Beyond Amazon Prime Day: 4 ways e-commerce has shaken up the retail industry over the past 5 years

Key Points
  • Amazon Prime Day has become a symbol of how e-commerce is transforming customers' habits, driving sales and reshaping the entire retail industry.
  • E-commerce has steadily grown and become a larger part of overall retail sales, but has taken a lasting leap forward during the pandemic, said Andrew Lipsman, principal analyst at eMarketer.
  • With more sales online, retailers have to come up with new ways to attract customers to stores and ways to expand space that's devoted to fulfillment.

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Amazon held its first-ever e-commerce holiday — Prime Day — in July 2015.

Over the past five years, the annual online shopping event has become a symbol of how e-commerce is transforming customers' habits, driving sales and reshaping the entire retail industry. Even before the e-commerce giant dreamed up the event, it was already a powerful force that's pushed rivals to let go of a nearly singular focus on bricks-and-mortar and cater to consumers who want to go on a shopping spree from their couch.

Prime Day kicked off Tuesday. It's spanning 48 hours and reaching additional countries than in past years. Analysts expect it will bring in a record $9.91 billion in sales globally this year, up 43% from a year earlier, according to eMarketer estimates.

Sales were just $1.5 billion during Prime Day 2016, the earliest year of eMarketer estimates. That year, the event lasted only 24 hours and reached customers in nine countries.

The event, pushed to October this year because of the coronavirus pandemic, has inspired retailers including Walmart, Target, Kohl's and J.C. Penney to hold their own online deal days to compete.

With its dominance on the web and massive base of Prime members, Amazon has become an existential threat for companies — adapt, invest in websites and warehouses, or risk falling behind.

"We know that digital is the new normal. The consumer today is digitally grounded and simply will not revert back," Nike CEO John Donahoe told analysts last month.

Here are four ways e-commerce has shaken up the retail industry in the past five years, shown in charts.

A growing piece of the pie

Each year, e-commerce has steadily grown and become a larger part of overall retail sales. With the pandemic, that upward trajectory has taken a lasting leap forward as customers look for safer ways to shop, said Andrew Lipsman, principal analyst at eMarketer.

Digital sales are expected to account for 14.4% of all U.S. retail spending this year, and 19.2% by 2024, according to eMarketer. Online sales are expected to total $794.50 billion in 2020, representing year-over-year growth of 32.4%, the firm said, compared with a pre-pandemic forecast for an increase of just 18%.

"We've seen e-commerce accelerate in ways that didn't seem possible last spring, given the extent of the economic crisis," Lipsman said in a news release.

As online sales grow, there is a tradeoff. Shipping and handling costs can eat into a retailer's profits. For example, in-store grocery sales tend to have an operating margin of 2% to 4%, according to research by Bain & Co. That drops to -5% for a grocer that picks from a store and has a customer retrieve the order through click-and-collect. It drops even further to -15%, if a grocer picks from a store and delivers to the customers' home. Other types of retailers may have more wiggle room, and fatter profit margins, but e-commerce tends to pressue profits across categories.

Retailers have had new reason to explore approaches that boost efficiency. They're emphasizing curbside pickup, turning stores into mini fulfillment centers and experimenting with new technology, such as robotics.

Changing fortunes

Meantime, the strongest appear to only be getting stronger in retail, as online sales balloon.

The top 10 e-commerce players are expected to account for 63.2% of all digital sales in the U.S. this year, up from 57.9% in 2019, according to eMarketer data.

Within that, Amazon's share is forecast to grow to 39%, placing it far ahead of everyone else on the list. The big-box chain Walmart is expected to jump past eBay to the No. 2 spot, with 5.8% of online share. And the department store chain Macy's will fall off the top 10 list, to be replaced by the grocer Kroger, according to eMarketer estimates.

Shrinking brick-and-mortar

As online shopping becomes easier, cheaper and faster than in previous years, retailers have to make a stronger case to customers. Why should shoppers head to the store rather than have a package delivered?

The rise of e-commerce has forced retailers to fundamentally rethink their real estate, Lipsman said. Instead of using stores as a place to stash inventory, retailers have had to pare down their physical footprints and transform their stores into destinations, he said.

"We're going through a reimagination of the retail store experience," he said. "It is shifting from inventory-led to experience-led." 

He pointed to grocers' embrace of more colorful and attractive layouts, prepared food displays and samples (though some of these examples have disappeared temporarily during the pandemic).

"We're over-stored in terms of square footage," Lipsman said. "It's just too much, and so we're going through a reckoning and a natural downsizing and who's getting squeezed here is sort of the traditional, the 'boring middle' of retail."

Net store openings grew from 2012 to 2014, as many chains expanded coming out of the last recession. A massive pruning, however, began in 2017.

And though this year isn't over just yet, closures are already on pace to break a record. Year-to-date in 2020, 8,007 store closures have been announced by retailers, such as J.C. Penney, Gap, Pier 1 Imports, Century 21 and Bed Bath & Beyond, according to a tracking by Coresight Research.

Warehouse demand is booming

Retailers are bulking up investments in a different kind of real estate: Warehouse spaces and fulfillment centers where employees pack and ship customers' online orders.

As store closures mount, the amount of warehouse space in the U.S. has skyrocketed, according to a tracking by the commercial real estate services firm CBRE, with industrial square footage up 9.4% since 2014. In some markets, supply isn't coming online quickly enough to meet the spike in demand. Companies are looking to get as close to customers as possible, opening so-called last mile hubs, to aid with same-day deliveries.

Dead malls are being converted into sprawling logistics hubs, as one way to repurpose vacant retail space situated near towns. In Memphis, Tennessee, a shuttered Sam's Club store is now home to a Sam's Club e-commerce fulfillment center

"Underperforming retail sites have become an ideal location for last-mile warehouse developers," said John Morris, head of retail and industrial for CBRE. "The disruption to the retail sector and the growth of e-commerce will continue to increase the viability and payback of retail-to-industrial property conversions."

And while e-commerce gains are largely fueling the heightened demand for warehouse space, it also stems from companies looking to move out of China, to simplify their supply chains and keep more inventory closer to home, Morris said. Warehouse rents continue to climb, too, he said, as the space is in hot demand.

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