Earlier today I was talking to a bright entrepreneur and the topic of ecommerce came up. He gave an example that he was skeptical that big box retailers, especially Home Depot, would be around in their current form in the next decade or two. The big problem on their hands is that even though they carry 100,000+ products, all of their profits come from fewer than 1,000 products that have strong gross margins and higher average ticket prices (e.g. power tools). Those same high profit products are the ones that Amazon.com can deliver at significantly lower cost because their model isn’t predicated on “big hits” but rather works well with the long tail.
Here’s his theory on Amazon.com and big box retailers:
- Amazon.com is going to keep building out distribution centers with the goal of eventually having same day delivery of most products
- Big box stores like Home Depot have prime real estate and will have to close the lowest performing 75% of theirs stores and turn the remaining 25% into distribution centers that act more like a warehouse to service building contractors and do-it-yourselfers
- Margins on the most profitable items will start contracting forcing more big box retailers to make drastic changes, with some like CompUSA and Circuit City going out of business
- The big question comes down to “will they slowly fight change or embrace it and get ahead of the curve?”
Amazon.com is an amazing company with their scale and reach growing daily. Big box stores like Home Depot, in their current form, will face more and more challenges.
What else? What do you think of this theory on Amazon.com and big box stores?
David Cummings on Startups 
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