Now Trending: It’s NOT the Internet, Dummy!
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The narrative is a familiar one: the scourge of online sales, encroaching ominously on brick-and-mortar market share, continues to siphon sales and transform the retail industry into an increasingly virtual landscape. Over the last few years, nearly every retail sales drop or unexpectedly poor performance has been laid at the feet of the Internet.
As ringing cash registers give way to wringing hands, retailers and analysts who should know better have pointed to online retail sales as a kind of catch-all bogeyman: a convenient cause for the struggles of a brand, a sector, or even an industry. Online retailing is perhaps cited most frequently as one of the biggest reasons why the department store sector appears to be in a steady, and perhaps even terminal decline.
The truth, however, is very different.
At the beginning of 2015, online retail accounted for just 7.0% of overall retail sales. While that number is projected to rise to 8.9% by 2018, the rate of growth is actually slowing–a far cry from the way that online retail is commonly portrayed in the media. For a more concrete and direct example of online versus brick-and-mortar retail, take a look at the numbers behind two iconic brands: Walmart and Amazon. Amazon has annual retail sales of approximately $70 billion. Walmart? $500 billion. What is likely going on is that the Internet is not so much taking a larger slice out of the brick-and-mortar pie, it is simply contributing to a bigger pie by expanding the platform for sales and prompting many consumers to make purchases they never would have made without the ease and marketing power of the Internet. While some consumers purchase staples online, it’s undeniable that the online marketplace “creates” a lot of new sales: things you didn’t know about, things you may have only found out about through social media or other online channels, or offbeat items that simply are not available at traditional brick-and-mortar venues.
To assess whether or not online retailing has the kind of impact on the overall retail marketplace that purveyors of conventional wisdom would have us believe, let’s examine the apparel category. Approximately 25% of apparel sales occur online—and that percentage is rising steadily. Bad news for brick-and-mortar retailers, right? It wouldn’t seem so, seeing as the fastest growing segment of commodity brick-and-mortar retail is also apparel. Online sales are certainly not hurting brands like H&M, Zara and Forever 21, and the growth of apparel retailers has been one of the most noticeable retail trends over the last few years. TJ Max, Marshalls and Ross are on pace to open over 200 new stores this year with no end in sight.
In fact, it is that growth that is one of the biggest reasons why the demise of traditional department stores has accelerated in recent years. The influx of new and emerging discount apparel brands occupying square footage in and around Class A malls has been tremendously detrimental, particularly at a time when department stores continue to respond to market pressures by focusing more and more on apparel. Department stores no longer offer a sufficiently wide variety of products, and have unwisely narrowed their inventory focus to predominantly housewares and apparel. The combination of giant store formats and a business model based largely on selling a product that happens to be one of the fastest-growing and diversifying sectors of the industry is a recipe for disaster. And now Nordstrom, the one department store once considered exempt from other department stores’ woes, has virtually abandoned new full-line store openings, opting instead to open 40-50 Nordstrom Rack discount units for the foreseeable future.
The reality of department store struggles is that it is not the result of online competition at all. As in so many cases of retail struggles, the true causes are more complex, and have less to do with outside forces than with an unwillingness or inability to adapt. As the old saying goes, a “fish stinks from the head-down,” and these venerable institutions have not had the innovative and visionary leadership they need to survive and thrive in a rapidly evolving and increasingly competitive marketplace. Together with a continuing shift in consumer preference toward that more accessible level of apparel, sustained success from discount competitors, an influx of new fashion brands and the growing popularity of outlet retail, it’s easy to see why department stores as we know them may be on the way out. While department stores are somewhat limited in their flexibility from a format standpoint, that is far from their fatal flaw. If Macy’s still had the coolest stuff and the right environment, it would be making headlines instead of making stockholders nervous.
So don’t buy the online bogeyman. Instead, take a look at the numbers. Because virtual storefronts are not the problem: a failure to respond to changing consumer tastes and nimble competition, a failure to take calculated risks, an apparent unwillingness to experiment, and ultimately an inability to evolve in relevancy is a far bigger retail problem than the modest 7.0% of the market that is represented by online sales.
Nick A. Egelanian is president of Siteworks, a strategic retail real estate consulting firm providing highly targeted retail and mixed-use development consulting services to retailers, developers, owners and municipalities. The firm applies its knowledge of specialty and commodity retail shopping centers throughout the United States and internationally — along with leading research, development, and leasing capabilities — to provide real-world solutions to the ever-changing issues facing today's increasingly global, post-department store era retail industry. To learn more, visit siteworksretail.com or connect with Nick at [email protected]
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