The Wall Street Journal’s article today titled “Amazon Tests Its Cashierless Technology for Bigger Stores” was the most important disruption-related story of the day. As a reminder, this is the same technology the company is using in a handful of “Amazon Go” convenience stores. Here’s how it works:
- The customer scans a QR code from a dedicated app on their smartphone to gain entry to the store.
- Video and electronic monitors then track the customer as they shop, using object recognition to log any items they take. The system can register when the shopper takes an item but then replaces it on the shelf.
- When the customer leaves the store their account is automatically charged.
- If you are curious to see how all this works in greater detail, Recode had a great piece when the first location opened back in January: https://www.recode.net/2018/1/21/16913984/what-does-photos-amazon-jeff-bezos-seattle-new-no-cashier-line-grocery-story-amazon-go
Amazon looks to be the leader in this technology; with its Amazon GO test bed, ownership of Whole Foods, and object recognition/Big Data analysis capabilities, we don’t see any serious domestic competition. All this puts the company in a position to remake the shopping experience in ways last seen when, well, Amazon started its online store. The advantages of an all-digital store include:
- Reduced “shrinkage” – what retailers call the loss of salable products from theft, paperwork errors and vendor mistakes. Average shrinkage in the US is 1.4%, which sounds small until you realize the typical supermarket runs at 1-3%.
- More efficient in-store inventory management since managers have a real-time take on both what’s on the shelves and which SKUs are moving the best/worst.
- Greater customer satisfaction and convenience. For all the obvious reasons…
- Reduced personnel expense. The average full time cashier makes $20,000/year, with a significant part of store management’s time dedicated to hiring, training and managing this part of the location’s workforce.
And while Amazon’s efforts are focused on grocery/convenience stores, the core technology is equally applicable – and compelling – to any retail setting. In fact, object recognition would be easier in apparel stores (just to name one example) since the items are larger and therefore easier for monitoring cameras/software to identify. Bottom line: cashierless technology is a game-changer for all brick-and-mortar retailers. And it fits neatly into Amazon’s core strategy of addressing huge addressable markets.
There is, however, a dark side to all this in the form of its impact on US labor markets. Here is how that works:
- Retail workers are 10.6% of the American labor force.
- This cohort is already seeing pressure from online shopping; at the peak of the last cycle (2008), they were 11.0% of the US work force.
- In the private sector, only Education/Health Services (15.9%) and Professional Services (14.1%) are meaningfully larger. Leisure and Hospitality (11.0%) is about the same size – and equally exposed to workplace automation of the type we’re discussing here.
- Information Technology workers, whose efforts implicitly target Retail, are just 1.8% of the workforce (in case you were wondering…).
Summing up with 2 investment implications from all this:
#1. This is a textbook case study showing why we are so concerned about the next US recession and technology’s effect on structural unemployment.Let’s assume Amazon’s technology is 2-3 years away from commercialization. It won’t just appear in Whole Foods once its ready. Amazon will roll it out to retailers everywhere, just as AWS is available to any business. The payoff is too large to keep it to themselves.
The timing of that rollout will likely coincide with either a US recession or the aftermath of such an event. Yes, there are other jobs in retail besides cashiers. But assuming that 10% of the 15.9 million workers in retail hold that position, that is still a structural challenge to 1.6 million American workers. And it is a problem for policymakers; lower interest rates won’t be much of a buttress against a permanent capital-for-labor substitution.
#2. There is currently a 3-way horse race for “most valuable company” in US equity markets: Amazon ($867 billion), Apple ($877 billion) and Microsoft ($860 billion). Despite AMZN’s lofty valuation, it is easy enough to see why the company deserves to be in the mix here. And, as we have occasionally argued, to lead the pack.