More Challenges Ahead for Physical Retail

People like to shop, and they like places at which to shop, and the phenomenon is global.

People like to shop, and they like places at which to shop, and the phenomenon is global. Anyone who’s been to an underground shopping street in Japan or one of the new megamalls in the Gulf States or even one of the more successful lifestyle centers in the United States can appreciate that fact. Even so, online retail sales continue to eat market share from physical retailers, so in some cases people prefer to order from home or from a mobile device. According to the Census Bureau, e-commerce sales were up once again in the second quarter of 2015 both in dollar volume (seasonally adjusted) as a percentage of total sales, a pattern that’s been consistent for more than 10 years.

In 2Q 2015,  U.S. retail e-commerce sales totaled $78.8 billion, an increase of 5.1 percent from the first quarter of 2015, and an increase of 14.4 percent from the second quarter of 2014, while total retail sales increased only 0.9 percent in the same year-over-year period. Moreover, e-commerce sales in 2Q 2015 accounted for 7.2 percent of total sales, an all-time high (as an adjusted figure, because relative to each year, absolute retail sales numbers are always higher in the fourth quarter). As recently as 2010, e-commerce sales were only about 4 percent of all sales, and in 2006, they were less than 3 percent. As time marches on, consumers are more willing and able to order goods online.

The nuance of the matter is that e-commerce isn’t going to threaten all retail sectors equally, or even some much at all. As destinations, many malls still have staying power, and so do many stores. Moreover, shopping is a social activity that transcends mere economic utility. But not for every kind of good: e-commerce has already disrupted a number of categories, such as books, office supplies, electronics, and home furnishings—things that are relatively easy to buy electronically. There’s been less success in other categories, such as groceries or clothes online, but e-tailers are hard at work trying create sales models that disrupt those categories, too.

In the longer run, other factors will come into play for brick-and-mortar retailers. One might be the almost inevitable swing back toward home sales. For now, apartments still have the upper hand, but with the population bulge known as the Millennials edging toward an age when they will start having their own children (later than their parents and certainly their grandparents, they’ll get around to it), there will be a spike in interesting in home buying. That affects retail sales because homeowners tend to buy more than renters. Will Millennial homeowners turn out to prefer online purchases for their homes, or stick with physical stores? For some goods, probably the former; for other goods, probably the latter, though it’s a little hard to predict which retailers will be the winners in that circumstance and which the losers.