This is how the the era of traditional retailers will end

Amazon just had its greatest quarter ever. Its revenue hit $29.1 billion versus the projected $27.99 billion, citing a 28 percent year-on-year growth. More importantly, it marked Amazon’s fourth consecutive profitable quarter, reporting $513 million in net income, the highest ever in the company’s history.

As a result, Amazon’s stock price peaked at a record $767.74. Over the last two years, Amazon’s stock has more than doubled, while those of its traditional retail peers like Macy’s have remained flat or even declined. And this is just the beginning of Amazon’s growing success and decay of the traditional retail model.

A colleague asked me a few weeks ago which stocks I would invest in. “One, Tesla, and two, Amazon,” is what I answered. Little did I know he had regrettably sold his Amazon shares a few years back, expecting it to decrease in value.

Why would someone want to invest in Amazon stock at such a peak price? Very simple. Amazon’s dominance and stock value will only keep increasing with the ongoing global structural shift from offline retail towards ecommerce. Ecommerce penetration in the US today is “only” 7.7%.

Can you imagine Amazon’s stock price when this number hits 50 percent? Never mind economic recessions impacting people’s purchasing power, America’s consumers – Amazon’s home field audience – will keep on buying, even if that means borrowing more money from the Chinese.

10-year returns for major retailers in US. Amazon stock beat the Nasdaq index by almost 20x over the last 10 years whereas traditional retailers’ stock prices have remained flat or declined. $1,000 invested in Amazon stock in 2006 would have been valued $26,993 today (unadjusted for inflation). Source: Google Finance, August 2016

Short-term, traditional metrics impede long-term strategic vision for traditional retailers

When speaking to traditional retailers across Southeast Asia about doing ecommerce, the question that always comes up in one way or another is, “What’s the cost of sales (CoS) for investing into and growing my ecommerce business?” In ecommerce and the tech space, many of us are familiar with using metrics like customer acquisition cost (CAC), customer lifetime value (CLV), and return on investment (ROI).

However, the metric that resonates most with offline retailers is cost of sales, which is essentially marketing investment divided by revenues. It’s the percentage of revenue that traditional retailers allocate for marketing spend in their annual budgeting.

CoS for traditional retailers often hovers around the 5 percent mark, driven by legacy organic offline traffic and brand awareness.

For ecommerce, especially during the first few years and depending on how aggressively the business acquires customers to grab market share, this number can be somewhere between 50-150 percent. Obviously, this is much higher than the number traditional retailers are accustomed to and, as a result, is often a major deal breaker for offline businesses thinking of moving into ecommerce.

Fortunately, CoS goes down when the number of SKUs online increase, leading to more organic traffic, higher basket size, and more frequent repeat purchases.

In the long run, as ecommerce businesses are able to build up their customer database and find multiple ways to monetize it (more on this later), CoS will decrease and potentially be comparable to comfortable offline retail channel values.

aCommerce internal data shows an example of a multi-category online retailer in Thailand starting at approximately 25 percent CoS and trending down to 5-10 percent at the end of year one and 5-8 percent by end of year two.

Unfortunately, most traditional retailers in Southeast Asia fail to adopt a long-term vision and never make the initial jump into ecommerce.

Controlling the last-mile: It isn’t about selling more physical products, it’s about who owns the customer

Pure-play, Internet-first retailers are bringing their game to traditional offline retailers

The role of ecommerce for traditional retailers