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Online retail shifting from disruption to destruction

One of the coldest, stormiest winters in decades took a heavy toll on retailers of every stripe and size, as merchants remind us at every opportunity. But the real cause of their seasonal affective disorder runs much deeper than a prolonged spell of lousy weather. It's a broad failure to adapt fast enough to structural changes in the industry unleashed by Amazon.com Inc. and the massive shift to online shopping.

To be sure, harsh winter conditions kept large numbers of shivering shoppers out of the malls. But when the only consistent success stories are dollar stores and other deep discounters that cater to a demographic below that of food-stamp-embracing Wal-Mart Stores Inc., there's obviously something more at play here than weather alone.

The latest financial results show that the chill among traditional U.S. retailers extends well beyond such long troubled department store operators as Sears Holdings, now busy stripping assets like its 51-per-cent stake in Sears Canada, and J.C. Penney, which is in the midst of yet another turnaround effort. Specialty sellers as diverse as office products heavyweight Staples Inc., home improvement kingpin Home Depot Inc., U.S. athletic gear peddler Dick's Sporting Goods Inc. and teen-targeting Urban Outfitters Inc. all emerged from the first quarter bruised and battered. Many are closing outlets and shedding staff.

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Among broader retailers, mighty Wal-Mart Stores Inc. reported flat sales in its core U.S. market for its latest fiscal quarter, the sixth in a row with no top-line growth. Yet that was positive news, considering the heavy sales hit from the winter storms and deep cuts to the U.S. government food stamp program, a chunk of which was finding its way into Wal-Mart coffers.

Rival Target Corp., which seems to have lost its way when it ventured into the Great White North like an overconfident explorer with a broken compass, will report its own disappointing quarter Wednesday. Interim president John Mulligan booted Target Canada boss Tony Fisher Tuesday, part of the inevitable fallout from the earlier firing of parent company head Gregg Steinhafel in the wake of a loss in Canada of close to $1-billion (U.S.) and a massive, badly handled data breach in the U.S.

One thing that all these struggling retailers have in common is their rivalry with Amazon. The online giant is boosting its sales by 20 per cent or more a year and every time it enters a product category, it overwhelms competitors with state-of-the-art logistics and customer service, as well as its willingness to operate with little or no profit. As long as the company breaks even or squeaks out a tiny return, its investors seem remarkably confident that the retailer's long-term strategy will pay off.

Even those retailers investing heavily in e-commerce – both Wal-Mart and Staples have turned themselves into major players in the digital arena – are faced with the fact that Amazon can afford to continue offering a near-infinite range of products with faster delivery and lower prices than its profit-driven competitors can match without losing scads of money.

Take office supplies. Staples, which is shuttering another 225 stores, now makes 50 per cent of sales online. By the end of last year, it was offering about 500,000 products online, a fivefold increase from a year earlier. It intends to triple that number this year. But that will only to help level the playing field compared to Amazon.

As long as a patient Amazon largely ignores the concept of profits and continues to add a stunning number of products and services at low prices – including everything from fresh food to streaming video – it will continue to devour market share from other retailers in just about every segment of the market.

Not even a warmer winter next year can slow that process of creative destruction.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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