Internet hasn’t killed Retail – they need each other to survive.
This article is the first in an ongoing series covering the reimagining of retail and its effects on valuation.
2018 saw a record year of retail vacancies – in total: 155 million square feet (105 million in 2017). Chains have overbuilt and over-occupied their market becoming their own competition. Consumers have too many choices, and it’s not just the all-mighty power of The Internet.
Nearly 90% of purchases were made in the actual, physical world in 2018 – less than 10% (9.7%) of total retail sales, estimated by the US Census, were e-commerce. And that’s not even a full percentage point up from last year’s 8.9%. Granted, there is a margin of error for private companies and other sampling issues, and these percentages include purchases that are not typically, logistically, available to purchase online – gas, cars, dine-in restaurant sales. There is no discounting that e-commerce sales represented about 50% of overall retail sales growth, either.
An article by Internet Retailer contends that purchases such as fuel, automobiles, and restaurant/bar sales would ideally be removed from these surveys for a true reflection on the ratio of e-commerce/brick-and-mortar purchases, putting the e-commerce portion closer to 15%. However, when you consider the way retailers are adapting, and the fact that you indeed CAN buy cars online and have them delivered to your front door a la Carvana, or order a latte via the Starbucks app that is then both assembled and “distributed” in-store, it’s important to maintain the overall picture: physical retail is still very alive.
Consumers, as humans, are hunters and gatherers. We like to touch, compare, test out. Even in the nearly 10% of retail sales classified as e-commerce, about 5% were not a completely online experience. Rather, that 5% was a mixed-experience – whether the purchase was ultimately made online or in-store, some portion of the buying experience (research, testing, delivery, etc.) was done in the opposite “realm”. The seamless execution of creating the ultimate customer experience by having a physical store with face-to-face interaction that works in tandem with a strong online presence is crucial for the modern successful retailer. The best example of this idea is click-and-collect.
More than 50% of online shoppers utilize click-and-collect or buying online and picking up in store. Free “shipping”, instant gratification, no worries about tracking packages or returning by mail, no waiting in lines – it’s easy, fast, and satisfying. And more than 60%, across all three current generations, prefer to shop in a physical store, with nearly three-quarters of consumers saying that physical stores are vital to a neighborhood’s vibrancy.
A brick-and-mortar store has heavily weighted value even with online consumers, and roughly one-quarter of consumers will cease online spending with a company if its nearby physical counterpart closes. Just as it’s perceived that e-commerce is killing a company’s necessity or success in the physical world, consumers see a company as failing without a physical store in the local market. To shoppers, lack of a brick-and-mortar store implies decreased customer service availability, loss of ease when it comes to returning or exchanging items, and inability to click-and-collect. A physical store plays a huge part as a billboard, builds brand awareness, and in its absence the company is out-of-sight, out-of-mind.
A company’s success does not rely solely in one singular realm, be it physical or digital, and it’s a misperception – that The Internet is eating physical retail alive. Yes, E-commerce is growing, but brick-and-mortar is the foundation of the shopper experience, and it is here to stay.
Shane Investment Property Group uses research gathered from the US Census, International Council of Shopping Centers (ICSC), other articles and press releases. This article should not be assumed as investment advice.