by Elliott Morss, Morss Global Finance
My last piece explored some of the labor saving technologies being introduced into both the goods and the services industries. It suggested that “labor saving” is a major reason for the “weak feeling” US recovery and growing income inequality.
The labor saving impact in manufacturing is pretty clear cut. Here, I look at how these technologies are impacting service industries. Specifically, I look at e-commerce effects on retail sales and employment in department stores and malls. I also look at the presumptive winners and losers from these changes. The winners appear to be the package shipment companies with primary losers being malls and department stores.
A variety of sources collect data on online sales. According to emarketer, online sales worldwide were $1.3 trillion in 2015. China and the US are by far the world’s leading ecommerce markets. China’s e-commerce is significantly the largest ($563 billion in 2015) and growing most rapidly (32% in 2015). The US is second with $394 billion sales in 2015 and a 14% annual growth rate. In the US, online sales increased from a 6.3% share in 2011 to 10.6% in 2015.
The move from department stores to online purchases has resulted in far more than a 10.6% share. It is important to remember that total retail sales include, in addition to department stores, supermarkets, hardware, drug and other stores. Online sales for these entities are extremely low.
That means a good part on the online increase is coming out of department store sales.
Table 1 provides a breakdown of total sales by type of store for the largest 100 US stores. If one assumes all of the increase in online sales came from the department store segment, the online share of department stores would have grown from 15% in 2011 to 26% in 2015. It takes time to change buying habits but it is clear that a move from buying in department stores to buying online is well underway.
Table 1. – Top 100 US Retailers (bil. US$)
Source: National Retail Federation
Does the Move from Department Stores to Online Cost Jobs?
It can be argued that online sales require fewer workers than retail stores. Table 2 provides data on this question. A selection of firms is ranked by revenues per worker. It is of significance that Amazon and Staples, both with high online sales, generate far greater sales per worker than those with much lower online sales.
Putting it differently, it takes 4 workers for the bottom four firms to generate the same sales revenues as one worker does at Staples or Amazon. And the move to online sales by department stores is only one of the service industries needing fewer workers. Two other obvious examples are auto and real estate sales. For houses and cars, customers no longer need much help from salesmen.
Truck Deliveries Up
You might think that the reduction in workers needed in stores would be made up by more workers needed for home deliveries. The three major entities making home deliveries are the US Post Office (USPS, FedEx, and UPS). FedEx has 246,000 employees while UPS has 238,480. Table 3 indicates that package deliveries are up for all carriers. Part of the large jump in USPS package delivery is attributable to FedEx and UPS both “handing off” packages to USPS for home delivery. There will be considerable labor saving if and when drones are incorporated the delivery business.
Table 3. – Annual Deliveries, Primary Carriers (bil. US$)
Sources: USPS, FedEx, UPS
Home deliveries for Web purchases are certainly up, but all three carriers are losing out in other areas as electronic communication takes over for other things formerly sent through the mails. It is rumored that FedEx recently lost considerable business as Amazon decided to get into the shipment business for itself.
It is interesting to ask on an efficiency basis whether more online business is better than having carriers make bulk shipments to major stores. The carriers definitely prefer bulk shipments. However, when you think that for non-online purchase, each customer has to drive to stores to pick up their purchases, the net efficiency impact still favors online purchases – the delivery companies have worked out very efficient routes to get packages to homes.
The Evolution of Malls
It is easy to believe that with growing online purchases and the sorry sight of empty and decaying strip malls, the heyday of malls is behind us. This is not in fact the case. Occupancy rates are now as high as they were before the 2008 collapse. And operating incomes at malls are higher than they have been in years.
Of course, there are problem malls. A recent study has quoted here by FBIC analyst Deborah Weinswig found that among seven troubled retailers, including J.C. Penney and Kmart, the majority of the endangered locations are in smaller markets with less population and income density, or in an economically distressed region.
So what is propelling the growth of malls? Like gambling casinos have been doing for the last decade, successful malls are transforming themselves into all-purpose “recreation experiences” for customers. This can be seen most clearly in northern states where indoor malls are where many families with children will spend a good part of a day. They shop, have a meal, and possibly take in a movie. I quote from an industry observer:
“Stronger retailers stay, weaker retailers go, and it’s been that way forever.”
Table 4 lists the US malls with the highest revenues. It is notable that most of them have been around for some time. It also is apparent that the Simon Development Group understands what customers want.
Table 4. – Malls with Highest Revenues per Square Foot
Table 5 provides information relevant to investing in companies covered in this piece. Amazon is growing rapidly but judging by its price earnings ratio, this growth is more than reflected in its price. At the bottom of the list, we have mostly department stores having difficulty making the transition to online shopping. The property share of assets is included because for companies like JC Penny who might at some point have to be liquidated, their properties might have great value. Staples revenues are down since 2014, largely as a result of declining store revenues. The Simon Property Group has a good grasp of the shopping mall market and continually invests where money can be made.
Table 5. – Company Financial Data
Source: Yahoo Finance
The application of new technologies is causing considerable labor-saving in services as well as the goods-producing sectors. Here, we saw how growing online sales are affecting department stores and malls. A major takeaway is that these technologies are forcing firms to adapt to survive. Department stores that have not smoothly incorporated online sales into their operations are struggling. And malls that have not been transformed into shopping, entertainment and recreation centers also face problems.