To say that digital commerce is killing off physical stores is lazy thinking and a half-truth.
On the contrary, pure-play online shopping is the imperiled model, evidenced by the lack of e-commerce-only retailers — save for Amazon and eBay — that have gained any meaningful heft and influence.
Of course, e-commerce is informing how we shop, having an outsized impact on traditional retail: from the rise of buy online, pick up in-store perks to the fact that Amazon is now the second biggest seller of consumer electronics after Best Buy.
But the spate of retail bankruptcies, store closings and liquidations doesn’t mean consumers have traded in bricks for clicks. They reflect a mixed brew of factors, including a vastly over-stored retail landscape still sized for a pre e-commerce/pre Great Recession shopping mindset, just as consumers buy fewer tangible things, like a new purse, opting for more experiential purchases, like a dinner out.
And despite all the chatter about e-commerce putting brick-and-mortar out of business, it’s the online-only merchants that are struggling to go it alone (think Etsy), as legacy retailers such as Wal-Mart buy up online merchants.
1. All But One Of The Top Ten U.S. Retailers Are Physical Chains
Save for Amazon, the top 10 U.S. retailers are old-school, brick-and-mortar stores, according to the Top 100 Retailers list from STORES magazine, a National Retail Federation publication.
In ranking order, they are Wal-Mart Stores, Kroger Co., Costco, The Home Depot, CVS, Walgreens, Amazon.com, Target, Lowe’s and Albertson’s.
Among the top 10, all but Target generated sales growth in 2017. And it’s worth noting that 55-year-old Wal-Mart, the nation’s biggest retailer, grew 8% last year.
2. Stores Are More Profitable Than E-Commerce
While most of the top 10 retailers boast e-commerce arms, stores are still the meat and potatoes of their business.
What often gets lost amid the heady talk that retailers’ online businesses are growing faster than their stores is that bricks generate higher conversion rates — the percent of store/site visitors who make a purchase — than clicks.
And as a general proposition, a store purchase is more profitable than an e-commerce order, as factors like shipping and handling charges, and the costs associated with increased returns, eat into margins.
Alix Partners tracked five years of financial performance for 20 publicly traded retailers. For the group, online sales grew from 10.5% of total sales in 2012 to 15.5% in 2016 — but margins steadily declined, by 150 basis points to 9.0% in the year, according to the retail consultancy. Indeed, retailers’ store fleets are subsidizing their online businesses.
3. Amazon Purchased Whole Foods
When the nation’s biggest e-commerce retailer buys one of the nation’s biggest brick-and-mortar chains, attention must be paid.
Amazon’s acquisition this month of Whole Foods Market, the 30th largest retailer in the U.S., according to the NRF, confirms its big bet on physical retail.
The e-tailer has been dabbling in stores with the rollout of a handful of Amazon bookstores and Amazon Go, a grocery format. But its purchase of the 460-store, $15 billion Whole Foods chain marks a brick-and-mortar commitment.
4. Millennials And Generation Z Prefer Real-Life Stores
Millennials and Generation Z came of age amid the rise of Amazon, Facebook, and Instagram.
But while many of these younger consumers are opting to spend their free time online rather than watching television, for one, both groups actually prefer in-store to digital shopping.
Most global millennials (70%) prefer brick-and-mortar retail stores, according to CBRE.
And in the U.S., over 77% of Gen Z, consumers born after the mid-1990s through the early 2000s, said brick-and-mortar stores are their preferred shopping channel, according to Accenture research.
These groups are the future of retail.
Millennials have displaced baby boomers as the nation’s biggest buying group. There are an estimated 80 million millennials in the U.S., and each year they spend approximately $600 billion, according to Accenture.
Meanwhile, Generation Z is set to reach 2.6 billion by 2020, with $44 billion in buying power, according to a study by IBM and the National Retail Federation.
5. Online Retailers Are Being Eaten By Legacy Retailers
Traditional retailers are swallowing up online-only merchants. We saw the pattern emerge among the once-hot flash-sale sites, which offered big discounts on designer merchandise in limited quantities during 24-to 36-hour sale events. Hudson’s Bay Co. bought Gilt Groupe, Nordstrom scooped up Haute Look, while Bed Bath & Beyond purchased furniture flash sales site One Kings Lane.
Now Wal-Mart is leading a pure play acquisition binge, buying born-in-the-web retailers Jet.com, vintage apparel merchant Modcloth and most recently, Bonobos, the menswear e-tailer.
Brick merchants are buying click merchants because online-only is not a viable retail model, according to “The Death of Pureplay Retail,” a report from digital think tank L2. For one, “walk in traffic doesn’t exist online,” while stores can generate organic traffic. And expansion builds brand equity, the report says.
That’s why online players from Amazon to eyeglass merchant Warby Parker have been scrambling to open stores. They’ve “been quick to recognize the value of a brick-and-mortar presence.”