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October 22, 2018 • Volume 27


Will the Sears.com bankruptcy leave money in the bag for another retailer?

Sears, the once mighty 135-year-old retailer that brought us Kenmore washers and Toughskin dungarees, has officially filed for Chapter 11 bankruptcy, with the intent of coming out of the process a leaner, more competitive operation. Another once-mighty brick and mortar retailer that entered Chapter 11 a year ago was Toys “R” Us. However, what was supposed to be a reorganization turned into a liquidation sale for the home of Geoffrey the Giraffe. For Sears to emerge from Chapter 11 will be no small task, after many years of constant restructurings, store closings, and brand sell-offs. 

In anticipation of the possibility that Sears may not emerge successfully from Chapter 11, competing retailers are undoubtedly hoping to pick up an inordinate share of shoppers’ dollars as they search for alternative shopping destinations.

In the brick and mortar world, this is a complex equation, as shoppers will seek palatable options that are conveniently drive-able. And there will undoubtedly be some shoppers that will shift those brick and mortar dollars to online because of the geographic ubiquity that e-commerce offers.

In the online landscape, though, it is a simpler equation, as competitive retailers are just a few keystrokes away. We thought that we would take on the depressing question of what Sears.com’s online shoppers would do if Sears.com was no longer an option.

Let’s talk “shop”

First, let’s look at the amount of wallet share to be gained. During the past 12 months (October 2017 to September 2018) Sears.com shoppers spent a bit more than $16 billion across all online retailers in the US. Collectively that group accounted for about 4 percent of US online retail spending.

Unfortunately for Sears’ competitors though, Sears.com’s share was a small piece of that $16 billion, 5.2 percent to be precise. So if Sears.com were to disappear today, its competitors would presumably have about $800 million in US online sales to carve up amongst themselves.  

Below, we show the results of an online wallet share analysis focusing on Sears.com shoppers.  For those unfamiliar, wallet share analysis looks at the total spend of a group of target shoppers – in this case we are focusing on those that made at least one purchase on Sears.com between October 2017 and September 2018 - and looking at their spend across all US online retailers during that time period.

The biggest surprise in this analysis is that Sears.com is such a small component of its shoppers’ wallets, only 5 percent. This tells us that there are few shoppers for whom Sears.com is their ‘go to’ retailer. They might buy a refrigerator, toaster, or dress, on occasion, but they are spreading their dollars generously [too generously, from Sears’ perspective] across Sears’ competitive set. 

Not surprisingly, Amazon is the retailer that stands to gain the most, given Amazon’s dominant online market share. If Sears.com customers simply spread their Sears.com spend evenly across the other online retailers that they are already buying from, Amazon would see an incremental $260 million or so in spending. Walmart, Best Buy, Home Depot, and Target would each pick up an incremental $20-$50 million in sales.

The $800 million that would presumably be up for grabs if Sears.com disappeared, might register as material if the overall e-commerce channel weren’t growing so quickly. But we expect that the US e-commerce channel will grow by $60-$80 billion over the next year, so that $800 million represents only about 1 percent of the growth equation for competing retailers.  

The natural cycle of retail creation and destruction continues in its brutal, efficient way. The once mighty Sears, Roebuck Corporation, which in its heyday unceremoniously killed the mom and pop retail model, and created the mail order infrastructure that paved the way for e-commerce, seems to be on the verge of collapse, barely making a ripple in the great retail lake it helped create.

Postal rates are on the rise; has Trump landed a blow on Mr. Bezos?

The United States Postal Service announced postal rate increases in 2019 that would affect most packages shipped by online retailers by between 9 and 12 percent. President Trump has been advocating such increases since shortly after taking office, in characteristically overt swipes at Amazon’s CEO [and, coincidentally, owner of the often Trump-critical Washington Post], Jeff Bezos.

Let’s unpack this a bit.

To begin, USPS is a significant shipper for Amazon. A rate increase would undoubtedly have a material impact on Amazon’s bottom line and that will undoubtedly give certain residents of 1600 Pennsylvania Avenue a measure of satisfaction.

But it’s not as simple as that. Anyone that hopes to give Mr. Bezos a comeuppance needs to be thinking about a three-dimensional chess board.

First, Jeff Bezos’ wealth is entirely driven by the value of Amazon stock. And he is far more concerned with that stock price 10 years from now than he is about today’s stock price.

Second, Amazon’s market capitalization is minimally impacted by the growth and profit margins of its retail business these days. Investors have been happy enough for years with a fast-growing retail business that essentially breaks even - particularly with the growth in Amazon Web Service’s cloud computing business and Amazon’s advertising business.  

Third, Amazon is in the process of obviating its need for the third party shipment services that USPS and other third-party shippers provide. Not only is Amazon leasing trucks and planes, and  building its own Uber-like network of individual 1099-workers to deliver packages the last mile. Amazon also announced that it’s starting its own direct competitor to the likes of the USPS, UPS, and FedEx - the clunkily named ‘Delivery Service Partners’, which encourages entrepreneurial types to lease delivery vans in order to deliver on behalf of Amazon. CNBC reports that by September 2018 Amazon had ordered around 20,000 delivery vans for this program.

Fourth, Amazon is just one e-commerce customer of the USPS. None of the others have the scale or resources to develop their own delivery networks. Amazon is the only one that does, with roughly 10 times the market share of its next nearest competitor.  

Finally, we have to assume that USPS competitors will see postal rate increases as an opportunity to raise prices in order to fund the expenses that explosive e-commerce growth has driven.

So, the net effect of a USPS rate increase looks like this: Amazon’s retail margins might shrink a bit in the short term [probably without suffering a dent in its stock price]. But with Amazon positioning itself as the only retailer potentially immune to such rate increases, this rate increase will likely widen Amazon’s lead over the rest of the retail field as competitors choke on the rate increases that come from their third party shipping partners. And delivery rates might create an opportunity for Amazon’s Delivery Service Partners to take share from these third party shippers. So, the net effect of the postal rate increase will most likely cement, not challenge, Amazon’s dominance of US e-commerce.

It seems that President Trump may have managed to checkmate himself on this one.  

About Ken

Ken Cassar is vice president, principal analyst at Rakuten Intelligence, where he looks at trends in the e-commerce industry armed with Rakuten Intelligence's robust set of online sales data.

Ken brings a rich online retail background to Rakuten Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.

Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Rakuten Intelligence's profile. He also has the appropriate jacket for every occasion.