Now Trending: Online’s impact on store sales is vastly overstated
The narrative is well established: Online sales are rising dramatically and having a major impact on brick-and-mortar retailers. The facts, however, are not quite so cut and dried. Internet sales still account for a remarkably small overall percentage of U.S. retail sales. A quarter century after Amazon’s first shipment was mailed, the Web accounts for less than 9% of U.S. retail sales. With sales of $500 billion, Walmart alone is the equivalent of six Amazons.
These figures are so strikingly at odds with the prevailing narrative that many retail observers simply refuse to believe them. Even more unbelievable is the fact that Amazon, actually a collection of three different distribution platforms (wholesale, third-party fulfillment and marketplace operator), makes little or no profit on its core retail sales activities. Pricey logistics and shipping costs mean that Amazon has to struggle to break even in that part of its operation, and in fact generates the vast majority of its profits from its web services division.
Problems at department store chains like Macy’s have been blamed at least in part on virtual competitors. But department stores have been bleeding market share for the last three decades as discounters and big boxes encroached on their space. Contrary to popular belief, retail stores are actually accretive, if not essential, to online sales. Take, for example, the case of Macy’s Bloomingdales unit at the Mall of America. When Macy’s closed the store two years ago, Bloomies’ internet sales in Minneapolis -St. Paul plummeted by 75%.
At 30% of total receipts, apparel is online’s most active category. Yet retailers like T.J. Maxx, Marshalls, Ross Dress for Less, and Nordstrom Rack have been adding close to 300 stores annually. Deep discounters H & M, Forever 21 Red, Zara and Primark will add hundreds more stores in the next few years.
It’s not like technology hasn’t benefitted physical retailers, too. With instant access to competitive pricing and product availability through pocketsize mobile device, buyers can now become easily informed, effectively “democratizing” pricing. Shoppers’ ability to instantly weigh price versus convenience in sourcing goods has actually introduced a more Darwinian retail world, a world in which efficient and creative retailers are rewarded, and inefficient retailers, like Sports Authority, face extinction.
Beyond democratizing pricing and sourcing options for consumers, new technologies now allow retailers to connect directly with consumers through geo-tracking capabilities made possible by apps and built-in smartphone functionality that can track individual consumer movements, and deliver precisely targeted advertising and promotional messages. Macy’s for example, already is using this technology to “push” targeted sales incentives directly to its customers as they walk into and around their stores. Technology also opens up new categories of transactions, including broader use of show rooming by retailers to stimulate in-store sales for items stocked only in remote warehouses.
For brick-and-mortar retailers, the answer is not necessarily to keep throwing money into expanding unprofitable online sales platforms, but rather to balance investment in stores and the internet to optimize each customer’s experience and enhance overall sales productivity. If Amazon is unable to generate a profit from its massive online sales infrastructure, why should we expect any different results for brick-and-mortar? It will be interesting to see if Walmart purchase of Jet.com will significantly move Just ask Staples, America’s second largest internet retailer, has sunk billions into its online platform with little or no impact on sales.
In this context, the vague notion that new technologies and increasingly robust online platforms will eventually bear fruit in the form of increased profitability begins to seem less like an informed perspective and more like wishful thinking. The evidence so far suggests that shipping costs will limit the growth and profit potential of pure-play online retail models. Meanwhile, nimble new brick-and-mortar competitors Five Below, Aldi, and Lidl proliferate with an old-fashioned strategy, offering smarter merchandising and sharper pricing in convenient new store locations.
We are watching new and growing retailers closely to see how successful brands use technology in creative new ways to connect with customers, boost sales and enhance the bottom line — without selling out the store.
Nick A. Egelanian is president of SiteWorks, a strategic retail real estate consulting firm that serves retailers, developers, owners, and municipalities.
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