Overexpectations in E-commerce?
Poking holes in a common argument using the example of the corporate behemoths of our day
My column in Phenomenal World is out today, and this month it takes on the idea that e-commerce has a more profitable cost structure than traditional retail. There’s a general feeling out there that the portals of infinite choice and doorstep delivery are eventually going to win out over the brick-and-mortar experience, and part of that belief that e-commerce is the future has to do with the notion that it is more advantageous in its cost structure thanks to dispensing with retail store costs (rent, labor, signage, etc.). Looking at the actual costs for the two most prominent examples of these abstractions, Walmart and Amazon, I conclude that Amazon doesn’t have it quite as good as the “E-Commerce Advantage” theory holds. But I also look at the argument of someone who goes the other way on this, Marketing professor Nirmalya Kumar, who claims that online retail is a very substantial loser for Amazon (in his view, something they cover over in their 10-K reporting). Kumar makes some important points about the expense of shipping under the demands of Prime, but I’m skeptical of his argument that the retail side of Amazon’s business is as bad as he says it is. In the end, I can’t say that e-commerce has a less profitable cost structure, as Kumar seems to imply, but I’m pretty certain the “E-commerce Advantage” theory doesn’t hold water.
Full article here.
Interesting analysis. The assumption that removing physical stores automatically creates a superior cost structure for e-commerce often ignores the massive logistics, fulfillment, and last-mile delivery costs involved. Amazon’s scale helps absorb those costs, but it also shows how complex the economics really are.