It looks like we can finally have a serious conversation about the impending collapse of physical retail in the U.S.
All it took was a 160-year old retailer and a $34 billion kick in the stomach to the retail sector to get everyone’s attention.
News last week that Macy’s profits would take an unexpected Q4 nosedive set off a retail stock market shock wave that wiped $34 billion in value from the sector. But it wasn’t just Macy’s that got out over their skis about the prospect of a blowout holiday sales season with an employed, confident consumer ready to spend. Kohl’s and JCPenney, along with other specialty retailers, reported the same lackluster holiday performance in what is still considered the sector’s make-or-break quarter.
Of course, last week was also the long-anticipated swan song for the nation’s second oldest U.S. retailer, Sears, which found itself standing at Chapter 7’s front door.
Analysts who think of Macy’s as the bellwether for middle-America shopping and spending trends blamed some of the retailer’s gloom and doom on consumer skittishness over the stock market’s roller-coaster ride in the weeks preceding Christmas. A fire at Macy’s distribution centers, they said, also hurt inventory availability.
Although both could be contributing factors, that isn’t what ails Macy’s — or any of the traditional physical retailers who have spent years now trying to convince the world that it, as a retail channel, isn’t dead.
The Demise of Physical Retail
Maybe it isn’t.
But the traditional physical store model, which is how most everyone today defines physical retail and measures its sales, pretty much is — and has been for the last several years — on life support.
It doesn’t even take 10 words to summarize physical retail’s current malaise: Retailers missed the digital forest for the physical trees.
And that was, in large part, because they relied on bad data to make bad assumptions about how and where consumers would shop. Bad analysis that also helped blind many to the obvious.
To save physical retail, anyone who wants to operate a physical store must convince consumers that it’s worth their time to — how’s this for an insight? — go there to shop.
That won’t be a slam-dunk for traditional retailers.
That’s because they’ve trained consumers over the last half decade that walking into a store isn’t as nearly as satisfying or productive an experience as shopping online — and not necessarily from those same traditional players.
The Danger in the Data
I wish I had a dollar for every time I’ve heard someone say this:
“Physical retail isn’t dead — 90 percent of all sales today happen in a physical store.”
At the same time, we read the reports of year-over-year declines in foot traffic, see nearly 11,000 store locations shutter since 2017 and have 200 million square feet of unoccupied retail space in malls and main streets up for grabs.
Flawed Census Data reporting, combined with wishful thinking, fuels that now familiar talk track.
The myth of physical retail’s largesse, as perpetuated by that inaccurate Census Data, is a story that we uncovered almost three years ago to the day. Part of the problem is that the Census data doesn’t appear to be very reliable; the other part of the problem is that the Census does not report the data they do have in a way that would actually shed light on what’s happening in retail.
What’s really steered people wrong is focusing on the average percentage of all retail sales that are online, and ignoring what’s happening in key verticals. It’s like saying that on average, there are no canaries in the coal mine, so no worries.
Even though there were canaries in some important ones.
Take a peek at these numbers which we’ve put together using a combination of Census and other data sources we used to build our own models. I’m also pretty confident that clothing or sporting goods or electronics retailers aren’t talking about how 90 percent of retail sales are still happening inside their stores — if they’re even happening at their stores at all.
Then there’s how Census counts retail sector heads.
If one were to remove auto, restaurants and gas from their totals — as we did — you’d get a different number. Instead of nearly 90 percent, nearly 80 percent of all retail purchases are made in the physical store.
Of course, one doesn’t have to be a data scientist with fancy data models to know that people are shopping at physical stores less than they ever did.
All it takes is shopping at a physical store over the last four years and talking to the salespeople working in them to observe that there’s not a whole lot of shakin’ going on inside of them.
Aided and abetted by mobile devices, apps and payments and logistics innovations have substantially improved the consumer’s digital shopping experiences. At the same time, their in-store experiences have gotten less reliable. Consumers, who prize time as their most precious asset, want both convenience and certainty when they shop.
Visits to a physical store don’t always deliver either.
So, consumers don’t think twice about buying online the things that used to be physical retail’s exclusive domain: clothes, jewelry, sporting goods, electronics and, increasingly, home furnishings and even auto parts.
Consumers have widened the physical/digital retail shopping divide.
PYMNTS’ study of 2,600 U.S. consumers, which we conducted in the fall of 2018, makes this point stunningly clear in two categories where physical stores should have an advantage: clothes and beauty products. The ability to touch and feel and try on and sample should deliver an in-store advantage.
Yet only 42 percent and 34 percent of consumers who bought clothes or beauty products, respectively, over the seven days we asked them to document their shopping and buying behaviors said that they did so in a physical store.
We observed similar patterns this past holiday season.
PYMNTS’ study of 1,000 consumers, which we did the day after Black Friday 2018, reported that 40 percent of the consumers who shopped on Black Friday said they did so from their couches. The 60 percent who went to the store did for one reason: They were certain that if they did, they’d snag a doorbuster deal.
In both situations, our samples statistically represented the demographics of the U.S. adult population. Those consumers told us that the physical store was third on their list of preferred shopping channels, with desktop or mobile being one or two depending on what was purchased.
Reading the Right Retail Tea Leaves
Amazon has long been regarded as physical retail’s big bogeyman, the online behemoth that got a nearly 20-year hall pass from Wall Street while reporting no profits, and with the luxury of subsidizing its retail business and all of the Prime member goodies with profits from other parts of their business, like their AWS cloud biz.
I guess every sad story needs a bad guy.
But consider this.
When Amazon was founded in 1994, most retail was done in the physical store.
Amazon started with zero customers, zero brand awareness and a very ugly website with a clunky user experience, by today’s standards.
Amazon sold one, and only one, product: books.
