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. Brick and mortar stores seem to be going the way of the yellow pages. Sure enough, the Census Bureau just released data showing that online retail sales surged 15.2 percent between the first quarter of 2015 and the first quarter of 2016.
But before you dump all of your retail stocks, there are more facts you should consider. Looking only at that 15.2 percent “surge” would be misleading. It was an increase was on a small base of 6.9 percent. Even when a tiny number grows by a large percentage terms, it is often still tiny.
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 percent of retail sales in the first quarter of 2016. Their data show that only 0.8 percent of retail sales shifted from offline to online between the beginning of 2015 and 2016.
Many firms operating brick and mortar stores are in trouble. The retail industry is getting “reinvented”. It’s standing in the path of what Schumpeter called a gale of creative destruction. That storm has been brewing for some time, and as it has reached gale force, most large retailers are searching for a response.
It is becoming increasingly clear that retail reinvention isn’t a simple battle to the death between bricks and clicks. It is 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.
Retail reinvention is not a simple process, and it’s also not happening on what used to be called “Internet Time.” Some Internet-driven changes have happened quickly, of course. But many widely anticipated changes weren’t quick, and some haven’t really started. With the benefit of hindsight, it looks like the Internet will transform the economy at something like the pace of other great inventions like electricity: it will take decades, with occasional jolts, like the quick demise of video rental stores.
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 retailer gets a customer to walk in the store he 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. Many are having the same problem that newspapers have had. Even if they get online traffic, they struggle to make enough money online to compensate for what they are losing offline.
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.
(Source: Business Review)