The retail business has been evolving at a dizzying pace. Sure, fashion trends have always come and gone, and stores have always opened and closed. But what we are experiencing now is different. How, what and where we shop is different today than just five, two or even one year ago. This unforgiving pace of change is aptly captured in Amazon’s log-scaled stock price chart, which is essentially a manifestation of Moore’s Law applied to retail.
While e-commerce continues to capture only a fraction of the overall consumer retail market (13% of 2017’s $3.5 trillion total adjusted U.S. retail sales, or less, depending on how you slice the market), e-commerce punches above its weight contributing to 49% of the sector’s year-over-year growth, according to data released by the U.S. Commerce Department in February. The omni-connected consumer and “never closed” retailer have and will continue to transform the sector both online and off.
This is the Retail Revolution.
In the coming days, Yahoo Finance will explore the various ways disruption is affecting the ways consumers shop and retailers conduct business. We’ll delve into the ways e-commerce has changed the consumer experience, how brick-and-mortar is evolving and why it will stay relevant, what next-generation payment systems are doing to speed up transactions, and then we’ll go on to examine the profound implications for the economy.
Part 1: What Online Enables for Retail
Shopping and selling, both online and off, has never been more competitive – with an increasing number of hawkers using an arsenal of technology to capture the attention of savvy consumers who carry in their pockets the ability to continuously find a better deal. (Or, at least, consumers believe they can – read Monday’s article on search insanity to understand the power of search engines to influence what a consumer thinks they know and consequently what they buy). Both new and incumbent brands increasingly harness the internet, adtech and social media to go “direct-to-consumer,” to develop an omni-present relationship with consumers in the hopes that the myriad daily product offerings begin to feel like subtle persuasions of a dear old friend rather than price haggling of a vibrant Turkish bazaar.
Hand-in-hand with social media and the conversations brands have with customers, is the power of influence. From eBay, Etsy and Instagram to athletes, Hollywood celebrities and everyday bloggers, individuals are leveraging their influence to create and cash-in on products. And whether brands want to or not, consumers are demanding through these conversations, that the products they buy have a point of view. Yahoo Finance talks to brand leaders such as Steve Madden, who are increasingly speaking out on political and social issues such as marriage equality, standing for the national anthem, sexual harassment, the sale of guns, and more.
As a result, the brands that break through the noise by offering superior convenience, customer service and personalization, value proposition, price transparency, branding, and/or in combination with first mover advantage have been able to gain share and through platformization win a category. Companies that scaled to IPOs or $1 billion-plus strategic acquisitions last year, include Etsy, StitchFix, Wayfair, Jet, Dollar Shave Club and more.
There is an elephant in the room during every conversation with and about retailers, and it’s not just a river in South America. Yes, no conversation about e-commerce, let alone retail, could be complete without digging into the “Amazon Effect.” Whether one sells furniture, flowers, home improvement, luxury fashion or operates airport new stands, retailers seek to isolate their businesses from Amazon’s reach (or at least current attention). Given Amazon’s domination at nearly 50% of the total e-commerce market combined with a growing physical footprint, competitors cannot sit on their laurels and just expect their business to remain “Amazon-proof”.
Part 2: Brick-and-Mortar isn’t going anywhere
Despite headline grabbing announcements of record store closures, bankruptcies, and “the death of the mall,” retailers in 2017 actually opened more stores than closed according to a 2017 report from IHL Group. The growth in brick-and-mortar is primarily due to the expansion of deep discount retailers, such as Dollar General and Dollar Tree stores. Yahoo Finance speaks with retailers and industry experts that insist brick-and-mortar isn’t going anywhere.
Echoing larger demographic trends, such as a shrinking “middle class”, the retail market is similarly becoming bifurcated. Retail is experiencing growth within both deep discount and luxury brand segments. Traditional retailers which used to sell non-discretionaries at a moderate mark-up are being hit hardest, forced to squeeze margins to unsustainable levels given their fixed overhead and built-out (often debt laden) infrastructure.
To improve return per square foot, retailers are rethinking their brick-and-mortar strategy. Retailers are converting traditional stores, once stocked floor to ceiling with inventory, into showrooms, shrinking footprints, opening pop-ups, and supplementing the buying experience with customer service offerings (e.g, bike repair and “genius bars”). Dining options, in-store only discounts, events and “selfie-factory” opportunities are additional tactics to incentivize customers to make physical visits. Nordstrom, one of many examples, opened a concept store in Los Angeles at the end of 2017 that holds no inventory, but enables engagement with personal stylists, tailors, and beauty services as well as online purchases and pick-ups.
