How online sales have affected traditional sales

The online-shopping revolution has been heralded and hyped since the mid-1990s, and has been advancing quickly for a decade. So how did we end up with a consumer industry that seems unprepared for it?

Consider the evidence that’s piled up over the past few months, showing growth in e-commerce has indisputably begun to upend the familiar American shopping economy:

Visits to retail stores during the holiday-shopping season collapsed, despite broad improvement in the economy and job market. As the Wall Street Journal neatly detailed Friday, measured in-store traffic in November and December was around half the level of the same period in 2010 – a time when the economic recovery was in a significantly more fragile state. But that’s not because folks didn’t spend – industry estimates place 2013 holiday-spending growth at close to 5%.

Best Buy Inc. (BBY) reported same-store sales slipped 0.9% amid some of the heaviest discounting on electronics in years. Sears Holdings Inc. (SHLD) and JC Penney Inc. (JCP), already tired market-share losers at the mall, saw their struggles worsen and remain in heavy store-closure mode. Even Macy’s Inc. (M), easily the best operator in mainline department stores, is trimming its physical presence, closing five locations and shedding 2,000 employees.

Even among the most ubiquitous chains where sales are holding up, they owe much success to their online presence. For Gap Stores Inc. (GPS), online sales in the third quarter grew by 20%, and amounted to 15% of company-wide revenue.

There are simply far too many stores in this country for the current level of in-person shopping that occurs. Even as customer traffic has slid dramatically, total retail square footage has continued to increase each year, albeit at a reduced pace since 2008.

In part, the retail-store boom tracked the credit and housing bubbles. New suburban and exurban development brought waves of consumers to new areas, and cheap capital allowed for the plopping down of shopping centres by developers looking to serve these folks. But unlike in the single-family home market, where foreclosures, bank loan losses and an influx of private-investor capital purged and refreshed the system, hardly any net closure of stores has occurred. And while people will always need a place to live, it’s clear many feel no need to walk the aisles of a store as often as they used to.

Fewer afternoons at shopping centres has also meant fewer dinners at the nearby restaurants. Dining chains have witnessed lower customer traffic for nine of the past 13 years. And while the declines in visits were understandably most pronounced in the recession years of 2008 and 2009, they reaccelerated in 2012 and 2013 again, as Knapp Track data cited by HedgEye Risk Management’s Howard Penney show.

Much else is happening here, from tired menus and restaurant concepts to the rise of “fast casual” chains. But the point is the same as with chain retailers: There are too many locations and more people are choosing to take what they want “to go” or getting deliveries to their home.

Meanwhile, in a surprising turn, the concentrated surge in online buying over the holiday season buckled the package-delivery infrastructure. An Post, which already announced how weather and logistical challenges kept it from making many deliveries as promised by Christmas, on Friday said its fourth-quarter profits would fall short of Wall Street forecasts largely due to its miscalculations. This year, the growing pains caused by trying to service the enormous demand for immediacy seem finally to be taking a toll.

Clearly, a number of industries need to retool in order to adapt to this acceleration in the rise of on-demand, online consumer preferences. From a broad economic perspective, though, the effects are likely to restrain consumer-price inflation. Technology is deflationary, universal price-comparison ability is deflationary and excess store capacity should be deflationary, both for retail prices and perhaps store rents.

Ireland isn’t the only country where this trend is occurring. American journalist Barry Ritholtz notes at Bloomberg View, the retail game in most mainstream categories has made price-matching virtually mandatory. Casual-dining “value pricing” has escalated to near-comical levels of calories per dollar on offer. Red Lobster is promoting two entrees, two salads and a dessert for $29.99, and Olive Garden, another Darden eatery, has four lunch entrees for sit-down diners priced at $10 – barely above the average cost of a takeout meal at Chipotle.

As such, behaviour becomes ingrained as business-as-usual for companies, it will be hard for sellers of consumer goods in a broad expanse of the economy to lift prices with much success.

Share This:

This entry was posted in Blog. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.