I hate to be the bearer of bad tidings, especially during the season to be jolly, but I’m a realist. And though I wish happy holidays for all, I must tell mall retailers to steel themselves for another disappointing holiday season. Deloitte is expecting seasonal sales growth of 3.5% to 4% this year, ahead of inflation but below the 5.2% growth of last year — but don’t expect malls and department stores to see that growth. A disproportionate share of holiday sales will go to the humble discount stores, far away from the fancier shopping centers.
But the bigger story will be shoppers’ continuing collective flight to online shopping. One of the myths retailers — and especially the shopping center industry — try to convince themselves is true is that the shift to e-commerce is slowing. Even casual observation of shopping trends suggests otherwise. Just ask your teenager … or your grandmother. They’re holiday shopping on their phones and tablets, from the comfort of their living rooms while watching TV.
It’s true that year-over-year sales growth in e-commerce is slower now than it was a decade ago, when online shopping was still in its infancy. In the middle of the last decade, e-commerce was growing almost 25% annually. That average growth rate has slowed to about 15% per year. Lower inflation accounts for some of the difference, but real growth rate is lower now than it was before the recession.
Physical retailers should take little comfort in this trend — because in-store growth has slowed even more, relatively. The annual in-store sales growth rate is down 53% from before the recession, compared to 38 percent for online sales. So, online sales are growing even faster compared to in-store sales than they were previously — growing 5.4 times faster now compared to 4.2 times faster before. Of course, e-commerce cannot sustain even this growth rate indefinitely — at these rates, e-commerce will surpass total retail sales in 25 years, which is logically impossible.
The more important metric is how quickly online shopping is capturing market share from physical stores. And here the picture is much more of a challenge to traditional retailing. Online sales now account for 7.9% of total retail sales excluding autos, as shown in the left chart below, rising by an average of just under 50 basis points (bps) a year since the Census Bureau began tracking e-commerce sales in the fourth quarter of 1999.
Though the ascent appears relatively steady, in fact the online market share, while volatile, has been gaining momentum since the recession, especially recently, as shown in the right graph. In the three years prior to the recession (2005-07), the online market share rose an average of 45 bps per year, meaning the online market share was about 0.5 percentage points higher each year. This growth has surged by two-thirds during the last three years to an average of 76 bps — an annualized rate of 111 bps in 2015.
The reasons should be obvious: Online shopping is more compelling, and shoppers are increasingly comfortable doing it. One telling statistic: slightly more people shopped online on Black Friday than went to stores, according to the National Retail Federation — a rather startling accomplishment for an event that started only 10 years ago. All told, in-store spending on Black Friday fell to $10.4 billion this year, from $11.6 billion in 2014, while e-commerce saw a 14.3% increase over last year’s total.
Definitive market share figures for online vs. in-store for the full holiday season are not available, but we can get a sense by removing the seasonality smoothing from the quarterly sales figures, as shown by the red line in the left graph below. The annual spikes represent market share during the fourth quarter every year. The spikes are getting larger, as the right graph clearly shows. Last year, for example, the e-commerce market share averaged 6.7% during the first three quarters but jumped to 8.3% in the fourth quarter — a spike of more than 160 bps.
Thus, not only is the overall online market share still rising at an escalating rate, but the shift to online holiday shopping is growing even more. Again, there’s no mystery. Excluding autos, e-commerce has the greatest market penetration in discretionary shopping (e.g., apparel and hobbies), and the lowest share in convenience goods (groceries and personal care items). As the share of discretionary shopping surges in the fourth quarter, so too does the online market share. Malls are especially vulnerable to this sales erosion because they specialize in the kinds of goods most frequently sold online.
All of which means that malls and retailers without a winning omnichannel strategy are hemorrhaging sales during the all-important holiday season that are make or break for retailing. In the last few weeks we’ve seen all the department stores and many mall-based specialty chains report falling sales and downgraded forecasts.
And there’s no reason to suspect retailing is near an inflection point of declining online sales growth — e-commerce still accounts for less than 10% of all sales (though far greater in some categories such as electronics and books), and mobile shopping has the potential for even greater growth given the near ubiquity of smartphones.
In fact, retail sales are at new peak levels — and not because there are more stores. Unfortunately, the size of the retail stock has barely budged since the recession, with less new construction and less occupancy recovery of any property sector. The cause, instead, is sales leakage to online shopping. And it’s certainly a trend to watch this holiday season and beyond.
Andrew Nelson is chief economist/USA for Colliers International. Nelson develops economic and market perspectives for Colliers, drives the research agenda, and provides insight, thought-leadership and guidance about commercial real estate, capital markets and financial investment, and related sectors. He can be reached at Andrew.Nelson@colliers.com.