Consumer spending in the United States generates two-thirds of our gross domestic product, or GDP.
With GDP growth averaging only 1.3% over the past decade, compared to the 3.3% average annual growth rate from 1990-2000, it’s high time consumer spending had a thorough check-up.
On Wednesday, I wrote about consumers having less to spend because millions of jobs have been exported, about the stress they face with increasing levels of debt from rising healthcare and housing expenses, and the crushing weight of school loans squeezing discretionary spending.
But being stressed out isn’t the only thing shaping consumption patterns. A fundamental, structural shift in how and where consumers shop is taking an even bigger toll on consumer spending’s contribution to GDP.
Amazon Can’t Stop Making Waves
Traditional spending revolved around shopping.
Shopping meant going out, filling up the car to get to a mall, a favorite shopping center, a grocery store or supermarket.
Browsing through retail shops, looking for that special item or a sale, often triggered some impulse buying along the way. All that impulse buying adds up to billions of dollars in spending.
A trip or a day of shopping often meant stopping in somewhere to eat, adding to consumer spending… While maybe adding a few pounds, which in turn might spur the need for a gym membership, or some exercise equipment, or some bigger-sized clothes.
The physical act of shopping added significantly to consumer spending.
But that’s all changed.
The Internet of Everything has profoundly shifted the nature and act of shopping.
In fact, changes have been so radical they’ve forever altered the structural impact of consumer spending’s contribution to GDP.
When it comes to the Internet’s impact on shopping and consumer spending patterns, we only have to look at Amazon.com Inc. (NASDAQ:AMZN) to get the whole picture in one giant frame.
Shopping online doesn’t require a trip anywhere. It doesn’t make you hungry enough to go out to a restaurant. But it can generate something like impulse buying, as things you’ve searched for pop up elsewhere on your screen courtesy of the advertising algorithms running constantly behind everything we do online.
Besides changing the physical act of shopping, ecommerce’s deepest impact on (embodied perfectly by Amazon) is the effect it has on prices of everything.
How the Future is Affecting Today
Because online shoppers can search the same goods and services by price, retailers have to be competitive.
That means the general level of prices for almost all goods and services has come down.
That’s one reason why we’re not experiencing rising inflation.
Manufacturers’, producers’, intermediaries’, and distributors’ profitability are all being cut as the margins they worked off of have been eroded steadily by ecommerce competition.
That’s a reason brands aren’t as powerful or profitable as they used to be.
As Andrew Bary wrote in a recent Barron’s article,
“Amazon has effectively conspired, with voice and technology and about a half-billion consumers, to destroy brands,” said Scott Galloway, a New York University marketing professor in an April talk that still is discussed on Wall Street. Amazon’s view, he argues, is that brands have an “unearned” price premium that doesn’t match their benefits to consumers…. All of this reflects CEO Jeff Bezos’ strategy of taking aim at businesses with higher profitability. “Your margin is my opportunity,” he has said.
That’s what’s happening to prices and margins.
But of course, Amazon (though it’s the biggest by far) isn’t the only player in the new shopping arena.
There are established companies like Amazon that are the future of shopping and upstart ecommerce companies being rolled out regularly who are and will be the cyber iron and cement foundation of the new structure of consumption in America and globally.
This is not something that’s going away any time soon. This is going to be a major investing theme for years to come because the kind of change that we’re talking about – a fundamental shift in the single biggest driver of the world’s biggest economy – isn’t going to happen overnight.
Retail’s demise is going to be a slow and painful slog. The emergence of new shopping habits and trends is something that is going to shape the markets for at least the next five years.
Traditional retailers will have to adapt or die. We’re already seeing two of the biggest retailers – Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) – making big moves to try to keep up with Amazon. Wal-Mart’s purchase of Jet.com showed they were serious about beefing up their online operations.
Amazon itself will face competition from e-tailers like eBay Inc. (NASDAQ:EBAY), and Alibaba, as well as ecommerce logistics operations like Shopify Inc. (NYSE:SHOP), a cloud-based platform designed specifically to help small business owners manage their online stores.
Investors would do well to place heavy bets on some of these next generation owners of earnings and profits.
And they’d do well to bet against the companies who are falling by the wayside every day, just as we’re doing in Zenith Trading Circle, making generational profits for ourselves in the process.
Not understanding where the money’s going to be made (and lost) in retail, is just as bad as not understanding that our GDP growth rate may never be as high as it used to be.