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The 'Amazon Effect' Is Crippling Department Stores

Amazon is fast on its way to becoming the number-one apparel retailer in the U.S. while stores like Nordstrom and Macy's continue to struggle.
Is Amazon the new desirable retailer? Photo: Andrew Burton/Getty Images

Is Amazon the new desirable retailer? Photo: Andrew Burton/Getty Images

Many long-standing retail companies, from department stores to teen brands, are feeling the pain of the changing retail landscape, a phenomenon now being dubbed the "Amazon effect." On Friday, Nordstrom reported a staggering 64 percent drop in net earnings for the first quarter of its fiscal year. "Clearly Amazon is a major factor in our industry," Co-President Pete Nordstrom tells WWD. "They're a formidable competitor. Our traffic is down. If you look at the brick-and-mortar part of our business, that demand didn’t just entirely go away[...] The difference is the online business — Amazon."

But if retailers are feeling the Amazon effect in a negative way, it's obviously working out well for Amazon. According to a report from Cowen & Co.'s John Blackledge, quoted in Barron's, Amazon is set to overtake Macy's as the number-one apparel retailer in the U.S. by 2017. Meanwhile, Macy's reported on Wednesday that its Q1 sales had dropped by 7.4 percent. But in even better news for the Seattle-based e-tailer, Morgan Stanley’s Brian Nowak estimates that Amazon will have 19 percent share of the U.S. apparel market by 2020, up from 6.7 percent just last year. That number is based on a survey which claims that 20 percent of U.S. consumers "frequently" buy clothes on Amazon, and that Amazon Prime members — also up 50 percent year over year — are 5.5 times more likely to do so.

All in all, that means Amazon's attempts to make gains in the fashion industry are not in vain. The Morgan Stanley report states "vertically integrated retailers with strong brands" — they cite Victoria's Secret and Lululemon as examples — should be sheltered from this effect, as they're "unlikely" to sell to Amazon or see "substitution risk."

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Amazon's success will continue to pose serious problems for traditional retailers like Macy's and Nordstrom, however, who are already trying to combat these losses through off-price chains like Saks Off Fifth, Nordstrom Rack, and Neiman Marcus's Last Call. It also increasingly poses problems for teen retailers like Aeropostale, which recently filed for bankruptcy, and for value brands like Gap, which can't seem to stabilize tumbling sales

One thing is for certain: Retail is in the middle of a massive upheaval, and unless brands can figure out how to compete with Amazon's convenience, swift delivery and low pricing, they'll be left behind.

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