Sunday 23 July 2017

Adrian Weckler: Amazon spells end of high street

Amazon’s market domination will mean carnage for the retail sector
Amazon’s market domination will mean carnage for the retail sector
Adrian Weckler

Adrian Weckler

Amazon is starting to kill off high street shops in Ireland. What has become an epidemic in the US, with Walmart, Macy's and others shrivelling against the competition of Amazon, is now hitting these shores.

So landlords may be foolish in thinking they can jack up commercial rents because of a growing economy. If anything, they might have to lower them if they want long-term retail tenants.

Last week, I met a veteran of the Irish tech retail industry who ran one of the biggest tech accessory businesses in Ireland, dealing directly with brands such as Apple, Samsung and Nokia. His turnover was over €100m per annum. He also had a retail outlet in a prominent Dublin shopping centre.

But he has now ditched this offline business completely because of the shrinkage in offline retail economics. He has moved all his resources onto Amazon, where he runs a rapidly growing business for parts and accessories across Europe and the US. If you want to buy a vacuum filter or a phone accessory online, there's a good chance it will be from his business on Amazon.

"It's working out much better," he told me. "I don't get screwed on price by retail chains here. I give Amazon 15pc and they take care of everything from storage to fulfilment, both here and in the US, as soon as the container lands off the boat. And I'm doing it all from an office here on the north side."

He says that a combination of his landlord, his trading partners and people's changed shopping habits pushed him into it. Last year, his landlord told him that the shop's rent was going up by 50pc. He told the landlord that neither he nor anyone else in his business could survive that kind of hike. The landlord thought he was bluffing and insisted on the rise. So he quit. Today, the shopping centre space his shop occupied is still vacant.

The bad news for commercial landlords is that Ireland is in a relatively early stage of this retail substitution.

A recent PricewaterhouseCoopers report into Irish shopping habits found that a quarter of Irish people now shop online every week and 23pc bought most or all of their clothes online last year.

As big a hole as that is for high street shops to plug, the PwC report suggests it's about to get much deeper. Ireland's online migration curve is following the UK, where 43pc of shoppers now shop online every week. In countries such as China, the weekly online shopping participation rate is 73pc.

Meanwhile, shopping on phones has doubled as a percentage of ecommerce in the last four years. Almost half of Irish people, in the midst of a switch to large-screen smartphones, say they have yet to buy something on a phone. That adds up to a near-certain chunk of imminent shopping activity that will transfer further over to online channels.

Lighting a fire under all of this in Ireland is the gradual spread of competent broadband. For all of rural Ireland's internet woes, the footprint of high speed broadband is undeniably increasing in towns and cities, the very places where shops seek to do almost all of their business.

Too gloomy a view? Sorry, but look at the US. In a growing economy with unemployment at under 5pc, the number of major retail chain bankruptcies and store closures is unparalleled. Major chains such as Macy's and Sears are shrinking. Clothes chains such as Urban Outfitters, Ralph Lauren and Payless seem to be hit worst.

This is bad news for Ireland, where clothes shops are the heartbeat of any thriving main street or shopping centre.

It's especially bad as retail spending in the US is still rising. So who is gaining at the retailers' expense? You guessed it: Amazon. Its sales have risen fivefold in the last six years. It has also changed the rules of retailing with services such as Amazon Prime (not yet available in Ireland).

In Ireland, entities such as Asos are wreaking havoc among traditional retailers such as H&M and Debenhams Ireland. It's easy now to buy something online and return it if you're not happy.

Indeed, some categories of shops barely exist in Irish cities any more. Try finding a general electronics store in Dublin city. (There's arguably only one left: PC World in the Jervis Centre.) People won't pay an extra €100 for a TV or a laptop any more just to get it in a physical shop.

This means that it's a grossly unequal playing field in terms of retailers' fixed costs. All things being the same, shops with higher costs must either charge higher prices or sell things not available online, such as treatments or services.

"But what about Primark?" some might ask. "It's embarking on a big physical expansion in Ireland and Europe."

Yes it is. But only because the goods it sells are so cheap that it's no advantage to order them online due to postage costs. The same might be said for Dunnes Stores, Lidl and Aldi. But as soon as items start costing over €20 or €30 (but not into the realm of boutique stores), the traffic is one way.

Increasingly, that leads to Amazon and other big online retailers. Some 71pc of Irish people now shop on Amazon, according to recent PwC research. And a quarter of those say that this has led directly to less shopping at other retail outlets.

Ominously, Amazon is only getting started. Its latest patent shows a system that automates clothes manufacturing even more. It is now buying its own planes and looking into robot deliveries. It is doing this while being unconcerned about making a profit.

How are Irish retailers to compete? Customer service and personal attention can only get them so far. Price and convenience always wins.

Against this backdrop, do shopping centres and high street landlords really think that they can hike up retail rents? Or even maintain them at current levels?

If so, our shopping streets and centres may look very, very different five or 10 years from now.

In short, get ready for a future Henry Street made up largely of cafés and discount stores.

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