San Francisco recently passed a law banning cashless stores. From now on, Amazon To Go stores will have to accept cash. The argument for this law is that poor people don’t have credit cards or cell phones and so cannot shop in these stores. The argument for these stores is that cashless stores can charge lower prices because they have no cashiers and that they safer places to work for the employees, especially at night, because these places all have surveillance cameras and there is no cash to rob. Oakland is in the process of passing a similar law. I have been wondering if Berkeley is going to pass a law like this next. There are no cashless stores in Berkeley, but that probably won’t figure into the debate at the city council on this. Berkeley has lots of laws regulating businesses that don’t exist in Berkeley, like gun stores and slaughterhouses.
Cashless Society. Personally, I think banning cashless stores is just fighting the inevitable. Industrialized nations everywhere are moving to cashless economies, and that has been going on for generations. 100 years ago, there were no credit cards, and most people didn’t have checkbooks. When I first became a landlord, a lot of tenants paid their rent in cash. Now, every landlord I know has a clause in his leases requiring tenants to pay their rent by check, money order, or electronic transfer. There are lots of things that used to require cash but don’t anymore, like taxicabs and parking meters. I know several people who keep no cash in their wallets and not because they are poor. Although the San Francisco bay area is the world center of high technology business, we seem to elect a lot of Luddites here, politicians who are hostile to and fight new technology, the very businesses that have made them and their cities rich.
Most people assume that internet retailing is a very profitable industry. Internet sales are growing rapidly, and internet retailers don’t have the enormous expense of operating brick-and-mortar stores, like the ones you see at shopping malls. Because of internet retailing, hundreds of departments stores and shopping malls have closed all over the country. It seems like internet retailing should be a gold mine, but it isn’t. The sad fact is this – most internet retailers lose money, a lot of money. And it doesn’t seem that its a question of size. In most cases, the bigger an internet retailer is, the more money they lose. Even Amazon loses money. Over the past 20 years, Amazon has only made a profit in few quarters but lost money the rest of the time. Amazon makes money on some of their services, especially Amazon Prime, but they lose money selling merchandise, and they always have. Amazon may someday become profitable, but if that happens, it probably won’t come from selling merchandise online. So what’s the problem?
The problem is the cost of shipping and returns – especially returns. About 10% of all the merchandise purchased in brick-and-mortar stores is returned, but 20% to 30% of all goods purchased online is returned. Even worse, 30% to 40% of all the clothes and shoes purchased online are returned. Still worse, most internet retailers pay the shipping both ways. Add to that the labor costs for filling and packing orders and then unpacking and processing all those returns. Then add to that the fact that most returned merchandise cannot be resold for full price. Some cannot be resold at all, like damaged clothes and toys. Some can be resold, but only at a discount, like the ‘out of box’ TVs at Best Buy. However, most returned merchandise is sold to liquidators, and they pay just a fraction of the good’s wholesale cost. So, why don’t internet retailers charge for shipping or adopt less generous return policies? Well, they would if they could, but they can’t. People who buy stuff on the internet have gotten accustomed to free shipping and returns. People take it for granted. Besides, who would buy something like a pair of shoes online if they didn’t know that they could easily return them for a refund if they didn’t fit? But most important, internet retailers know that if they charge customers for shipping or for returns, they will quickly lose those customers to other online retailers that still offer free shipping and no-cost returns. Until internet retailers figure out some way to significantly reduce the cost of shipping and returns, I don’t see how the industry will make money.
Of course, things are very different for retailers that just sell their own brand products, like Ikea, Godiva, and Gap. Because they are just selling their own products, they have pricing power that general merchandise retailers do not. If you are considering a career in internet retailing, think twice about it. Remember that we live in a market economy. Making a profit is not just a desirable objective. A company that fails to make a profit must eventually go out of business.