Posted on 01/19/2014 2:16:08 PM PST by 2ndDivisionVet
The news around shopping during the holiday season was dominated by two separate stories. One talked about how traffic to brick-and-mortar stores was well below expectations, and that these retailers were forced to discount tremendously to drive sales. The other talked about how an enormous late surge in packages coming from e-commerce companies overwhelmed the capacity of UPS and, to a lesser extent, FedEx, and caused many of these packages to arrive after Christmas.
But, to me, these two stories are not at all separate, they simply reflect different sides of the same narrative: We’re in the midst of a profound structural shift from physical to digital retail.
The drivers of this shift are simple:
•Online retail has strong cost advantages over its offline counterparts and is rapidly taking share in many retail categories through better pricing, selection and, increasingly, service.
•These offline players have high operational leverage and many cannot withstand declining top-line revenue growth for long.
•The resulting bankruptcies of physical retailers remove competition for online players, further boosting their share gains.
So, how has this shift been playing out? Recent data suggests that it’s happening faster than I could have imagined.
The U.S. Census Bureau publishes what I consider to be the most accurate figure on e-commerce penetration in the U.S. It reports that e-commerce penetration of total retail sales in the U.S. was around eight percent in 2012. But, as I’ve blogged previously, this aggregate figure seriously underestimates the impact of e-commerce in large sectors of the retail landscape. Let’s unpeel the onion and look at the next level of reporting from the Census Bureau, where it segments the retail landscape into six large categories of goods. It’s at this level that things start getting more interesting:
The data suggests that there are two very different patterns going on with respect to e-commerce penetration. The two largest categories — “Food and Beverage” and “Health and Personal Care” — show e-commerce penetration well below the overall average. These categories essentially are the domains of grocery stores and drug stores, and e-commerce (at least to date) has achieved only modest penetration of these massive categories (but Amazon Fresh has designs on changing that).
The other four categories are what I would consider to be the domains of traditional specialty retail categories, the ones that are transacted in the malls of America. All of these demonstrate e-commerce penetration well above the overall average, ranging from a low of 12 percent for “Clothing and Accessories,” up to 24 percent for “Media, Sporting and Hobby Goods.” It’s in these specialty retail categories where e-commerce to date has had its strongest impact.
One additional observation is that the pace of online share gain in the specialty retail categories shows absolutely no signs of slowing down. All of these charts are “up and to the right.”
So it’s clear that a growing share of the retail pie in the specialty retail categories is being captured by e-commerce. Now let’s throw in one more massive complication for brick-and-mortar retailers in these categories: The total retail sales in these markets have been extremely sluggish, and have barely recovered back to pre-recession levels. This is a toxic combination — physical retailers in these categories are losing share of a total retail pie that isn’t growing. The inevitable result is that the portion of the pie left available for physical retailers is shrinking rapidly:
And that’s just what’s happening. The Census Bureau reports that the four specialty retail categories representing total sales of just over $600 billion grew by only $5 billion between 2007 and 2011 (the last date that this level of detail was reported). That’s less than one percent over four years. The e-commerce players increased their cumulative sales in these categories by $35 billion over the time period. This means that the cumulative sales of brick-and-mortar retailers shrank by $30 billion in just four years!
The result of these macro shifts is a Darwinian struggle playing out in the malls of America among physical retailers. Some recent retail news:
•It’s getting hard to find a physical bookstore, music store or video store these days. In books, Borders has closed, and Barnes & Noble has reported continuing declines in comp store and total retail sales in its second quarter. All major music retailers are out of business. And the Dish Network recently announced that it would close its remaining 300 company-owned Blockbuster stores in early 2014.
•Office-supply retailers are under pressure, as the paperless office is finally arriving. Office Depot and OfficeMax recently completed their merger, and will likely consolidate stores. Staples reported a four percent decline in comp store sales in their most recent quarter, and has closed 107 stores in the past year.
•Electronics retailers are facing enormous pressure. Circuit City has closed. Best Buy recently declared that “show-rooming is dead,” as it offers to match the prices of 19 online retailers and all offline retailers. The next day, it warns of potential profit shortfalls from the hot promotional environment. And all of the computer superstores are long gone.
•Apparel retailers serving the youth market are facing big headwinds. The “Three A’s” (American Eagle, Abercrombie & Fitch and Aeropostale) are all performing poorly, with declining sales and stock prices. It feels pretty likely that a key factor in these declines is early-adopter teenagers turning to online alternatives like Nasty Gal and Stitch Fix.
•The general-merchandise department store is under siege. Sales at Sears have declined for 27 straight quarters (for you keeping score, that’s almost seven years). And it just announced that it is spinning off its Land’s End subsidiary, following its divestitures of Orchard Supply Hardware and Sears Hometown and Outlet business. Says Brian Sozzi, chief executive of Belus Capital: “Sears is in a steady state of decline. … They’re essentially selling their body parts so they stay alive today.” J.C. Penney continues to be in the intensive-care unit, with declining sales and substantial losses, and the SEC just launched a probe “requesting information regarding the company’s liquidity, cash position, and debt and equity financing.”
