08/20/2020

The Cannibalization of Brick and Mortar by E-Commerce

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The Coronavirus Pandemic is changing the face of traditional retail in dramatic ways. Some of those changes to physical stores will be temporary, such as in-store mask-wearing and social distancing, once the virus is conquered. But many of the changes look to be permanent, both in how shopping is conducted and in the growing numbers of big stores entering bankruptcy.

Before many of these famous stores disappear forever, though, several online retailers are eyeing these closed stores as growth opportunities for themselves. If you look at it in terms of natural life cycles, it’s like the Circle of Life as celebrated in Disney’s The Lion King. The top of the food chain is shifting from the giant retail centers of the past to the newer giants of e-commerce, with the latter feeding from the carcasses of the former.

We’ve spotted two trends that demonstrate how much a lot of shuttered brick and mortar stores still have to offer. Many larger brands are looking to cannibalize the assets of better-known brick and mortar competitors. In some cases, giant brands with hybrid operations are even cannibalizing their own stores for e-commerce support.

Here are the trends we’ve noticed.

 

1. Customer Data and Intellectual Property

Store profits used to be the main measure of a retailer’s assets. But the world has turned topsy turvy. Now, a struggling brand’s intellectual property and customer data are the most valuable things it has to offer.

Since 2010, brick and mortar retailers in bankruptcy have increasingly sold off their intellectual property for millions of dollars to e-commerce interests looking for a rapid buildout to their customer base.

More than 90 percent of S&P 500 companies’ market value is in their intellectual property and other intangible assets, according to the intellectual property merchant bank Ocean Tomo. They say that figure is likely to increase in a post-coronavirus world, as more businesses slough off expensive real estate and burdensome leases.

 

Mining for gold in customer data

As reported by NBC News, customer data has become the preeminent valuation factor for retail companies that are failing in their old methodology. The real property assets are seen more as liabilities in a declining market for big, mall-oriented retail space. But customer data — including emails, addresses, purchase history, income, phone numbers — has become increasingly valuable.

A buyer typically wants that customer list because it allows them to take on that brand and give it new life by marketing similar products to the same customer base, or leveraging the brand affinity to sell them other new products.

 

 

2. Former big department stores as warehousing space

The Wall Street Journal reported recently that Simon Property Group Inc. has been pitching Amazon with the possibility of turning some of the big mall property owner’s anchor department stores into Amazon distribution hubs. With the bankruptcies of nationwide mall staples JCPenney and Sears leaving behind gaping, empty maws of shuttered floor space, Simon has seized on this concept as a way to stave off their own financial troubles. They seem to have Amazon’s ear, and are hoping it becomes a win-win.

 

Malls and big-box stores: re-packaging and re-purposing

The strategic locations of suburban malls can be an advantage in speedier delivery times to a concentrated regional base of customers. It also avoids the cost of developing and building a new fulfillment warehouse. As Amazon moves further into retail, a large retail space is attractive to them for that purpose as well.  We noticed recently that the former Barnes and Noble store in our local mall has now become an Amazon bookstore. This is the Circle of Life coming almost full circle. Selling books is how Amazon got started, back in the 1990’s.

Sam’s Club has recently completed conversions of six big-box stores throughout the country to serve as fulfillment centers for samsclub.com. It’s part of the growing trend where retail spaces of all sizes are being converted into e-commerce fulfillment centers. The Coronavirus pandemic may have turbocharged the shift from brick-and-mortar retail to e-commerce, but the conversion of retail into industrial spaces had already been trending.

During the height of the pandemic, we reported here about how a niche brand with both e-commerce and physical stores dealt with pandemic-related store closures by turning retail locations into temporary fulfillment centers for e-commerce orders. Lululemon was also able to retain some of its in-store workforce this way, with employees packing and shipping e-commerce orders.

 

Fulfillment hubs in urban population centers

It’s not just retail giants doing the cannibalizing.  Warehousing startup Ohi operates a number of micro-warehouses for e-commerce fulfillment in 80 cities across the U.S, and also provides the operating software for the robotics operations used for picking and shipping. Several of its locations are in former office and retail spaces in midtown Manhattan–not a place you would typically think to locate a warehouse. But Ohi’s warehouses serve both well-established brands and smaller direct-to-consumer ones, offering fast or even same-day delivery to well-off city dwellers.

The Wall Street Journal reports that many medium-size retailers catering to middle-income consumers are also looking to add e-commerce fulfillment to their existing stores. Big grocery chains across the globe like Albertsons Cos., Wakefern Food Corp. and France’s Carrefour SA, say they are using or planning to use either semi or fully automated micro-fulfillment warehouses within existing stores and adjacent retail spaces.

 

The Circle of Life brings rebirth to retail jobs

Michael Mandel, chief economic strategist at the Progressive Policy Institute, has been watching the transformations taking place in retail and found a surprising discovery: When you count up all the jobs in fulfillment, delivery, and related roles, e-commerce has created more jobs between 2007 and January 2020 than bricks-and-mortar retailers lost.

The Lion King looks over this landscape and wisely nods his head.

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Julie Stewart

My mission at Shoppingfeed is explaining how to leverage e-commerce platforms and SaaS technology to e-merchants who just want to run their business and make more money.

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