Could filling your iPod destroy the economic recovery?
It may sound like hyperbole — that downloading the latest Jay-Z song could empty government coffers, end careers and stall infrastructure improvements — but it represents a trend that has cities and businesses uneasy.
As consumer spending begins to bounce back, Internet transactions are increasing, albeit modestly, as a percent of overall sales. This hits disproportionately in certain products — books, electronics, music — but every retailers sees at least some migration. While this can be good for the bottom line, it isn’t necessarily good for the average worker. Online sales mean fewer employees and fewer physical storefronts. That means falling salaries and rents, decreased construction, lower payroll taxes — not to mention sales taxes — and less of that word Congress loves these days, “stimulus” and more talk of the feared “Jobless Recovery” that could cost them their seats.
We spent most of the last century transitioning from a manufacturing economy to a service economy, and places like Detroit and Bethlehem bear the scars. Might the wreckage of the auto and steel industries foreshadow the same fate for sales clerks on Fifth Avenue?
If so, what’s next?
GOODBYE SALES TAX
The most immediate impact in this economic revolution is in sales-tax revenue — unless New York has anything to say about it.
The state’s taxation department decided a couple of years ago that Amazon.com owed it sales tax because it had affiliates inside the state. In May 2008, Amazon sued the state; the case was dismissed, but the online retailer has appealed.
In the meantime, Amazon.com has closed its affiliates. But if the dismissal stands, Amazon owes New York potentially tens of millions of dollars.
If other states follow New York’s lead, and win, Amazon could find itself boxed in.
This isn’t a fight over nickels and dimes. A University of Tennessee study, released this April, said states could lose $56 billion in sales tax revenue nationwide from 2006-12 if Internet retailers remain immune.
Considering that states combined are $74 billion behind in upcoming budget projections, according to the Center on Budget and Policy Priorities, losing more tax revenue could force more hard choices or shift the tax burden elsewhere.
That’s not to say California’s insolvency crisis gets a lot better if everybody there invades the mall and buys some Ray-Bans at full retail price, but ever penny counts as cities and counties face escalating costs for areas such as pensions and debt.
“Governments have always operated on the premise that sales tax would always be this ever-expanding pot,” says Steven Titch, policy analyst at the Reason Foundation. “It means municipalities are going to have to live within limits.”
Titch has seen firsthand the lure — and consequence — of changing shopping habits.
“When I bought my flat screen, I did all my research online and bought it for less,” he says. “A decade ago, ‘shopping around’ meant driving around to stores and taking a day or more. Now we do it in an hour and read the reviews to know we’ve made the best choice.
“I could have gone to Best Buy and tried to get them to match the lowest price,” he adds, but didn’t because it was much easier to get the big purchase shipped free to his house in Sugarland, Texas.
“At the end of the day there’s going to be a considerable amount of sales tax dollars lost to online sales, and it’s going to have an impact on municipal revenue.”
GOODBYE SALESPEOPLE
Titch’s television purchase was unstimulating (at least economically) in other ways as well. More money was spent on shipping than salespeople; the fancy term is disintermediation, cutting out the middle guy.
What’s overlooked is that the middle guy gets paid, gets health benefits, pays taxes and also buys stuff; now his or her sales “job” is being handled by computer servers in an unmarked warehouse in Iowa that need only air conditioning to keep selling around the clock.
Of course, online shopping isn’t about to completely gut malls of stores and end retail sales as we know it. In most retail categories online top out at 10% of sales; government data tracked by Bloomberg News shows all E-commerce — about $32 billion a quarter — is just over 3% of total US retail sales.
But online sales are growing faster than traditional sales (up more than 20% since 2007) as millennials — who seem surgically attached to iPhones, laptops and other gadgets — start to sew their spending oats.
And everybody’s still doing more online: A Burst Media study shows 85% of shoppers will buy online this upcoming holiday season, and 27% of those shoppers will spend more online that last year as the shift to online buying accelerates.
Top retail analyst Michael Exstein of Credit Suisse told a retail forecasting convention last month in Dallas that brick and mortar store growth likely needs to stop and wonders why a serious culling of weaker stores – despite a rash of retailer liquidations during the recession — isn’t grabbing hold because the nation is overbuilt with retail square footage, now more than ever.
“It’s very odd that we seem to have stopped closing stores in this country even though business is so awful,” Exstein told the Dallas Morning News.
Online will continue stealing from traditional retail, and that means fewer retail jobs. The latest government employment data suggests the country has just under 15 million retail-related jobs, and that the category — likely owing to slowed consumer spending — has lost tens of thousands of jobs in the past year.
It could affect younger workers even more to have fewer openings in soft retail goods stores such as clothing. Being clerks and sales associates are often teens’ first taste of the professional world, if not an easy way to get employee discounts on gear they like.
How many of those brick and mortar retail jobs are gone because customers don’t come to the store isn’t clear, but it’s a number likely to grow.
“Look at Blockbuster video,” said Titch, noting the company said it would close 10% of its stores in an attempt to save a business model many think is permanently broken. “There’s always going to be an element in America that enjoys shopping for goods in person, but there’s going to be a measurable impact on the number of stores out there as we shift more to the computer.”
Retail giants such as Tower Records have already been put deep into the ground as retail commodities that are easily digitized — including this newspaper — force painful restructuring for those who sell them.
First music, news and travel and now books getting Kindle-ized and movies blasted through broadband pipes for on-demand viewing are just some of the examples of viable brick and mortar retail models getting some Death Star treatment. Then there are industries such as banking, which can be easily done with a computer and flat mail, but branches keep erupting around the country as banks still need to sell customers in person in new investments or lower mortgages.
