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Why brick-and-mortar just can't compete with online retail

For most goods and services, it’s just a whole lot cheaper to buy online through websites like Amazon.com (AMZN) than at brick-and-mortar retailers. For this simple reason, online retailers are booming.

Online retailers are able to offer discounts because their own costs are low. They operate out of efficient centralized distribution centers, which enable them to engage in more commerce with less square footage and fewer employees per sale.

This whole narrative is captured elegantly in this chart from JPMorgan economist Michael Feroli. It illustrates the average annual sales per employee at online retailers versus all other retailers.

The average online retail employee generates a million dollars more in sales than other retail employees.

According to Census and Bureau of Labor Statistics data, the average employee of a bricks-and-mortar retailer generated $279,000 in gross sales. Contrast that to the average electronic shopping and mail-order house employee, who generated an average $1,267,000 in sales. You see that correctly: Online retail employees generate 4.5 times the sales of its offline peers.

“If there were no online retailing, and the revenue productivity in the entire retail trade sector matched that in the bricks-and-mortar subsector, then the level of retail employment would be 1.2 million employees greater than it is currently,” Feroli said. “We don’t think it would be accurate to say that on-line re- tailing has ‘destroyed’ 1.2 million retail jobs; rather employment has been reallocated to other sectors.”

Online retail will continue to boast this significant cost advantage as land remains scarce, the labor market remains tight, and the demand for higher minimum wages continues to intensify.

Sam Ro is managing editor at Yahoo Finance.
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