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What To Do When the Music Stops?

Why the Rise of On-Line Shopping is Far More Disruptive Than We Ever Imagined

Story by Guest Blogger Eugene McGrane
Senior Director, Cushman & Wakefield

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Consumer Patterns: Can Change as Subtly as Shifting Traffic

Major Retail Disruption
Retail is facing a major disruption – it is predicted by industry analysts that by the end of 2017 Amazon will be the world’s largest retailer. Amazon just reported its most profitable quarter ever.

For the first time since the days of the Sears and Roebuck catalogue, the largest retailer will generate the vast majority of its volume outside of a traditional brick and mortar setting. This is set to have a dramatic impact on consumer patterns, retail real estate and employment.

Retail Real Estate, however, will be just fine. The fundamentals behind retail Real Estate are sound. Location proximity to consumers and availability of parking will allow most high quality Real Estate to find a second life; either as consumer services, healthcare or as a residential redevelopment. The disruption will be painful but in only extreme cases will the functional obsolescence be fatal.

“ Consumer patterns will be difficult to quantify, as they can change as subtly as shifting traffic patterns, or as disruptively as municipal sales tax revenue shortfalls. We will have to get used to a very different world; both as city planners and as tax planners.”

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American Manufacturing : Steady Over the Last Twenty Years

The Coming Wave
The coming wave of underemployment isn’t where you would think it is. The current political rhetoric centers around how America doesn’t manufacture anymore and that because of globalization those jobs have been shipped overseas. This is a vast oversimplification and it denies us the most important parallel we could draw from the hollowing out of the middle class through the loss of well paying manufacturing jobs.

A direct refute of the premise of American manufacturing moving overseas is that American manufacturing has remained steady over the last twenty years, rising at a clip commensurate with the GDP per annum.

“ US manufacturing output is close to a record high, even when adjusted for inflation. The reason that sounds surprising is manufacturing jobs have been disappearing since the late 1980s, and now that number is just 12.3 million. Since 1989, manufacturing output has surged 69% while employment has fallen by 32% .”

 

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The Culprit: Technology
Despite the fact that we are making as much or more from a manufacturing standpoint, it isn’t blown smoke that we have lost those jobs. Technology has been the main culprit, not outsourcing. The solution for what to do with our society as we shift from a manufacturing economy to a service economy is still a question we haven’t answered.

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Technology: The Shift from a Manufacturing to a Service Economy

Automation – Competing With the Online Behemoth
The purpose of this article is to discuss what happens when most of the service economy becomes automated. The clearest example of this trend is Amazon. Amazon now employees 220,000 people and it is predicted to be the largest retailer in America by the end of 2017.

This is an important number because the other major Big Box Retailers, Walmart, Target and Home Depot employ 3,000,000 workers. Sadly, their future resembles that of Sports Authority, which just declared Chapter 11, laying off the remainder of its 16,000 employees. They struggled in vein to compete with online sales. The problem is a function of overhead; Amazon operates a much more efficient model on so many levels that this trend borders on the inevitable.

The Fringe of Economic Insecurity
For another example, see what’s happened to Borders Books. Border’s plight illustrates a far more important argument and policy problem affecting retail workers. Of the top 10 national employers in the United States, six are large retailers. Their employees, by nature of their wages live much more on the fringe of economic insecurity. These jobs are typically the most vulnerable to technological disruption and it is already beginning.

Amazon is aggressively carving into retailers market share and consumer comfort level with purchasing online is only growing. Thusly, we can observe very clearly from having spent the last fifty years dealing with the loss of major manufacturing jobs, that replacing those jobs is incredibly difficult. The difference, however, is that the security of many of the manufacturing jobs allowed for some economic mobility within the generations.

With retail jobs, which often pay minimum wage or even lower, there is no security that enables workers to aspire to seek a better education and eventually enjoy better economic mobility.

Walmart vs. Amazon
Contrast Amazon with Walmart, the current largest retailer. In more than half of the 50 states Walmart is the biggest employer. Amazon by contrast will soon have Walmart’s position as top retailer but with only a fraction of the headcount. Not only that, but Amazon is always pushing towards more automation, not less.

Clearly, a crisis is heading our way, one that draws parallels to the 1980s and the Rust Belt, but it will be far more pervasive. Today, 10% of the total U.S. Labor Market is employed in the Retail Trade Industry; what happens when 50% of that workforce is functionally obsolete? Essentially we will become a consumer economy without any consumers.

 

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Eugene McGrane is a Senior Director at Cushman & Wakefield’s Walnut Creek Office. He is both an advocate and advisor for companies who lease or own real estate and has an extensive and wide ranging background in complex commercial real estate projects, from small business office leases, to large corporate site selection and negotiation. Eugene has also handled complex disposition and acquisition of Retail, Land, Office, Industrial, Medical and Development sites. He is a regular Guest Blogger for blog.cushwake.com. See Eugene’s previous article here.

 

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