Saturday, March 5, 2011

The Return of the "Catalog" Retailer

The February employment numbers showed a growing private sector economy in every sector except retail.   Retail jobs dropped by 8,100.     Retail jobs can grow only to the extent that sales at brick and mortar outlets are growing. 

The decline in retail jobs reflects the shift from brick-and-mortar to online retail sales.  In December 2010, online-and catalog merchant sales recorded by the Bureau of the Census grew by 20% over 2009 while retail sales at brick and mortar focused retailed grew by 3.2% in the same period.   In February, 2011, American Banking and Market News reported that online retail sales grew by 13.2%, over three times the 3.8% the growth rate of retail sales in general.

The shift to on-line sales is most clearly evident at America's nationwide department stores including jcPenney's, Macy's, Sears, Target, and Walmart and large specialty retailers like American Apparel, Gap Stores, Best Buy, and Barnes and Noble.   Both Sears and jcPenney's used to be known for their large catalog divisions that no longer print the "big book" catalogs but now sell products for home delivery on-line. Sears and BestBuy allow customers to buy online for nearly immediate pick-up and both jc Penney's and Walmart help customers cut shipping costs through ship-to-store options.   Sears even runs an on-line marketplace that competes with the marketplaces of and eBay.

The growth of the on-line sales of traditional retailers is now significant enough that both jcPenney's and Macy's announced the growth of on-line sales in February at the same time they announced their monthly sales figures.  For jcPenney's  online sales grew by 11.8% which helped the store generate a total same store sales growth of 6.4%   Macy's generated a 30.9% growth in on-line sales which allowed total same-store sale growth to reach 5.8%.   For both stores, their recent results suggest that their on-line "catalogs" will drive their sales growth with brick-and-mortar outlets lagging behind.

For the economy, the shift to on-line retailing means a shift in jobs and economic activity away from brick and mortar retail outlets and businesses that create and support the consumer retail infrastructure to segments of the economy responsible for selling and delivering goods to consumers at home.   Rather than hiring more retail employees, jcPenney's and Macy's are going to have to hire more warehouse employees to pick and pack the items for on-line purchases.    Those jobs will likely be in distribution hubs like those that exist in central Pennsylvania that allow a company to ship to consumer within a day or two of the order and less will be in the communities where the brick and mortar outlets now are.   There will be a ripple effect in this shift in construction and real estate as the consumer retail infrastructure is rightsized and the on-line retail infrastructure grows. 

On-line sales give stores like Macy's and jc Penney's a broader geographic footprint than their retail outlets.   It allows items advertised on the Macy's Thanksgiving Day Parade to be sold in rural Nebraska where the nearest Macy's may be 100's of miles away and the nearest Walmart or Kmart may be well over 25 miles away.

In order for online retailing to grow the way that it has, retailers like Macy's and jcPenney's need a sound and reliable infrastructure for both delivering their products to consumers and means to advertise their on-line catalogs and they need one that reaches not only every household in metropolitan New York City, but one that can reach the most rural towns in the Great Plains or in Appalachia.    This is where the courier, express and postal industry comes in.  This industry, while primarily designed for business-to-business shipments, has adapted to the business-to-consumer market and has done it generally profitably. 

Profitability of parcel delivery requires that rates charged reflect differences in costs by shipment and by customer.   Delivering to households cost more for private sector carriers as many of these deliveries require multiple delivery attempts or involve only delivering a single item, so private sector carriers charge more.  Delivering to locations far from terminals to locations that are less densely populated also cost more as the time it takes to get to the delivery point is greater so charges by private sector carriers generally are higher to those points as well.     Private sector carriers have also expanded their use of the Postal Service for home deliveries of light weight items which reflects the primary business of the Postal Service, household delivery.  The joint private sector-Postal Service delivery service can allow private sector carriers to profitably sell the delivery of light weight parcel delivery services by purchasing Postal Service delivery at rates below their own operating costs.   Both jc Penney's and Macy's rely heavily on Postal Service delivery for items that one of the major private sector carriers pick-up from one of their warehouse.

The Postal Service has increasingly become a core part of the on-line retail delivery network as the on-line sales volume of light-weight, relatively low-value items like apparel and domestic goods have grown.  It must continue to remain a core part of that network for jcPenney's, Macy's and hundreds of other retailers to be able to growth their businesses.   For that to happen, the Postal Service's parcel delivery operation has to be profitable so that it will have the capital to invest in the infrastructure that will be needed to handle volumes that could grow at double-digit rates.   Profitability must apply to all parcel shipments regardless of class or customer and must include customers shipping single parcels.

Profitability also requires greater flexibility in pricing than now exists.   Most of the customers of private sector parcel carriers buy their services using contracts that are define discounts off of list rates based on the annual volume of business a customer does with the carrier.  Contracts exist for customers from those shipping just a few shipments per week to those spendiong tens of millions on parcel shipping. The discounts differ not only based on the total annual volume, but also total volume per shipment, and the distance that a particualr shipper is located from the carrier's distribution hubs.  Depending on the volume, carriers even negotiate significant discounts in rural and home delivery surcharges and may wave pick-up charges all together.  

The Postal Service needs to shift its pricing model to reflect private sector practice and allow it to price its parcels to reflect differences among its parcel-delivery customers as to     The sooner that obstacles to such practice could be eliminated the better for the future of the growth of on-line retailing.  


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