The Dawning of the Amazon Effect

THE DAWNING OF AMAZON THE EFFECT

BY JASON PRINT, CFP®, CO-PRESIDENT & CEO | MAY 5, 2018

 

The Amazon Effect is a term created to describe the ongoing evolution and disruption of retail markets, due to an increase in e-commerce. As Amazon has grown, its effect over a vast array of products, and both physical and online retail is astounding. The term itself, “Amazon Effect,” is an acknowledgment of Amazon’s continuing domination of all facets of the retail environment.Amazon has come a long way since 1994 when it was just an online bookseller primarily competing against brick-and-mortar bookstores. They now control approximately 50% of total e-commerce sales in the U.S. and offer an endless number of products and services.

From grocery deliveries, original TV content, Amazon Web Services as well as about every product you can imagine from garbage disposals to coffins. Amazon has become such an integral part of our lives; it’s hard to imagine life without it.

Due to Amazon’s dominating presence, it’s difficult to find a part of the economy that does not feel its impact. Inflation, the increase in the price of goods and services and subsequent decrease in currency value, is not an exception to this.

Shopping for the best deal on Amazon is easier than ever, attracting the price conscious American consumer. How often have you opened up Amazon to do a quick price check on a product?

As prices for products and services remain low, inflation has remained in check, and we have not seen a significant increase in this specific sector of our economy.

Almost all retailers have been forced to compete with Amazon’s competitive pricing strategies, yielding mostly positive economic benefits, but it has not been without some casualties.

Many Mom-and-Pop retail stores have been forced to shut down their business, unable to compete with Amazon’s pricing and low overhead. The retail workforce has also taken a hit as the Amazon Effect slowly but surely eliminates general retail positions.

According to Forbes, traditional retail employs about 16.5 million Americans – nearly 10% of the entire workforce. An estimated 6.2 million jobs are in the product lines targeted by e-commerce.

Over the next five years, the imminent decline of brick-and-mortar stores will likely cause 26% of all retail-related jobs to disappear.

Many economists believe Amazon has become such an economic powerhouse that the lowering of prices has had a deflationary effect on the Consumer Price Index or CPI. The consumer goods category makes up about 35% of core CPI, which excludes food and energy.

This category accounts for the majority of the Amazon’s revenue. Many believe that Amazon’s impact on the consumer goods category reaches much further than the products it sells alone. Its presence has arguably changed the behavior of many large retailers, Wal-Mart, Macy’s, and Target- just to name a few, forcing these companies to lower prices, and up efficiency, to compete with Amazon for market share. To what extent has Amazon’s business model, caused other companies to reduce their prices? Has the consumer demand for lower-priced goods helped to limit inflation?

When the Federal Reserve lowered interest rates to zero a decade ago, most economists thought higher inflation was inevitable. When you add 4% unemployment to the equation, and strong economic growth over the last several years, economists are left befuddled by the lack of inflation. The Federal Reserve highlighted in its recent commentary that Core CPI is below the inflation target rate of 2%.

While the direct effect of Amazon is one part of the equation, the indirect effects are a bit more challenging to quantify. Many companies have started utilizing Amazon’s Web Services as a cloud management tool. This tool has enabled companies like Netflix, Adobe, Airbnb, McDonald’s and BMW to reduce technology costs. While this type of system is now a mainstream necessity to compete in today’s tech-savvy world, it’s just not cost-effective for companies to attempt to replicate.

Now that many small businesses can sell products on Amazon’s website and use Amazon’s fulfillment centers to manage the shipping, companies can keep their infrastructure costs low. Again, lowering costs for both small and large companies, which in many cases, are outside of the consumer goods sector.

With inflation not materializing as many anticipated, economists continue to study the influence of technology. The expectations are for the Federal Reserve to keep tightening, even if inflation remains relatively soft.