Brick-and-mortar retail has a very bright future despite the dramatic and disruptive rise of massive ecommerce organizations such as Amazon (NASDAQ: AMZN). Recent events in countries such as the United States and the United Kingdom show that these entities will drastically change brick-and-mortar retail, but they will not destroy it.
Instead of annihilating traditional stores, ecommerce will change the role of physical retail stores. Shops and even supercenters will remain viable enterprises, but they will have to undergo a paradigm shift in their business models to survive.
The situation in the United States, where online retail began and has had the greatest impact on commerce, provides the best illustration of how e-tailing will transform business. The patterns of ecommerce growth and operations in the USA are likely to be repeated all over the world as online retail spreads.
How Ecommerce Has Affected American Retailing
There are some notable impacts in the United States from ecommerce that every retailer should be aware of. These impacts are likely to be repeated in other nations and have similar effects.
The most important effects of ecommerce on brick-and-mortar retail in the United States include:
- The effect of ecommerce has been most felt on specialty retailers, particularly those that sell small, easy-to-ship items such as books. Amazon famously started as a bookstore, and books are still one of its most popular lines of merchandise. One notable effect of ecommerce in the United States has been to greatly lower the prices for some merchandise, such as used books. The reason for this is that a used book dealer can now ship all over the country and the world. Observers have complained about the lack of bookstores in New York City. This means that those who sell certain items, particularly collectibles or specialized parts, should move online or diversify their business. For example, a bookstore might add a coffee shop in order to attract more customers and generate additional revenues.
- One of America’s largest chains of bookstores, Borders, has gone out of business completely. The other, Barnes & Noble (NYSE: BKS), has survived, but it has had to close several hundred stores. Barnes & Noble also saw its revenue fall dramatically in just two years. In July 2013 it reported sales of $7.164 billion, which fell to $6.71 billion a year later and $6.051 billion in July 2015. Barnes & Noble is trying to survive by shrinking its footprint and diversifying into areas like electronics sales.
- The Internet facilitates discounting. Amazon and Walmart.com have greatly lowered prices for office supplies in the United States. Shipping envelopes, which often sell for $1 to $2 apiece at office supply stores, retail for as little as 15¢ or 20¢ online. A big reason for this is that many online sellers have much lower operating expenses. An online book dealer can store her inventory in a storage locker or the garage rather than pay rent for a store for example. Ecommerce also allows wholesalers, distributors and manufacturers to compete directly with retailers. For example, a factory can sell off excess stock directly online rather than throw it away.
- Businesses that rely heavily upon deep discounting to attract customers, such as clothing, electronics, toys and sporting goods stores, are very vulnerable to online competition. In the United States, one major sporting goods retailer, Sports Authority, has declared bankruptcy, and another, Finish Line (NASDAQ: FINL), is closing 150 of its 617 stores. The department store chain Macy’s (NYSE: M), which is heavily dependent upon clothing sales, saw its revenues decline by $370 million between October 2014 and October 2015. Macy’s recently announced plans to close 40 of its stores. The giant American discounter Target (NYSE: TGT), which also relies heavily upon clothing, also reported a decline in revenue for the fourth quarter of 2015.
- Some industries are less vulnerable to ecommerce than others. Alphabet, (NASDAQ: GOOG) decided to shut down Google Compare, a marketplace for insurance and financial products like mortgages that operated in the United States and the United Kingdom. A major reason for the shutdown could have been the intense regulation that insurance is subject to in both the USA and the UK. In America, insurance is regulated by each of the 50 state governments, some of which have dramatically different laws on the matter. The grocery market in the United States has proven resistant to online competition despite attempts by major retailers such as Walmart, Kroger and Amazon to launch such services.
- A hybrid of brick and mortar and online is the most probable future for retail. Walmart (NYSE: WMT) is experimenting with lockers that merchandise ordered online will be shipped to in Canada and the UK. Some of the lockers are located at Walmart; others are in 7-Eleven convenience stores. The retail giant also lets its customers pick up any merchandise purchased through its website at its stores with no shipping charge. The giant American grocer Kroger (NYSE: KR) offers click and pull, in which customers place grocery orders online that are picked up at some of its stores. Kroger also offers delivery services in some American markets. Amazon has opened a brick-and-mortar store in its hometown of Seattle and is reportedly considering opening hundreds more shops across the USA.
The reports of brick-and-mortar retail’s demise are greatly exaggerated. Events in the United States demonstrate that there is a future for traditional retail. Companies that learn to adapt to the new reality can survive and perhaps thrive in it.
