The Retail Industry and Its Impact on the Economy
Retail is how producers of goods and services get their products to the consumer. Retailers often get their goods directly from the manufacturer. That is when a commodity becomes a finished product.
Retailers can also buy products from a middleman, known as a wholesaler or distributor. The wholesaling company consolidates the products from around the world. It repackages them for easier marketing and distribution. Retailers are the last stop on the supply chain before the products end up in your shopping cart.
Importance of the Retail Industry to the U.S. Economy
In 2017, the U.S. retail industry generated $1.14 trillion in value-added. That’s 5.9 percent of U.S. gross domestic product. The largest category within retail is automotive, at $212 billion. Grocery stores are $167 billion and general merchandise is $161 billion.
Since retailing provides a way for products to get to consumers, it also supports the $1.15 trillion wholesaling industry. It contributes to the $2.2 trillion U.S. manufacturing industry.
Retailers create 4.8 million jobs. Many of these are entry-level positions, paying around $10 an hour. Despite the low pay, they provide solid training on dealing with the public. These positions also teach employees math skills.
The most important time of the year in retailing is the holiday shopping season. It starts the day after Thanksgiving. Almost 20 percent of annual retail sales occur between Black Friday and Christmas. This season includes Cyber Monday, the biggest day of the year for online sales. It also includes Green Monday. It's the last day to order online to make sure you receive your gifts before Christmas.
How Retail Works
Retailers make money by raising prices well above their cost of labor, equipment, and distribution. Everyone along the supply chain does the same thing. Retailers can sometimes make more money if they bypass the wholesaler and purchase directly from the factory. Some large retailers often manufacture best-selling items themselves. This is called vertical integration.
This price increase is known as a markup or the retailer's profit margin. It's typically 100 percent (double the cost) at each stage. That's called "keystone markup." It's needed to cover costs and provide enough profit to pay stockholders or private owners.
Internet retailing is the fastest-growing segment. By 2020, it is expected to reach $523 billion, at a growth rate of 9.32 percent each year until then.
Mobile devices, especially cell phones, are becoming the biggest source of internet traffic By 2020, 270 million shoppers will use their mobile devices to research and buy products. That’s up from 244 million customers in 2015. Tablet use has been declining, while iPhone and Android phone use have been growing.
In 2017, people in 16 countries said that 60 percent of their “everyday transactions” occurred in a digital form instead of a store. This included the United States, the United Kingdom, and Canada.
The Future of Brick and Mortar Stores
The popularity of online retailing is destroying shopping malls. In 2018, former J.C. Penney CEO Mike Ullman said that only 25 percent of America's 1,200 shopping malls will survive over the next five years. Those that survive will have enough financing to transition to a new style of retail. They must also be in a location that serves the highest-earning 20 percent. He added that malls that can attract an Apple or Tesla store will probably survive.
In 2018, retailers filed for bankruptcy at record-high rates. Well-known brands such as Nine West, Claire's, and Toys R Us announced bankruptcy in the first four months of the year.
An emerging online trend may become even more devastating for the industry. Websites such as Wish.com, AliExpress, and LightintheBox allow U.S. consumers to purchase directly from Chinese manufacturers. This eliminates the retailer completely. It also allows consumers to purchase goods at a deep discount. Wish.com is worth $8.5 billion. It's the same as Macy's, J.C.Penney, and Sears combined.
But the U.S. Supreme Court removed a competitive advantage for some online retailers. On June 21, 2018, it ruled that states have the right to collect sales taxes on online retail sales. Some retailers, such as Wayfair.com and Overstock.com, did not pay state sales taxes. Amazon did for its own products, but not for smaller online retailers that use its site. States will now be able to collect up to $33.9 billion annually in uncollected sales taxes. It also removes a disadvantage previously imposed on brick-and-mortar stores.
Examples of Retailers
The most common examples of retailing are the traditional brick-and-mortar stores. These include giants such as Best Buy, Wal-Mart and Target. But retailing includes even the smallest kiosks at your local mall.
Examples of online retailers are Amazon, eBay, and Netflix. Even though they are growing the fastest, they still only represent 15 percent of the total retail industry.
Many retailers focus on home sales. These include Schwan's food and Casper mattresses. Others sell through home-based parties. The most well-known are Avon, Pampered Chef and Cocoa Exchange. A small group relies on TV channels like QVC, the Home Shopping Network and Evine.
Retailers don't just sell goods, they also sell services. Restaurants, hotels and bars are all included in retailing.
Many retailers combine different distribution methods. An example is Kroger, which offers both brick-and-mortar stores and online delivery. Large stores often also provide food services, like a restaurant. This lower cost and increased consumer appeal is an example of economies of scale.