Retailers are taking an omnichannel approach, removing residual internal friction between online and offline to leverage the strength of each channel’s ability to engage the customer. Although, as former Hudson Bay CEO Gerald Storch explains, even when brands do not completely lose sales to competitors, “every time a dollar of sales goes from being an in-store sale to an online sale [retailers] lose money” given the higher costs of delivering purchases direct to a customer’s home (not to mention the expense of offering free returns). The potential of higher per unit economics through brick-and-mortar is among the reasons we are seeing online-first players, such as Warby Parker, whose founder recently spoke with Oath’s Susan Lyne, and Rent-the-Runway also open showrooms.
Yahoo Finance speaks with retailers and investors about the tactics to create in-store experiences and product offerings that drive higher foot traffic; introduce supplemental revenue streams within the floor plan; and create an omnichannel approach that strategically fulfills customer needs as well as introduce technology that can collect, analyze and inform retailers about customer engagement similar to the data they have been able to leverage to optimize profitability online.
Part 3: Payments and Logistics
It’s hard to believe that Amazon only comprised 3.7% of total US retail sales of the top 100 retailers in 2016, according to the National Retail Federation’s most recent full year report, when it dictates the rules of the game for online in terms of pricing, one-touch checkout, and two-day shipping. As a result, consumer offline expectations and behavior has also shifted. Convenience, and the seamless payment through fulfillment process, is no longer a perk offer. Not only do customers demand this from retailers, but cutting out friction and cost along the purchase process is also becoming increasingly vital to a retailer’s survival.
As we’ve learned, while ecommerce is the fastest growing component of the retail sector, this growth in revenue is unlikely to translate to a growth in profit given the variable costs such as shipping. Likewise, as purchases migrate online, retailers have less revenue to cover the fixed costs associated with their brick-and-mortar footprint. Increasing the efficiency of and reducing the costs of logistics and payments is therefore a growing priority for retailers both online and off.
While industry experts deem we are still years, and significant investment dollars, away from an onmi-connected IoT world when washing machines automatically reorder detergent, drone delivery, and in-store dynamic, real-time pricing, the fact that these solutions are being experimented with provides a pathway to their eventual, potential, adoption. Retailers are kept up at night wondering “Are we moving fast enough?” The advent of “Conversational Commerce” is one such innovation which today is being actively adopted by retailers, incorporating voice-enabled capabilities into the discovery, purchase and fulfillment experience. Levering companies that can provide last mile delivery solutions will also enable retailers to meet online customer expectations from brick-and-mortar locations.
Yahoo Finance explores the impact that digital currencies, voice, AI, checkout and delivery innovations have in reinventing the industry with retailers and industry experts.
Part 4: Changes for Real Estate
As big box retailers and department stores shrink their footprints, the retail disruption is reshaping the look and feel of main street and malls. Yahoo Finance spoke with real estate developers who are rethinking the types of “anchor tenants” to have in order to attract potential shoppers and provide quality of life benefits to residents of mixed-use commercial properties.
While not new concepts, the decline in retail specific foot traffic along with millennials’ and consumers’ increasing desire for experiences and good food is driving growth of eatertainment and food halls. Additionally, developers are carving up the space previously held by one retailers, and filling it with multiple tenants.
During International Women’s Day, today, retailers, including McDonald’s, Mattel and others, used the opportunity to “celebrate women,” primarily through PR and product launches. Whether this converts to profit or substantive change for the companies remains to be seen.
Part 5: Jobs
Yahoo Finance closed the week looking at the significant impact the retail revolution is having on jobs. There was a nice jump in retail jobs last month, with retail reporting gains of 50,000 jobs in February, including 18,000 in general merchandise stores and 15,000 in clothing and clothing accessories stores. But that doesn’t offset a long-term trend where job growth for the industry has been going sideways, and where 67,000 retail jobs were lost during 2017.
Chief U.S. Economist Michelle Girard of NatWest Markets, tells Yahoo Finance that despite some market volatility, we can expect consumer confidence and consumer spending in 2018 to be bright. She is unconvinced, however, that growth in the retail jobs sector will continue in line with February’s performance.
Where has there been growth and a stronger long-term trend? Take a look at transportation and warehousing jobs. While much smaller than the retail trade business, transportation and warehousing reflect the rapidly growing online shopping movement.
Thanks for being part of Yahoo Finance’s deep dive into the retail revolution this week. We look forward to continuing to cover your stories as well as those of business leaders, employees and consumers all navigating the evolving retail landscape.
(Editing by Katharine Rogers)