During the Covid-19 induced lockdown, one industry has been doing particularly well. Online retail. Is this the new holy grail for shopping or are does it come with nasty side effects? Are the costs fully priced in?
Besides offering the convenience of shopping from home, online shopping has two big advantages. The first is that the selection offered is much bigger than a brick and mortar shop. Companies like Amazon have got a vast selection of items to spend cash on. The second advantage is that the products are often cheaper than those bought in a physical store. In times like these, cheaper is exactly what most consumers want. The increased demand of goods bought online during the lockdown was so enormous that the e-commerce giants had to hire thousands of new employees. But it was not only the dominant internet retailers that benefited from the shift to online purchases. Thanks to Shopify, building an e-commerce website was within the reach of almost anyone.
The advantages for companies selling their wares online are obvious. They no longer need to rent expensive shop floor space, but cheaper industrial warehouses are adequate. They also do not need to worry about changing their displays and using expensive shopfront props and designers to make their shops inviting. Now they only need to hire a few whippersnappers to create a few new graphics. The armies of bored sales agents and shop assistants are replaced by a handful of call centre agents, mostly outsourced to the cheapest bidder somewhere in the emerging world. And the stock control is much simpler because there is no need for an internal distribution system. The products go directly from the warehouse to the consumer. And best of all, the consumer saves money and time – in theory at least.
The effect on the business landscape has been dramatic. In the USA, 9 300 brick and mortar shops closed in 2019. That number would surely increase dramatically this year, partly thanks to Covid-19. Bloomberg, a financial data provider, estimates that number of shop closures in the USA will be about 25 000 in 2020. Worldwide we have seen a similar trend, although not as dramatic yet. But that will change. The world is evolving and so should businesses. The intense focus on price and efficiency may seem like an undisputed benefit to customers and therefore society, but is that so? Are we counting the full costs of the changes?
Although our capitalistic system has been the greatest driver of innovation, sometime the change did not incorporate all the costs though. Cheap coal fired power stations bring down the cost of electricity by ignoring the costs of the air pollution. Similarly, cheap flights are only possible by not including the costs of the harm of the exhaust fumes. The growing appetite for cheap red meat is partly to blame for the deforestation of the Amazon rain forest. The impact of the deforestation has not been included in the cost calculations because, like the examples above and so many other instances, the costs are external or social costs. It is difficult to allocate the cost to an individual. The cost might not even be borne by a specific country, but by the whole world society. It is not hard to determine who originated the costs, but it is hard to determine who the money should be paid to. So how does the shift to online retail fall within this category?
Simply put, there are few factors not currently considered that count against online retail. For one, it is not an even playing field. An online retailer reach is unconstrained by geography. They can operate across borders and even across different continents. As such, their headquarters can conveniently be located it in a Tax haven. The value of intangibles, such as their brand is also hard to quantify, and they would be able to structure their company in such a way that most of the profits are made in the most least taxed country. That is very hard to do with brick and mortar shops. They typically pay their Taxes where they operate, and as such contribute to the fiscus of their host government.
A second problem is that shopping centres normally have at least one, sometimes more anchor tenants. They might be a big grocery shop, pharmacy, hardware store or department store (although they are going our of fashion fast). The idea is that those well-known shops draw a lot of customers, who need to do their regular shopping there. The small shops surrounding the anchor tenant are line shops and might be anything from mom-and-pop shops to boutique fashion stores, bookstores, delis, food outlets or hobby shops. These are small businesses, owned by an individual, families or small companies. They rely on the foot traffic going past their shopfront. If the big anchor tenants close because they face unprecedented pressure from big online retailers, the small line shops would surely not survive. The evidence can be seen in the USA which is littered by abandoned shopping centres.
The third point is more philosophical. We, the human race are social creatures. We crave human interaction. Solitude leads to destitute. While it is easier to order your groceries from the comfort of your own home, it takes away one more crucial point of human interaction. We also forgo the subtle knowledge we get from talking to our local butcher about the best cuts, or from the advice we get at our local DIY store. We would not act on the recommendations of the in-store beautician, but rather on computer or AI generated suggestions.
Not only do brick and mortar shop employ more people from our community, spend more Taxes in our community but they serve as meeting points, places where we exchange ideas and do what we need to do most – interact with other people. Those are big costs not included in online purchases.