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

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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Read/Post Comments (5) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On January 30, 2014, at 9:25 PM, yh88lee wrote:

    The reason that Amazon's margin sucks is that it is LESS efficient. It has been officially documented that Walmart pricing is about 20% cheaper than Amazon.

    Based on my personal experiences, almost all items that I want to buy is more expensive at Amazon. Amazon excels on offering a good price on those odd items that you would need like once in your lifetime. For example, a garage door repair kit, or a rare electronic part.

    Most people who shop at Amazon don't even bother doing comparison shop. Online and big doesn't mean that it's cheaper automatically.

    But I guess for the internet generation, who think they're richer by 20%, and can always afford paying more money to save their "precious" time (to facebook & twitter, I guess), Amazon is the best bet.

    The retail revolution has voted for time rather than money.

  • Report this Comment On January 30, 2014, at 9:50 PM, yh88lee wrote:

    I believe that gross margin squeeze must be due to selling Kindle at cost or below cost. As an example of item, I bought GOGO Squeeze in the store for $5.98 at Walmart (online price is more expensive at $6.48 :

    Amazon sells it for $39, 4-pack of 12.

    Assuming gross margin at Walmart is 5%, 4-pack would have cost $22.78 (or $5.98*4/1.05). Amazon should have a gross margin of 71% because it's 63% more expensive than Walmart.

    Based on Amazon's prices that I see, the low gross magin must have come from selling Kindle, and definitely not everyday items.

  • Report this Comment On January 31, 2014, at 8:08 PM, cmalek wrote:

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

    Until the next paradigm comes along. Beware of absolute statemets. They have a nasty tendency of making a fool (small f) out of the declarer.

    At one time the department store and the supermarket were the "Final Paradigms" then the Internet came along. Just because you and I cannot imagine/envision the next step, does not mean that it will not happen.

  • Report this Comment On February 01, 2014, at 3:15 PM, DukeMontrose wrote:

    As a value investor for 50+ years I'm astonished that my favorite Fools OMIT to mention the astronomic PER of AMAZON stock..

    Fancy words like "final paradigm" seem to mask/contradict everything I learned from Benj. Graham + Sir John Templeton.

    Then there is not even a hint about cash dividends.

    These insane valuations created by fashionista fast talkers are the reason we are in a bubble = see January's market action. Does anyone seriously believe, that is the end of the correction?

    Not as long as AMAZON (as per Yahoo Finance) has a 1000+ PER.

    Wish everyone good investing in this crisis of 2014

  • Report this Comment On February 02, 2014, at 1:56 PM, IndianaLarry wrote:

    Amazon competes on convenience, not price.

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John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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