The Amazon Effect is a name that economists have given to the trend in which many brick-and-mortar stores are closing. To be honest, the brand owning companies are closing their primary retail stores in major shopping malls but continue to sell their products through factory outlet malls and their Websites. And those brand companies that have distribution deals with major retailers still benefit from those channels, although department store brands like Macy’s, JC Penney, and Sears are all struggling and closing hundreds of stores every year. The Sears story is especially heartbreaking because it looks like Sears CEO Eddie Lampert is dumping more and more money into the company in a “hedge bet” that could leave him as the failing company’s principal creditor: reaping him a windfall in real estate property.
The Sears story is not bad for everyone. Some older Sears properties are being reconditioned and put to new use. But for now the Sears legacy is a growing wasteland of empty retail space spreading across America’s malls. Even Walmart is cutting jobs and closing stores.
Market analysts have been saying for years that the US retail space is overbuilt. We just have too many shopping malls, too many discount department stores, and too many of everything. Consumers cannot support all these retailers and the brands they sell because consumers have less money to spend than they did 11 years ago. The Great Recession hurt the US economy in many ways, not least of which was by destroying millions of high-paying jobs that have never been replaced.
Yes, President Obama was proud of the 10.9 million or so jobs that were created during his administration, but those jobs pay far less than the jobs that were loss at the end of the Bush administration’s term. Although different economists use different data, they generally agree that most of the jobs created during the Obama years were not very good jobs. This contraction in consumer spending power is being felt throughout the retail sector and it will continue to contract as more people lose jobs. In fact, these are among the types of jobs that the Obama administration helped to create. The ailing economy is taking back ground that was recovered at great cost.
The Amazon Effect can be summed up thus: consumers turn to Amazon first to find lower prices on higher quality items before visiting their local retailers. The common perception among consumers, going back many decades, is that what you buy at the mall is overpriced. Retailers who depended on mall store sales are now in the bad position of having to slash prices to compete with Amazon, but they still have to pay high rents to the mall owners.
The Amazon Effect came about for several reasons. For one thing, many smaller sellers can use Amazon’s online marketplace to offer their own versions of products that consumers want. Amazon bears all the costs of operating a complex shopping Website so these small retailers don’t have to absorb those costs into their prices. And competition between Amazon retail partners ensures that they offer the best possible prices. Consumers are almost always assured of being able to find products for less on Amazon.
But there is a downside to Amazon: One of the dark secrets of the Amazon marketplace is that many counterfeit products have crept into the inventory. Consumers really have no way to distinguish between these fake products and the real high quality merchandise until they get the packages and open them up. Angry consumers can leave reviews and warnings on counterfeiters’ product pages but the fakers can just open new accounts and start over.
At least with the major retail stores you can be reasonably certain you are buying the brand you want. Those high prices are one sign that the quality is genuine. But consumers want brand value at counterfeit prices, and this is the other side of the Amazon Effect. You can’t have it both ways but shoppers are demanding exactly that.