A lot of companies have been affected by the decline of brick-and-mortar retail in favor of e-commerce over the past decade. According to the Census Bureau, nearly 10% of all retail sales are now made online, and the trend doesn't seem to be slowing down. The list of casualties includes Toys R Us, JC Penney, Sears, and many others. But the impact goes a lot deeper than the physical stores themselves.
Consumer-products manufacturers like 3M (MMM -0.10%), PepsiCo (PEP 1.18%), Gillette, Sony (SONY -1.68%), Duracell, and many others are feeling the impact of the lost power of physical retailers. In a lot of ways, they were built on the back of a dying business model.
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Shelf space is no longer the key in retail
Walk through any big-box department store retailer and you'll see a lot of the same companies with shelf space. The brands of Colgate (CL 0.67%), PepsiCo, Sony, Fisher-Price, and Procter & Gamble (PG 0.65%) proliferate in big-box stores, leveraging a leadership position in one area into a new product or acquisition in another. The more they offer, the more leverage they have to get shelf space with retailers.
PepsiCo's synergies with Frito-Lay are a great example of how this dynamic works. Pepsi's beverages command a large percentage of shelf space in beverages, and Frito-Lay snacks command the snack aisle. Pepsi can leverage that space into new products that take up shelf space and limit the opportunity for upstarts to gain market share.
The internet and online retail changed this dynamic. Shelf space is no longer the limiting factor, and new, innovative products can grow unfettered by retailers artificially limiting their potential. That changes the power of retailers and the large companies that rely on their shelf space.
Changing the rules of retail
Do a quick search of common products on Amazon.com and you see this change in retail happening before our eyes. I searched "blue tape," "55-inch TV," and "white T-shirt," and brands like Blue Summit Supplies, Stikk, Sceptre, TCL, Sansui, Gildan, and French Toast appeared alongside -- and often before -- better-known brands like 3M's Blue Painter's Tape, Sony, and Fruit of the Loom. The lesser-known brands were often lower priced than these big brands and were just as convenient to order.
In traditional retail, big brands have power because of their scale and shelf space, but the playing field online is more level. And that has hurt a lot of these large companies.
Retail's change hits more than retailers
If your business is built on the power of shelf space, it makes sense that business would suffer as brick-and-mortar retail falters. That's exactly what we've seen with some of the biggest consumer goods companies in the world. 3M, P&G, PepsiCo, Kimberly-Clark, and Colgate-Palmolive are a good representative sample of large companies that have seen revenue stagnate or drop over the past five years as retail has changed.
MMM Revenue (TTM) data by YCharts
For these big brands, I don't see the dynamic changing anytime soon. Small, niche brands will continue to pop up and take their little slice of the market online, whether that's through their own stores or through a big online retailer like Amazon.
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Understanding your path to market
Investing today isn't just about understanding what a company makes and what its financials look like now. It's about understanding what the distribution model looks like and how changes in that model may change business.
It may not seem as if big brands like Procter & Gamble, Pepsi, or 3M would be affected by a changing retail landscape, but they are. Their stagnant results are no coincidence in a world where almost anyone can create a product and distribution model to compete with the biggest companies in the world.
