be The Economist.  If I were to go into hibernation for a year (or 20, for that matter), a cover-to-cover read of the current issue would bring me up-to-date on pretty much every topic of major importance, both in the U.S. and globally.  And no, I don’t get a kick-back from them on subscriptions.

The current issue has not one but TWO thoughtful pieces on the impact of the internet on retailing.  From a real estate perspective, this is of vital importance for three reasons.  First, internet retailers actually DO occupy space, but it’s a very different kind of space than most-bricks-and-mortar retailers occupy.  (For more on my perspective on this, read my interview about Amazon in Seattle’s Daily Journal of Commerce this past week.)  Second (as the Economist articles point out), many retailers “get it” but many don’t (more on this in a minute).  As a result, some retailers thrive (Apple and Disney are two cited examples, but I’d also note Seattle’s Nordstrom as a firm that grasps how to thrive in both markets).

The third reason is a bit more subtle.  The Economist quotes Roy Amara, the American futurologist, who says, “We tend to overestimate the effect of technology in the short run, and underestimate the effect in the long run.”  As a small-e economist, I would note that in the long run, internet retailing has the very real impact of making American business more productive, in terms of “unit of output” per “unit of cost” (or “unit of labor”), which is a very good thing indeed.  Why?  Simply put, the developed economies (U.S., Europe, and Japan, for starters) are fighting a demographic battle.  Japan and Europe are more-or-less losing.  Their populations are becoming increasingly older, and their population growth is basically flat.  The U.S. is barely winning the demographic battle, ironically thanks in no small part to immigration (both legal and otherwise).  Why is this important?  Simply put, increases in GDP are necessary in order to create jobs and to support the increasing costs of an increasingly aging population.  There are only two real ways to accomplish this (note the word “real”, as in without inflation):  either grow the working-age segment of the population (we’ve already thrown in the towel on that one) or make equal strides in productivity.  Hence, the information age allows fewer workers to generate greater productivity in order to support a population in which increasingly large segments are not part of the productive landscape.

As noted, some bricks-and-mortar retailers “get it”.  For many segments of the shopping landscape, an on-line substitute just won’t do.  Apple figured this out with the Apple Stores, which are slick looking, very efficient, and a far better solution when need instant answers or want to buy something “Apple”.  By the way, I have an Iphone which I acquired from an ATT store.  I have to go back into that store occasionally for upgrades or accessories — it’s near my house and thus very convenient.  I can’t help but notice that they’ve re-done the store in much more of an Apple-esque image.  Accident?  I don’t think so, plus the shopping experience is much more efficient and enjoyable now.

Borders didn’t make it, but Barnes and Noble seems to be hanging on, in no small part because of the adaptation to the internet.  Interestingly enough, many “mom-and-pop” booksellers were predicted to go out of business due to Amazon, yet many of them have thrived by partnering with Amazon and doing what entrepreneurs do best (catering to “niche” needs).  Last time I bought a “new” book it was a Christmas present, and I got it at a deep discount at Costco.  The last 10 books to come into the Kilpatrick house, though, came from small-town retailers who had partnered with Amazon, and to whom we paid full-retail.

Interesting side note — ONE of these retailers was Seattle’s Goodwill store, who have cataloged their bookshelves and partnered with Amazon to sell used books.  (My congratulations to my good friend, Ken Colling, the CEO of Seattle Goodwill, and no, I didn’t get a penny’s worth of discount.)  Also, by the way, it was cheaper for me to go on-line to Seattle Goodwill, buy the book, and have them mail it to us, than for us to drive to downtown Seattle and buy the book the old fashion way.  Is Goodwill going out of business because of Amazon?  Far from it — this is a windfall for them.

As The Economist notes, and I concur, retailers are struggling to figure out this new paradigm.  They are also coping with an explosive growth in shopping space — between 1999 and 2009, shopping space in the U.S. ballooned from 18 square feet per person to 23 square feet.

A final note:  The Economist deals primarily with the experience in the U.S..  Clearly in Europe and Japan, this is also a struggle and perhaps an even worse one.  However, this information-age paradigm shift is occurring right as many developing nations (China in particular) are seeing an emerging middle class, and the retail-therapy that permeates middle-classes everywhere.  Retail real estate developers who look at the Chinese economic trends and think that China may need as many square feet of shopping experience as Americans have come to enjoy over our cultural history may need to think again.  The simultaneity of the emergence of the information age with the emergence of a Chinese middle class (not to mention the cultural history, which in China may favor small, entrepreneur-driven businesses) may portend a very different retail future.

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