3 Reasons To Avoid Retail Store Stocks

Almost every single inconvenience listed here is addressed by e-commerce. Shopping can be done right from the sofa, in your pajamas, 24/7, with no worries about parking, gas, or the person in front of you in line paying in pennies. Online retailers carry far more stock, both in quantity and variety, and if one retailer is out, going to another one requires very little effort.

For some time, the cost of this convenience was shipping, but even that is beginning to go away with nearly ubiquitous free shipping deals. Amazon has even used free shipping to build out a recurring revenue model in Amazon Prime, an impressive accomplishment in this space.

History has proven that a business model that makes accomplishing goals convenient for consumers is one that will win over time. It is absolutely clear that e-commerce accomplishes just that over the traditional physical retail model. It is the single biggest reason that "brick-and-mortar" retailers have struggled so mightily.

Physical Retail Is Expensive To Operate And Scale

Compared to a purely e-commerce operation, physical stores are pretty expensive to operate and even more expensive to build out a presence with.

Think of all the expenses every individual store has to deal with. There are facility costs, like rent and utilities. There are operating costs, like wall fixtures, shelving, flooring, displays, in-store advertising, check-out counters, etc., all of which must be updated and refreshed on a regular basis. They have to staff their stores with employees, which requires not only labor costs, but also search and training costs (which are important as retail has very high turnover).

Inventory management is also more difficult for physical retail stores than it is for e-commerce operations. Since there is limited space, management has to carefully decide the appropriate mix of merchandise for that particular store's clientele. Additionally, physical stores have to deal with things like "breakage" - a nice way of saying shoplifting, or the ruining of merchandise by employees or customers.

Each individual store can only service a fairly limited number of potential customers - usually no more than a 30 mile radius (often less). That means to address the maximum number of customers, a whole network of locations has to be built out, each one of them facing the expensive challenges outlined above.

This pales in comparison to the e-commerce model. Here, a handful of warehouses or distribution centers are built out that can service a much wider area (Walmart's service a 200 mile radius each). Employee costs are much lower, as many of these centers are largely automated. Warehouses don't need to look nice for customers. Inventory management is much more generalized, and breakage is less of a concern.

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Disclosure: Steve owns no stocks referenced here.

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