Retail profits are plummeting. Stores are closing. Malls are emptying. The depressing stories just keep coming. The internet is apparently taking down yet another industry. Sure enough, the Census Bureau of the United States just released data showing that online retail sales surged 15.2 per cent between the first quarter of 2015 and the first quarter of 2016.
However, looking only at that 15.2 per cent “surge” would be misleading. The increase was on a small base of 6.9 per cent. More than 20 years after the internet was opened to commerce, the Census Bureau tells us that brick and mortar sales accounted for 92.3 per cent of retail sales in the first quarter of 2016. Their data show that only 0.8 per cent of retail sales shifted from offline to online between the beginning of 2015 and 2016.
So, despite all the talk about drone deliveries to your doorstep, the Census data suggest that physical retail is thriving. Of course, the shuttered stores, anxious executives and tanking stocks suggest otherwise. What is the real story?
It is becoming increasingly clear that retail reinvention is not a simple battle to the death between bricks and clicks. It’s about devising retail models that work for people who are making increasing use of a growing array of internet-connected tools to change how they search, shop and buy. Creative retailers are using the new technologies to innovate just about everything stores do from managing inventory, to marketing, to getting paid.
Apple’s massively successful brick-and-mortar-and-glass retail stores and Amazon’s small steps in the same direction are what should keep old-fashioned retailers awake at night. Not to mention the raft of creative new retailers, like Bonobos, that are blending online and offline experiences in creative ways.
The rise of mobile has recently added a new level of complexity to the process of retail reinvention. Now, just about everyone has a smart mobile phone, connected to the internet almost everywhere, almost all the time. Even when a retailer gets a customer to walk in the store she can easily see if there’s a better deal online or at another store nearby.
So far, the main thing many large retailers have done in response to all this is to open online stores so people will come to them directly rather than to Amazon and its smaller online rivals. But even if they get online traffic, they struggle to make enough money online to compensate for what they are losing offline.
A few seem to be making this work. Among large traditional retailers, Walmart recently reported the best results, leading its stock price to surge, while Macy’s, Target and Nordstrom’s nosedived. Yet year-over-year Walmart’s online sales only grew 7 per cent. Part of the problem is that almost two decades after Amazon filed the one-click patent, the online retail shopping and buying experience is fraught with frictions. A recent study graded more than 600 internet retailers on how easy it was for consumers to shop, buy and pay. Almost half of the sites didn’t get a passing grade and only 18 per cent got an A or B.
Despite the turmoil, brick and mortar won’t disappear any time soon. The big questions are which, if any, of the large traditional retailers will still be on the scene in a decade or two because they have successfully reinvented themselves, which new players will operate busy stores on main streets and maybe even in shopping malls, and how the shopping and buying experience will have changed in each retail category. Investors shouldn’t write off brick and mortar. Whether they should bet on the traditional players who run those stores now is another matter.
David S. Evans is an economist. Richard Schmalensee is the Howard W. Johnson professor of management and economics, emeritus, at the Massachusetts Institute of Technology.