All these trends add up to fewer physical stores. Fewer stores could mean not only less sales tax for cities and counties, but also less property tax as commercial developments lose their luster and could possible have lower taxable values, futurists predict.
Combine a diminished commercial real estate market with the steep drop in residential property values, and governments that depend heavily on property tax are facing years of lower returns, difficult choices and very likely higher property tax rates for owners — perhaps even higher income tax rates to make up the difference, or in struggling states such as Florida, maybe even the introduction of an income tax because of weakness in sales and property tax bases.
The graveyard of failed retailers reached overflow status in the past 18 months as names such as Circuit City, Linens ‘n Things and KB Toys all failed and liquidated. Some would say, hey, that’s capitalism and that the “victors” in each of those retail failures — Best Buy, Bed Bath & Beyond and Toys R Us — will grow stronger having slain its category foe. Or that just means they’re the next ones on the block.
GOODBYE PROFITS
So a company gets rid of its store and goes completely online. Great, you say. More efficient for them, easier for you, even better for the environment.
From a CEO’s perspective, cutting from the payroll may seem like a win, but they’re also going to lose on the bottom line. Consider how the Internet has improved consumers’ ability to price virtually anything.
Buyers today have something close to “perfect information” when it comes to pricing airline tickets, cars and other big-ticket items, all courtesy of online shopping. That is putting pressure on all areas of retail both in profit margins, and without profits, there are no jobs.
Take travel. Airlines crowed to analysts when they opening a cheap new distribution channel in the late 1990s and put their fares online and starting selling through Internet travel agencies.
Carriers avoided paying high travel agent commissions and cut their own telephone reservations staff, saving quite literally billions. The cost of selling a ticket fell from nearly $10 to pennies.
But the other effect was that airlines’ complicated pricing schemes become nearly transparent. Fliers can now outsmart the airlines at their own pricing game by figuring out quickly how to buy the cheapest fares and comparison shop among low-fare alternatives. New fare advice sites even use airlines’ own inventory to predict whether fares are falling or rising, allowing travelers to buy with confidence.
The latest trend for online travel shopping is that consumers are shopping “too much,” according to executives at travel companies such as Sabre Holdings Group, and it’s costing airlines and online travel agencies more to keep adding expensive servers to handle volumes of shoppers who spend hours hunting for $5 off that New York to Los Angeles flight before buying.
Modern car buying offers more grim outlooks both for automaker profitability and future dealership sales employment. When this writer bought a car last month, I didn’t just know the invoice price my dealer paid but the true “dealer cost” of the vehicle that takes away all the previously unseen pricing incentives (“holdback”, “trunk money” and other unseen bonus dollars) that let dealers make plenty of money even if a new car gets sold at “invoice.”
Why are more car dealers offering “invoice pricing”? Because they can make money at invoice.
Sites such as truedelta.com show nearly real-time sales data to help buyers target precisely how much cars are selling for at that moment, defeating any counterargument car dealer sales managers may offer in terms of resisting a low price.
I bought my car at nearly $2,000 under invoice because the dealer had already marked it down to its “Internet price” — and I bought it through their non-commissioned “internet sales manager” who makes a living, but probably doesn’t maximize commission income like his traditional salesman predecessor might.
Selling cars is to men a little like what waitressing has been for women; a job that’s gettable nearly anywhere if they have basic people skills. Now the Internet has drilled a hole in the commission structure of auto sales, creating an even more cutthroat environment at dealers where the only way for many salesmen and women to make a decent living is through steep volume. That’s the kind of sales experience that pushes more buyers online.
And finally, look at real estate commissions, where you can see real fear in the eyes of Realtor groups that are doing everything in their power to legislate fences around their precious Multiple Listing Services, data that’s digital today but behind a commissioned wall for buyers and sellers. Home sellers have quickly tired of paying 6% to real estate agents who earn whopper checks for not even lifting anything heavy; instead they’re buying MLS access for a few hundred bucks and either using a discount agent or selling properties themselves.
Home buyers come armed and dangerous to the bargaining table with Zillow.com-backed comparison pricing and tax assessment databases provided by governments. While it’s not quite “perfect information” it’s so much more than before that it has to be a driver for lower home prices.
HELLO UNCERTAINTY
By this point, you’re probably nodding your head in glee. Let’s stick it to the airlines, and the realtors and the car dealerships.
But how many of us will have money to buy anything from them?
If a raft of traditional service- and retail-related careers evaporate as online commerce rises, what replaces those jobs? Health care workers to care for aging Boomers and tech-related careers are touted as the fastest-growing occupations. That’s clearly not a path for everybody, though, when science education remains weak and those careers almost universally require college degrees, something only a quarter of the population has obtained.
The US has evolved out of agrarian and now industrial phases to get to a service-based economy fueled by consumerism, all to the golf claps of economists who see the transition as enlightened. If rampant spending won’t support cities, malls and employment like before, we have to rethink the basic notions of infrastructure and growth.
Perhaps the millennials will show us a new way. Despite their most notable characteristic — a fondness for not working hard — the next generation of workers has all the technical savvy to be nimble in work and write their own rules. They’ll find some way to earn and produce that doesn’t involve Forever 21.
Meanwhile, the rise of online commerce may have some positive effects — culling generic retailers, emptying weak malls and perhaps reining in government spending.
It means better deals today for all; tomorrow it might not mean better jobs for many.
Eric Torbenson is a business writer in Dallas.