Mar 27, 2017

Articles: The History of the Department Store and the Modern Day Department Store Destroyer

Two articles that I thought your students might enjoy since shopping seems top of mind for many teens. I think these would be particularly good as a supplement for your investing or entrepreneurship lessons. One article describes the rise of the department store (Inventing the Department Store in Barrons; about 5 minutes reading) and the other describes the modern day Leviathan that is destroying department stores and other competitors too (Amazon: Primed from the Economist (three articles free per week); about 15 minutes reading).

A Q&A follows focused on the key takeaways from the readings.

Some highlights from the Barrons article:

What led to the first department stores being opened in London? 

As affluence increased in the 18th century and the Industrial Revolution made more goods available, shopping began to evolve into what would become the department store. The first ones began by catering to the most common type of shoppers, women. The first real department store, Harding, Howell & Cos.’ Grand Fashionable Magazine, opened in London in 1796. Its four departments carried furs, jewelry, dresses, and hats, and accessories such as lace and gloves.

Who brought concept to US? Alexander Stewart

What was his insight that led to their popularity? 

Stewart’s great insight was that shopping could be much more than a necessity; it could be a pleasure and a recreation. As the New York Herald wrote when the store opened, Stewart paid “the ladies of this city a high compliment in giving them such a beautiful resort in which to while away their leisure hours.” Stewart instituted set prices to eliminate haggling, full-length mirrors so women could see how they looked, and fashion shows to show them what to buy.

How popular did the department store become? He was once one of the three richest men in America!

By 1855, Stewart’s fortune was estimated at $2.25 million, more than enough to put him on a list of the richest Americans. In 1863, he reported a taxable income of more than $1.6 million. By the mid-1870s, he was one of the three richest men in America, along with William B. Astor and Cornelius Vanderbilt.

Highlights from the Economist article:

Why has Amazon succeeded on the e-commerce side of their business?

The money it has spent on its e-commerce system has set new standards for service and price. Its site and the formidable logistics behind it are an alternative to queues and trekking from shop to shop. Little wonder that, according to a recent Harris poll, Americans hold Amazon in higher esteem than any other company.

What other business is a large contributor to their profits (might surprise many students to find out that Netflix hosts their streaming-video on an Amazon server)?

The company has also found new things to sell: most notably, computing power delivered as a service. The ability to get the number-crunching, data-storage and development tools they need without capital expenditure has been a blessing for startups and larger customers alike. Netflix, a streaming-video company, uses AWS to serve 94m subscribers; America’s Central Intelligence Agency uses a version customised to its security needs. (The Economist’s website is also hosted by AWS.)

Why is their Prime subscription so popular and so important (amazed to see that AMZN spends twice as much as HBO on programming)?

One of Amazon’s most successful offerings has been its Prime subscription. Originally this just offered free shipping, but the company has added more and more new perks—two-hour shipping, for instance, or free and sometimes exclusive streaming video—to encourage people to stump up the annual subscription ($99 in America). The idea, Mr Bezos told investors last year, is to make Prime “such a good value, you’d be irresponsible not to be a member.”

That is costly. In 2017 Amazon is expected to spend $4.5bn on television and film content, roughly twice what HBO will spend. But it has a big payoff. Users who subscribe to Prime spend at least three times as much as Amazon shoppers who don’t subscribe, estimates Brian Nowak of Morgan Stanley. In part this is a selection effect; it makes more sense for heavy shoppers to subscribe. But it also seems that, having subscribed, they shop yet more heavily, knowing that they incur no further shipping costs when they do so. Mr Nowak reckons the company had 72m Prime members last year, up by 32% from 2015.

What might threaten Amazon’s future growth? Government regulation and competition

Bigger competitors do not want to work through Amazon. Some will not use AWS because they don’t want to subsidise a rival. Large retailers are seeking to match Amazon’s standard of fast, cheap shipping on their own. But that lowers the margins for their online sales and risks cannibalising sales from their stores. The competition thus threatens to make many of them permanently less profitable…

In a recent article in the Yale Law Journal, Lina Kahn argued that, among other things, the scope of Amazon’s activities may make it impossible for competitors not to end up relying on it. If regulators paid more heed to market power, that could be a red flag—especially as Amazon continues to grow and provide its services to competitors ever more widely.

Other questions to ask using this Amazon article:

  • What if you had invested in Amazon’s IPO? How much would a $1,000 investment be worth today?
  • Amazon started as an online bookstore. What other businesses is Amazon involved in? Do they seem to fit with their original vision?
  • Do you think Amazon would make a good investment today? Why or why not?
  • Jeff Bezos, the founder of Amazon, is considered one of the best entrepreneurs of this era. Do you agree or disagree with that statement? Explain your answer.

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Here’s an NGPF Data Crunch that analyzes how teen spending habits have changed over the past ten years.

 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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