Memo: On J-Curves and Agglomeration

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The recent shift to online retail has been reactionary. The next phase of eCommerce growth will be more intentional. But first, the bottom of the J-curve.

After closing to the public, many suburban malls and strip centers are in the process of reopening. Physical travel was inconvenient but the roads aren’t as empty as they had been in March or April. Social distance has been a public health issue. And yet, in many cities across the United States: bars, restaurants, and parks are reminiscent of pre-COVID behaviors. Customs are returning and familiar practices will follow suit.

Density precedes agglomeration, which influences consumer behaviors. Agglomeration economies are the benefits that come when firms and people locate near one another together in cities and industrial clusters. [1] Most 20th century retail developmental strategy was built around this concept.

As density returns to shopping malls, strip centers, and urban boulevards, business will follow. Multipurpose shopping, the purchase of products from more than one product variety or cluster on one shopping trip [2], will follow suit and a number of businesses will begin the work of salvaging their fiscal years. The Director of Adobe Digital Insights, Taylor Schreiner recently provided timely perspective on signals that may have greater meaning as the year progresses. He explains to TechCrunch:

As online is absorbing the offline retail economy, some inflation is being observed for the first time in years, especially in categories that have consistently experienced online deflation, such as electronics. [3]

Attractiveness of Retail Agglomeration Based on Product Type: An Experimental Study

6 Pages Posted: 21 Jun 2017 Last revised: 10 Mar 2018 Date Written: June 19, 2017 Agglomeration has been defined as, the presence of a set of firms in a topographically defined unit, for example, in a building, on the street lane or block (Knoben & Oerlemans, 2006).

Cities may physically change or they may not. But the agglomeration that should concern city managers and politicians is no longer representative in physical spaces. The shift to online education, remote work, gaming, live conferencing, and leisure is a new form of agglomeration. A leading indicator, consumers have contributed to the first period of inflation for electronic products in over a decade. Over quarantine, these purchases provided gateways to work, socializing, and play. But if these behaviors become more permanent, cities will struggle to account for it. I’ll explain.

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The United States is over-retailed. With ten times the square footage (per capita) of China, a growing eCommerce economy could be catastrophic in the short term.  Online retail’s growth will exacerbate existing issues with commercial real estate vacancies and revenue collection. A $5.27 trillion dollar market, retail is nearly one-quarter of America’s gross domestic product. Bank of America’s credit card data and others have placed eCommerce as 20-30% of a down retail market (-16% in April).

The projected number of retail employees in the United States was trending downwards before the pandemic began. The graph reflects a slow and steady decline in a retail format that is heavily reliant on hourly wage workers and duplicitous storefronts. Traditional retail employment and eCommerce adoption maintain an inverse relationship.

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10 years vs. 8 weeks

As local economies reopen, eCommerce penetration will fall as the aggregate retail economy begins to regain its footing. But unemployment figures won’t ever look like they did in January or February. In the next 24 months, employment is unlikely to return to the record low 3.5% that existed prior to the global pandemic [4]. Consider this 2016 report by Jönköping University’s Hanna Kantola.

Over the last 100 years, the retail industry has undergone radical changes. At the beginning of the 20th century, goods were still supplied over-the-counter at small, independent local retailers who had a limited amount of product variety. By the end of that same century, we had moved to a highly productive and efficient retail industry offering self-scanning and an overwhelming range of products. Retail firms have also grown at an exceptional speed and are today largely composed of huge international corporations. At the same time, consumers have become more aware and more mobile, creating demand for specialized goods and services from retail clusters in locations easily accessed by car. [5]

The online retail industry will have a dual responsibility that it may be unequipped to address. Digital retailers are tasked with building and powering the infrastructure that will become the foundation of the next 50 years. This, while also addressing a fracturing job market. Walmart, Target, Instacart, and Amazon have collectively hired hundreds of thousands since February but that number will never be in the millions. This leaves a hole in the market. Where will America’s millions of retail employees work next?