And it did so via a channel that was not at all conducive to a digital shopping experience.
Then, only 42 percent of U.S. consumers had ever heard of the World Wide Web, and the most popular way to get online was the dial-up modem, which some people had used to access AOL. Here’s what that sounds like, for those who’d like to take a walk down memory lane — or for the millennials reading this who have never known anything but 3G.
It would take two minutes and 30 seconds to load a web page.
Not exactly a great user experience.
It would take another 12 years — until 2007 — for half of the U.S. to have broadband at home. And another seven — until 2014 — for more than half of the U.S. population to own a smartphone.
It’s not surprising that retail dismissed digital — and online shopping via digital channels — as a small, and perhaps insignificant, part of the consumer retail experience.
But forward-looking innovators, of course, knew the digital world would only improve, and that it was just a matter of time before more people would have access to broadband at home and own their own mobile phones that could connect to the internet.
And they knew that when more people did, there would be more demand for better mobile devices and faster network speeds to enable those digital commerce connections. And that would drive more demand for more and better apps that would increasingly blur the digital/physical worlds.
Payments innovators saw the mobile, digital future, too, and invested in ways to remove friction at checkout. And they knew that more apps with better payments experiences would sell more smartphones, perpetuating the virtuous cycle of digital commerce innovations.
Between 2007 and 2014, Amazon’s net retail sales grew explosively, making it the leading eCommerce player — 20 years after Amazon was founded. The now-defunct Sears occupied the fifth spot and Macy’s was №8, with web volumes that were growing but that were dwarfed by the sales volumes driven by the feet walking in and out of their stores.
Unfortunately, those data points also dwarfed the impact that digital and mobile would have on retail’s status quo, and the relevance that consumers would place on the role of the physical store in this new digital world.
At the end of Q4 2014, Census reported that online sales were roughly 6.5 percent of all retail sales, up from 5.8 percent in 2013, totaling $308 billion. You can also find tons of articles that talk about online being only a few percent of retail sales, and about online being overhyped and the death of physical retail just hysteria.
It’s hard to believe that was only four years ago.
The Great Physical Retail Store Paradox
Over the last several years, retailers have spent hundreds of millions of dollars on attempts to get consumers inside of their stores. They host fashion shows. They bring in experts to demonstrate new products. They use sports figures and celebrities to hawk brands and products. They install magic mirrors in fitting rooms to make trying on clothes more efficient. They give salespeople iPads that offer tips on what to pair with what or how to use specific products. They offer in-store only sales and promotions.
When NRF opens tomorrow, the trade show floor will be loaded with even more innovations designed to do the same thing. There will be new ways to detect shoppers when they cross the store threshold, and robots to greet them and help them find things in the store. There will be new in-store AR and VR experiences to induce purchases there.
Only time will tell if that is all too little, too late.
Physical retail is now facing the same uphill climb that Amazon and other e-tailers faced when they launched in 1995, with one big difference: The digital trendlines are moving in the same direction today as they were then, but the tailwinds aren’t at their back.
This shift to digital from physical has happened very quickly in a sector that accounts for $4.2 trillion in consumer spend. In 2008, the year after the iPhone was introduced and the mobile, digital revolution was truly unlocked, Census reported that physical store sales were at roughly 97 percent.
At the same time that retailers (and their consultants and analysts) were reading the Census Data tea leaves and thinking it would be another 20, 30 or 40 years before eCommerce would become more than a speck on the head of a pin, consumers were accelerating their use of mobile and digital channels for making retail purchases.
And getting very accustomed to the certainty and convenience of finding what they wanted to buy online, and getting it when they needed or wanted to have it.
And they were growing very frustrated with the uncertainty they found when going to the physical store — and cutting back on those trips.
Stores don’t have the inventory they once did. Nor the prospect of getting it any sooner than if the consumer ordered it online at home.
Options to buy online and pick up in store are mixed — the dozen or so times I have tried to use it, what I found was a two- to three-day wait.
Walking into a store to find something to buy isn’t that much fun anymore, because there are so few consumers in the store shopping — even around the holidays — and so few things to choose from.
The salespeople in those stores aren’t always helpful — or are, at the other extreme, much too helpful, since consumers in the store are such an increasingly rare sighting. Regardless, most salespeople don’t have complete visibility into the consumer’s shopping history to make the experience productive.
No inventory plus no shopping vibe makes the physical store a dull place to shop.
And the negative feedback loop between all of them leads to the death spiral.
A Change Could Do Physical Stores Good
Getting consumers to change their thinking means getting retailers to change theirs about the role of the physical store.
Investments in click-and-collect can get consumers part of the way there. But even that isn’t a guarantee that consumers will buy more stuff when they get there — or that they will ever step foot inside. The convenience of curbside pickup and lockers that don’t require stepping into the store or even picking up at the store put consumer convenience first — as it should be — and plying consumers into the store second.
Several years ago, I wrote that the future of physical retail as a category, and the physical store as its consumer touchpoint, will follow the path that traditional media has taken: those with scale or those with rich but narrow niches will survive.
Those with scale will use it to get the inventory and logistics and delivery efficiencies that satisfy consumers across all of the channels they shop — and build their digital chops.
As will those with narrow niches — the local clothing atelier or designer brand who can marry a unique selection with exceptional customer service — because the experience they offer will be quite different.
The great undifferentiated, unwashed middle will shrivel up and die.
Innovations in how consumers use connected devices to order ahead for pickup or use QR codes to avoid checkout, and/or pairs that with smaller-format stores and in-store tech that makes shopping for a few items efficient and seamless, have already changed the consumer’s mind about how they want to use the physical store.
Physical retail definitely isn’t dead. Just take a look at Amazon Go.
But physical retail in the future will look a lot like media: mainly new players using technology and new business models to do things in new ways.