Definitions, Statistics, and Consumer Impact

In 2023, Americans will spend a staggering $7.2 trillion on e-commerce, with nearly half of that flowing through one company: Amazon.com Inc. (AMZN). The digital giant has not only transformed the way we shop, but entire industries, supply chains, and consumer expectations. American spending on e-commerce will increase by a third from 2019 to 2023, and Amazon sales in the first quarter of 2024 increased 13% year over year, while overall U.S. e-commerce sales increased 8% during the same period. That has allowed Amazon to maintain its dominance, at least in the U.S., despite efforts by retailers like Walmart (WMT) to enter the e-commerce market.

Welcome to the era of the “Amazon Effect.” It describes the profound impact that Amazon-led e-commerce is having on traditional retail and beyond. It includes the shift to online shopping, the demand for lightning-fast delivery, and the expectation of endless product choices. For consumers of Amazon products, it means unprecedented convenience and often low prices. For retailers, it has sparked major changes, often forcing them to choose between adapting or becoming obsolete. For all of us, it has meant increased greenhouse gas emissions, with Amazon accounting for the emissions of roughly 10 million American households, despite reducing its carbon footprint in 2022 and 2023.

As Amazon's influence grows and extends into new areas like healthcare, we examine its impact and expectations in e-commerce over the next few years.

Understanding the Amazon Effect

As online shopping increases, e-commerce businesses' gains come at the expense of brick-and-mortar stores. More shoppers are turning to screens instead of brick-and-mortar stores. In the fourth quarter of 2019, before the pandemic shifted many people to online shopping, online sales were about 11.2% of retail sales. According to the U.S. Census Bureau, e-commerce sales accounted for 16.4% of retail sales during the first pandemic period in the second quarter of 2020 and have fluctuated between 14.5% and nearly 16% since then.

Amazon.com, which debuted in 1994 and remains number one in online sales in the United States, epitomized this shift and gave rise to the name “The Amazon Effect.” The Amazon Effect has been cited as the primary cause of declining brick-and-mortar sales, which is often a precursor to the eventual closure of stores. In 2023, more than 4,600 stores, including those owned by major retailers, closed, an 80% increase over 2022.

The Amazon effect has not only pushed down the revenues of traditional retailers but also brought about a major change in consumer shopping patterns. For example, based on the convenience they get from online shopping portals, shoppers today expect more variety when visiting retail stores. While it may be impossible to read the contents and specifications on a small package of electronics or cashew nuts in a retail store, on an online shopping site, you can easily see the details of the same product in large letters.

The places where Americans get jobs have also changed. While Walmart has long been the largest employer, Amazon's influence can also be seen in the next three largest employers in the U.S.: Amazon (1.53 million employees as of mid-2024), FedEx (FDX, 529,000 employees), and United Parcel Service (UPS, 500,000 employees).

The advantages and disadvantages of online shopping

Online shopping eliminates the need to drive to a store, choose different items, and wait in line to make a purchase. Buying products online is often cheaper than buying them in a store, but this isn't always the case.

But the technology behind these benefits also has significant drawbacks. E-commerce platforms use big data and AI to analyze your shopping patterns and behavior to create personalized recommendations and offers. This can be helpful, but it's also often unsettling. Personalization can feel intrusive or just plain cheesy. That vintage record player you bought as a gift means an algorithm has long since identified you as a hipster vinyl lover, and is bombarding you with recommendations of obscure folk records and vintage audio gear that costs more than a car.

The trade-off between online retail and brick-and-mortar stores is complicated. When shopping online, customers can't touch the products before purchasing, which can lead to dissatisfaction and increased returns. To address this issue, some e-commerce platforms offer hybrid solutions that combine online ordering with in-store pickup.

This creates an interesting trend where consumers research products in-store and then purchase them online at a cheaper price. This “showrooming” phenomenon is beneficial for consumers, but poses significant challenges for brick-and-mortar retailers, who cannot guarantee consistent sales while incurring the costs of physical stores.

As e-commerce continues to grow, it is reshaping entire industries and local economies. Brick-and-mortar store closures limit possibilities for engagement and change the landscape of communities. Big box stores already drove many independent shops out of business a generation ago. The Amazon effect has forced remaining storefronts to close in towns across the United States. Balancing the convenience and privacy concerns of e-commerce, the value of the brick-and-mortar experience, and the broader economic impacts remains a key challenge for consumers, retailers, and policymakers.

The Future of Retail

The 2020 pandemic highlighted the importance of online shopping as people around the world faced quarantines, stay-at-home orders, and travel bans. For many, online shopping has become a necessity rather than a luxury, and it's likely to remain so as long as the internet exists.

But brick-and-mortar stores remain a vital part of the economy, and are seeing sales increase as the pandemic eases. Brick-and-mortar retailers' revenue is expected to exceed $7 trillion in 2023, with that figure projected to reach nearly $9 trillion annually by 2026.

Still, as online shopping becomes more prevalent, brick-and-mortar stores must be ready to adapt. To draw customers to a physical location, they need to offer something they can't get online. This could be an experience or emotion they get when they visit the location. Some malls even feature theme parks and are focused on becoming a destination, enticing people to spend an afternoon or evening at the mall.

Despite the rise in online shopping, some retail stores are thriving because they offer unique or high-quality products that online retailers don't sell or that can't be easily replicated as cheap knockoffs (things that other companies can sell online).

Other retail chains have created a culture around their products and stores that people want to visit and be seen in. As online shopping takes a larger market share, more brick-and-mortar stores will need to adopt such strategies to thrive.

Conclusion

The Amazon Effect has fundamentally transformed the retail industry beyond online shopping. This effect has changed standards of convenience, price competitiveness, and product variety, forcing traditional retailers to adapt or risk becoming obsolete. This effect has redefined customer expectations, with fast (often free) delivery and wide product selection becoming the new norm.

Amazon's impact has also meant the closure of many brick-and-mortar stores and is changing the structure of local communities. Its effects extend to labor markets, supply chains and urban planning. As Amazon continues to expand into new areas, its influence is growing, raising important questions about market competition, data privacy and the future of retail. But the company faces competition not only from Walmart, but also from Chinese e-tailers with direct access to Chinese suppliers.