What is the Fate of Retail?

In the late 1950s and early 1960s, a new phenomenon in the consumer goods industry was developing in America: the birth of the retail industry. Instead of buying distinct household items and food from different places like mom and pop shops and other small businesses, people increasingly began to flock to large department stores such as Walmart, Target, and Kmart that offered everything in one place. Throughout the second half of the 20th century, the retail industry grew larger and larger, and soon it came to dominate the consumer goods market, out competing many of the once-prosperous mom and pop small businesses. Now in 2018, a similar phenomenon is happening, this time with an unfavorable result for the retail giants. Consumer preferences are beginning to shift towards online purchasing.

The 21st century brought the rapid growth and development of the internet and more importantly the online marketplace, where people can purchase items right from their home computer. As the internet continued to evolve, a multitude of websites such as Amazon and eBay began to enter into the scene in the late 1990s. Investors and consumers both took notice of this trend in the internet, which prompted the start of the tech bubble. Regardless of the business model, investors were willing to put their money in any website that popped up on the world wide web. The tech bubble was opportunity for rapid growth for the new tech companies, yet only a handful survived the tech crash after the crux of the bubble in 2001. At this point in time, investors’ confidence in the technology sector was low, and it took a while for their stocks to reach the level they once did. For example, Amazon’s peak during the bubble was not reached again until 2009. From there, Amazon and many similar companies grew even more rapidly than before.

Retail stores, most commonly found in large shopping malls or shopping developments, began to follow this trend by offering their own products via the internet, allowing customers to order items from their computers. In fact, online sales made up 59% of total retail sales in 1999. But even so, many of the retailers that were giants back in the golden days of retail have begun to fade. Sears, once the largest retailer in the world, is on the verge of collapse as its sales wane further and further. Sales for the once-dominate retail company have been reduced to nearly half from 2011 sales. Sears Holdings Corp. (SHLD), who is the parent of both Sears and Kmart, has closed half of its Kmart stores and a fourth of its Sears stores, leaving the grand total of stores still in operation at 1,250. Even its suppliers such as Whirlpool and Craftsman, many of whom Sears has had a long relationship with, are imposing strict deadlines on Sears, even threatening taking away their product from selves if Sears paid a day late. Just a quick look at Sears prices online, almost every item is available at a discount.

Similarly, Walmart has been hedging itself against the negative trend of retail. Walmart’s battle with Amazon over control of the many subsets in the retail industry is a constant back and forth. Walmart has been finding ways to improve its online marketplace by combining brick-and-mortar services and online/mobile capabilities, allowing consumers to order something online and pick up the same day in-store. Walmart has also recently been in talks to acquire health insurer Humana (HUM) and plans to provide health insurance along with its pharmaceutical services that are available in-store. By doing this, it diversifies its product and service lines in the face of close competition from Amazon. A significant amount of Walmart’s sales revenue comes from its grocery sector, and now Amazon is trying to directly compete with Walmart with its acquisition of Whole Foods. Amazon has been developing a new grocery strategy that eliminates check-outs altogether in order to make the shopping experience that much more accessible and convenient.

But what does all this mean? Certainly, it seems like retail companies are subject to a huge shift in consumer preferences towards online purchasing. However, looking at the aggregate data of the entire industry, we find that only 10% to 15% of adults in the United States make online purchases once a week or more. For categories such as grocery or beauty, consumers overwhelmingly turn away from online purchasing and tend to buy their items traditionally in-store. Although online shopping is becoming increasingly more convenient and expedient, many adults are taking their time to shift their shopping habits. Kurt Jetta from Forbes explains that brick and mortar sales growth is declining not because it’s being shoved out by online sales, but by families with growing purchasing power spending a larger percentage of their money in other sectors such as cars and other durables, which do not provide information about online vs. brick and mortar sales.

That’s not to say that online shopping does not pose a threat because, as we have seen, many companies cannot keep up with the changing trends. As the younger generation of adults become a larger percentage of consumers, online shopping will only become more prominent. In 2013, 68% of millennials shopped online and made online purchases; now that number has increased to 77%, and it is expected that it will only grow from there. Retail companies are going to need to step up their online game if they want to succeed in the future. The only constant in business is that there will always be change, and those who understand that reality have already taken the first step towards success.

Sources:

Bird, Jon. “Nordstrom Vs. Sears: An Open-And-Shut Case For Department Stores.”Forbes, Forbes Magazine, 13 Apr. 2018.

Braun, Stephanie. “The History of Retail: A Timeline.” Lightspeed POS, 9 Feb. 2017.

Court, Emma. “Walmart's Potential Humana Deal Could Connect Your Health Insurance with the Produce Aisle.” MarketWatch, 3 Apr. 2018.

Editors, Forbes Technology Council. “The E-Commerce Paradox: Brick-And-Mortar Killer...Or Is It?” Forbes, Forbes Magazine, 30 June 2017.

Kapner, Suzanne. “Inside the Decline of Sears, the Amazon of the 20th Century.” The Wall Street Journal, Dow Jones & Company, 31 Oct. 2017.

Mattioli, Dana, et al. “Walmart in Early-Stage Acquisition Talks With Humana.” The Wall Street Journal, Dow Jones & Company, 30 Mar. 2018.