The Evolution of Retail Is Complete; Amazon Is the Final Paradigm

The founding of exactly 20 years ago didn't mark the next step in the evolution of retail; it marked the final step.

Jan 30, 2014 at 7:00PM


The retail industry has nowhere to go from here.

It finished evolving two decades ago when Jeff Bezos, the founder and CEO of (NASDAQ:AMZN), introduced the final paradigm of shopping.

Any future changes, even those of seemingly remarkable consequence like the use of drones for same-day delivery, will be merely in form and not substance.

The future of retail is now; I hope you like what you see.

The downward march of gross margin
In the summer of 1989, a little-known bureaucrat in the U.S. State Department predicted that the end of the Cold War represented more than a diplomatic detente between nations.

To Francis Fukuyama, it marked the end of history:

What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government.

The claim was bold and controversial. And with the subsequent rise of China, one could argue that Fukuyama's foresight was dubious at best.

I nevertheless bring it up because the retail industry crossed a similar threshold in 1994 -- a mere five years after the fall of the Berlin Wall -- with the advent and proliferation of e-commerce.

You can structure the history of retail in any number of ways. You can follow it from the individual merchant of the early 1900s to the diversified department stores of today. You can organize it around the rise and fall of indoor shopping malls. You can use the waning ubiquity of customer service as a guide.

At the end of the day, however, there is one inviolable constant: the downward march of gross margin -- that is, the markup on merchandise.

When Sam Walton began his retail career, variety stores, which represented the prevailing model at the time, were accustomed to a 45% markup. With the introduction of discount stores like Wal-Mart, this dropped to 35% in the early 1960s and then to 22% three decades later.

And today, the best in the business -- namely, Costco -- has driven the figure to less than 11% by displacing all profit from selling goods with a tiny sliver of dues that it charges members. 

Can a brick-and-mortar store get them any lower? Probably, but the only avenue is likely to be through scale.

Amazon: The final frontier in retail
It's this dead end, in turn, that brings me to the question that inspired the present column: What are Amazon's gross margins and where, if anywhere, can retail go from here?

The answer to the first part of this question is, I'm sorry to say, unsatisfactory. Given Amazon's reticence when it comes to financial performance, we simply have no idea how big its markup is on physical wares.

What we can say with a greater degree of certainty, however, is that Bezos has pushed the envelope as far as it will go.

Since founding the company two decades ago, he's demonstrated an unprecedented willingness to forgo profit in favor of growth. Amazon has sold books below cost; is purportedly losing money on its stable of Kindle devices; and has a third-party retail platform that gives consumers access to a veritable universe of low-cost products.

On top of this, the proliferation of Amazon's high-margin services business -- namely, cloud computing -- gives investors every reason to believe that its retail margins on physical products will be pushed even further into the red as the company pursues Bezos' dream of becoming the "everything store."

The net result is that competing with Amazon simply isn't feasible. No amount of ingenuity is likely to change its model.

In short, the retail industry has reached the end of history.

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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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