“We believe that ‘pure play’ retail is going away, that e-commerce companies are either going to open stores or go out of business. And retailers need to be either excellent at retail, or they will go out of business. I also believe that Amazon cannot survive as a pure play retailer.”
That’s a bold new prediction from Scott Galloway, a Clinical Professor of Marketing at NYU Stern School of Business. His evidence is based on an algorithm developed by NYU Stern that examines 850 data points against 1,227 global brands to spot trends in retail. In a recent presentation (see video above), he explained the surprising finding that “pure play” retail is unsustainable. “Pure play” is a term used to describe companies that originated and only do business online. Amazon is the largest of these companies, and Galloway predicts that it will decline unless it changes its business model.
He points to several smaller companies that began as pure play online retailers but have now opened stores. Rent the Runway, Warby Parker, Birchbox, and Bonobos all started exclusively online, but once their venture funding dried up, they realized their business model wasn’t working, and they opened brick-and-mortar stores. All four companies have significantly increased sales, especially Warby Parker—the eyeglasses maker is now the second-most-valuable retailer based on sales per square foot, right behind Apple.
“Stores are the new black in the world of e-commerce,” claims Galloway.
Does that mean that e-commerce is dead? Not at all. Retailers that started with physical stores have found tremendous growth in online sales. The five fastest growing online retailers are Dick’s Sporting Goods, AutoZone, Costco, Lowes, and Ascena Retail Group (which holds brands including Dress Barn and Lane Bryant). From a shareholder standpoint, Amazon has had lower performance than Macy’s, Nordstrom, Walmart, and Best Buy.
These companies have all figured out something that Amazon has not yet realized: customers prefer a flexible shopping experience that includes online ordering with delivery, online ordering with in-store pickup, and in-store shopping. Traditional retailers can combine all three, while Amazon only offers the first option.
“The retailer of the future is not Amazon; it’s Macy’s,” Galloway says.
The pure play model is even more harmful for Amazon because it has gone all-in on free shipping. This started as a competitive advantage, but now Amazon customers expect to never pay shipping costs. And those costs are increasing rapidly; since Amazon Prime launched in 2005, shipping costs have gone up by more than 25 percent every year in all but two years. Last year shipping costs increased by 39 percent. Amazon received $3.1 billion in shipping charges in 2014 but paid $6.6 billion in transportation costs.
Galloway predicts that in the next twelve months, Amazon will acquire a brick-and-mortar retailer “because they have no choice. Pure play does not work.”
For companies that feel threatened by Amazon—and there are many of them—this is good news. Amazon has managed to undercut traditional retailers by operating on a slim profit margin or even losing money, but its investors are getting restless, and it cannot sustain this model for much longer.
Companies that can successfully combine online and in-store sales—a “brick and click” model—will find themselves at an advantage over Amazon. If you’d like to use eye tracking to better understand your online and/or brick-and-mortar retail environment, contact us!