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Here are 3 simple reasons why traditional retailers are doomed

Here are 3 simple reasons why traditional retailers are doomed
Stock Market2 min read

Here's some not-so-shocking news: traditional department stores are still struggling to lift sales.

Sales in May fell 3.9% compared to the prior year, worsening from a 2.9% drop in April, Morgan Stanley said in a note Monday.

Paula Campbell Roberts and her team wrote that this proved "department store share losses are accelerating."

"We saw this in 1Q, as we estimate department stores lost ~$400M apparel market share, primarily to Amazon and the off-pricers," they wrote. "We do not expect this trend to abate."

And according to Christian Magoon, CEO of Amplify ETFs, there are three structural reasons why department stores are unlikely to catch up with their online-only counterparts soon.

Magoon in April launched the IBUY ETF, which tracks 44 global companies that get at least 70% of their revenues from online sales. The fund is a way to bet on online-only retailers, and its top holdings include, Grubhub and Amazon.

Of course, companies like Best Buy and Macy's also sell online, but Magoon sees 70% as the threshold of online-sales share needed to thrive on the web.

In a recent conversation with Business Insider, he shared the CliffsNotes version of why traditional retailers are underperforming their brick-and-mortar counterparts:

  • Labor costs are rising: Wage pressures are being felt everywhere, and talk about raising the minimum wage, which would greatly impact retail associates, is fervent on the campaign trail.

    More specifically, brick-and-mortar retailers need staff to provide in-person assistance to customers; that's one way they distinguish themselves from the online-only shops, Magoon said. And by all indications, their costs are going to continue rising.
  • Maintaining physical stores is also expensive: That's because traditional retailers need to craft an appealing customer experience for people who shop by foot.

    And a number of them have decided to spin off their real-estate assets for cash, or are under shareholder pressure to do so.
  • They don't have the flexibility to be unprofitable: This is specifically a point about Amazon, which has long trained shareholders to look past being profitable and take a longer-term view, Magoon said.

    "You can't ever think of somebody like Macy's being able to create their own cloud system or even spend that amount of money without a shareholder revolt," he said in reference to Amazon Web Services, now a key profit machine.

    "Legacy shareholder expectations on these companies are not allowing them to be as disruptive as what they really need to be in today's retail market."

Disclosure: Amazon CEO Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.

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