The stark reality for brick-and-mortar retailers is that there currently are just too many stores. Remember, these retailers have very high levels of operating leverage, and a meaningful decline in sales can quickly render them unprofitable and eventually unviable. And $30 billion in lost sales is most definitely a meaningful decline in sales. It’s not surprising that few retailers are opening new locations, and that a large number are shuttering existing ones.
The retail world is changing, and we’re seeing creative destruction play out before our eyes. And the speed at which it is happening is absolutely stunning. UPS and FedEx had better start building out their fleets, big time — these trends are only accelerating.
It’ll continue until it won’t.
The biggest problem for many retailers is that people are increasingly working longer hours, odder hours, and they can’t waltz into a brick-n-mortar shop during business hours. Online retailing fits the chaotic hours of the modern workforce and lifestyles.
I wouldn't be surprised if Amazon and/or Google either buy out one of the shipping companies, or decide to establish an in-house delivery service, to complete the vertical monopolization.
Our local Staples has announced that it will close. I was a regular customer there. I'm not sure it makes sense to order pens, pencils, and other small office supplies on line, but I may have no choice.
I do...
You have no Wal-Mart or Sam’s Club/Costco?
It’s been done before.
Yes, I buy most books and music on line, but I am hesitant to buy things like clothes and shoes except at a store. I recently bought a pair of Georgia work boots from their website, and there were some imperfections in workmanship that should have caused them to sell those boots as factory seconds. Instead, they sold them at full price to a customer who could not inspect them before purchasing.
I have bought my last pair of Georgia boots.
I don't see any "vertical monopolization".
Amazon sells products from thousands upon thousands of vendors and ships them, according to the customer's wishes, by a half dozen or more combinations of FedEx, UPS, and the USPS. It's the antithesis of vertical monopolization.
Try Zappos. Free returns and shipping.
My wife orders 4-6 pair at one time. Tries them on and returns the undesired ones promptly. The charge is on and off our credit card in less than two weeks.
I live in a small town. Krogers, yes. Wal-Mart yes. That's about it. For anything else we have to go to the mall in the next town south.
I use L.L. bean and Zappos for the free shipping both ways-—superior service also.
I had to get an L.L.Bean credit card but it was well worth it.
In both cases I try on clothes and return what doesn’t fit.
I have always detested shopping so I’m quite happy.
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LOL, that's the extent of our shopping options here. Fortunately our daughter lives about 40 miles away in the "big city" and we tie visits with her to shopping we can't do here. Trader Joes, Sams and Asian grocery stores.
From my own experience, the Internet is fine if you know exactly what to expect.
However, shopping is often a visceral experience. For anything large, high-priced or tactile (i.e. furniture, mattresses), I would never buy it blindly off the web. I have to test it. Even clothing -- this is often hit & miss (usually miss).
Not everything is available or cheaper on the web, either. There are delays & shipping costs. Things there can also be out of stock. When I need something I need it; if I pass by a store & see exactly what I'm looking for, I buy it. I can't spend time web-searching for some "deal."
Certain websites like Ebay or Craigslist have a quirky charm, though. But even there, it's hit or miss, and I don't have time to look for something needed urgently.
I can't help wondering what will happen to these cities when people stop going out to shop & instead rely solely on clicking on items at home. Shopping used to be a social experience; not anymore.
Reality agrees with the article.
The link below takes us to a how many large retailers like JCP, Sears and others will be closing even more stores in malls across the country.
“The biggest problem for many retailers is that people are increasingly working longer hours, odder hours, and they can’t waltz into a brick-n-mortar shop during business hours. Online retailing fits the chaotic hours of the modern workforce and lifestyles.”
Add to that, what we call arrogant and often absentee local ownership. Owners, who hire untrained and maybe un able to be trained young people and senior citizens.
Then add to that, the know it all owners, who never listen to their customers and carrying what they want to carry or minimal inventory of sizes.
This was recently discussed by our local basic core group of friends re shoes that we can wear and can’t buy in our fair city. There are 10 of us, and none of us have a foot size than can be fitted locally with the exception of two stores, mentioned below.
Most of the shoe store owners only carry regular size shoes. If you have narrow, wide, long or short feet, they will not carry a selection or have trained sales people to fit you. The only two local stores, which carry an adequate inventory and have trained sales people are the local Croc store and an exercise/running/walking shoe store. They seem to do well, and I have gift certificates to both stores when my foot recovers from the surgery this past fall.
The same suicidal approach to inventory applies to the so called clothing dealers in town. Again, no one in our core group can buy good casual clothes in town from local owners.
My wife is a tall petite, and she can’t find anything to wear except from the local Talbots’s outlet, a full line store 45 miles away. However, she can go on line and order something that fits at a great price and have her order delivered in a few days. If anything doesn’t fit, she can return it to the local Talbot’s outlet or send it back for free with the enclosed return label in the delivery box.
LL Bean has great outdoor clothes with free shipping and free returns. All of our immediate family got something nice from LL Bean for Christmas.
My sons and I have been Cabela’s customers for decades. They have a good return goods program, good products and often great sales on those products. Their shipping policy sometimes isn’t that great, and I have had discussions with their management. If their shipping costs are higher than my California sales tax, why should I buy from them.
I haven’t been inside a mall for years, and now my wife agrees with me.
Who wants to be robbed, mugged, shot, or victim of a knockout gang?
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