At the 2015 Digital Life Design Conference, Scott Galloway, Professor of Marketing at NYU Stern, gave a brief talk on the business outlook of the most influential players in technology. His analysis of these companies highlights important trends and factors that will influence the business strategies of many other companies. At the beginning of the talk, he takes a look at Amazon. He predicts that the model of Amazon and other pure play ecommerce retailers may be unsustainable due to rising shipping expenses and decreasing access to cheap capital. “Stores are the new black in the world of ecommerce,” says Galloway. He believes that pure play retail is dying, and that ecommerce companies are either going to open brick and mortar stores to supplement their online sales, or they will go out of business. Galloway sites Warby Parker as an example of a previously pure play online retailer that has expanded into physical stores with a great deal of success; their sales per square foot is second to only Apple. He notes that rising shipping costs are putting pressure on online retailers to open stores. Amazon’s shipping costs have been increasing by 20 percent per year as the ecommerce market continues to push free shipping. It will be interesting to see how this affects the online retail giant as they are rumored to be in talks to develop a distribution center in Shakopee.
If more pure play online retailers begin to shift their focus to opening brick and mortar stores, that could have a big impact on commercial real estate. Usually when we talk about ecommerce in relation to commercial real estate it is a discussion around how the growth of ecommerce will lead to decreased demand for retail space. However, if Scott Galloway’s analysis is correct, it could have the opposite effect. Retail vacancy is already low in the Twin Cities, and landlords are increasing rental rates as tenants compete for space in prime urban areas. If pure play ecommerce companies shift their focus to opening physical stores, it will only increase the competition for space and lead to even higher rental rates.
As a Vice President with Colliers International | Minneapolis-St. Paul, Terese Reiling-Holden specializes in the retail market. We asked her which local submarkets could benefit the most from ecommerce retailers opening stores. She said, “’A’ trade areas that already boast high occupancy/low vacancy but draw from a very broad customer base. I would guess ecommerce retailers could add to their online options with a well-positioned location to not only supplement but support their online sales.”
This theory on the future of pure play ecommerce has implications for commercial real estate which are quite different from what is usually discussed in our industry when ecommerce is brought up. It will be interesting to see how the strategies of pure play retailers change in the next few years. Ultimately, it is expected that retailers will a need a presence both online and with physical stores in order to be successful (Learn more in this Colliers Insights post on Omni-Channel Retailing).
Amazon discussion: 1:52-7:05