[Steve] Jobs said in 1995: “People are going to stop going to a lot of stores. And they’re going to buy stuff over the web.” This is beginning to reflect in public and private markets. What happens when we stop driving to stores? What happens when shopping centers no longer have sufficient demand? What happens when advancements in last-mile delivery becomes carbon negative? This is happening now. [6, 2PM: Mobility Collision Course]

Agglomeration is now digital. Consider Slack, Zoom, Instacart, Amazon, the shift to working from home and the shift to distance learning. Even in the peak summer months, this will reflect in in-store foot traffic and brick and mortar sales volume. With reduced occupancy, tempered lines, health restrictions, and appointment-only shopping: the new peak shopping hour may not need the workforce that it once had. And this is how the problem may become political.

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2011: “Software is eating the world.” 2021: Software is the world.

It’s an election year and with that comes the consequences of near-sighted decision making. The summer will be a tenuous period for retail. Three months will determine whether or not we revert back to the belief that our retail economy will function the way that it once had. To ignore these would be to ignore the early markers of digital change. While commercial real estate adjusts to a new bottom, cities will change. But agglomeration is now digital and that’s where the next growth will be seen. With fewer college students filling into the halls of state schools, fewer workers driving to their workplaces, and with “third places” (churches, libraries, social clubs) digitizing [8] – retail will follow digital foot traffic. It’s already begun to do so.

The Tipping Point

Think of our institutions as infrastructure. Founded in 1775 by the Second Continental Congress, the Postal Service was born to help Americans correspond, exchange, and deliver. The service would later be enshrined in the first article of the Constitution. It’s the foundation of hundreds of years of communication, a freedom of the press, and a burgeoning system of networked commerce that has powered everything from 19th century trade, the rise of SEARS catalogue, and late-stage eCommerce.

A considerable barrier to online retail penetration sustaining at its current rates may be found in the government intervention against it. Amazon is under constant antitrust scrutiny. As are Google and Facebook. And now the United States Postal Service is on the brink of disruption. The agency’s revenue has plummeted over the last few months and its fate is being decided in Congress.

The USPS is a key component of the eCommerce economy. Packages are just 5% of its shipping volume but eCommerce accounts for nearly 30% of the agency’s revenue. Partnerships with vendors like Amazon (or providers like FedEx and UPS) provide a majority of its package volume but small businesses and direct-to-consumer brands rely on USPS’ pricing. Raising costs on retailers may lead to more attrition. A Washington Post report explains the context in clear terms: 

Trump and Treasury Secretary Steven Mnuchin have sought to attach terms to a $10 billion emergency loan to the USPS that would allow the administration to dictate package prices, review and alter bulk-discount contracts known as negotiated service agreements (NSAs), appoint the next postmaster general, and direct negotiations with labor unions. [9]

By raising prices to combat Amazon’s growing influence over the economy, disrupting the postal economy is no different than digging up paved roads before a period of heightened freight transit. For weeks: eCommerce operators, founders, retail executives, and agency directors have marveled at online retail’s surprising performance. These same business leaders anticipate the slowdown that the summer brings. But without an aligning of business and political incentives before August, online retail may not reach the heights that many analysts suspect it will. And with it harder to envision long-term prospects for many traditional retailers, we will need a strong eCommerce economy by them.

We are approaching a particularly divisive moment for the industry. Do we accelerate the J-curve and prepare for the fallout in commercial real estate and the jobs sector? The early indication is that the eCommerce industry’s greatest barrier to mass adoption will be its most formidable. Tolerating the fallout doesn’t appear to be the playbook.

With the potential of higher shipping costs and increased State taxes on retailers, the demand for traditional retailers may begin to rise to the normal that existed before the pandemic. But it will never reach that zenith. An election year effort to reinvigorate our retail economy may win hearts. But it will fall short of its expectation. America is shifting toward an eCommerce economy as retail analysts anticipate another 100,000 stores closing by 2025. The J-curve will happen for eCommerce; the leading indicators have made that clear. The new agglomeration isn’t within a trendy city or neighborhood, it’s on the internet. And retail will be too.

Report by Web Smith | Edited by Hilary Milnes | About 2PM

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