The Case For The Bright Future Of Brick-and-Mortar Retail23 February 2020
It’s interesting to see how industry outsiders react to when I talk about how enthusiastic I am about brick-and-mortar retail. It’s easy to have been convinced by the click-bait headlines of 2017 warning of the impending “Retail Apocalypse.” But just like not every storm is a “snowpocalypse,” these clickbait headlines do a disservice to what’s going on in retail. Of course there is increasing pressure from eCommerce. And certain sectors like department stores which haven’t innovated and have competed solely on selection are getting decimated.
At the same time, the case for the bright future of brick-and-mortar retail has more supporting data than ever. So I’ve decided to put together this resource to talk about what is really going on in the retail industry.
Physical Retail vs. eCommerce – Physical Retail is a $4.4 Trillion Market, 75-89% of Commerce and Is Growing More on a Dollar Basis Through 2038
Let’s start at the top on pure market size. Physical retail, depending on how which categories you include commands 75-89% of the market. If you include all categories as the US Government does, you end up at 89% because that includes automobiles (21% of retail), grocery (12.6%), gasoline(8%) and bar/restaurants (12%).
Remove autos and service (but keeping grocery) and you get to the lower end of 75%.
eCommerce is growing at about 14% while physical retail is growing at about 2%. That sounds like a pretty big difference, but when you plot it on a graph as Wolf Street did, I would ask you where would you want to invest? In the blue line market or the red line?
The reality is that eCommerce is such a small part of the market that on a dollar basis physical retail is growing more than eCommerce. Take a second to read that again. In fact, physical retail is projected to grow more on a dollar basis until about 2038.
So brick-and-mortar retail on the very top line is a $4.4 trillion market that’s vibrant and growing 1.9% CAGR.
Sector Breakdowns On Store Closures – 5x More Brands Are Opening Stores Than Closing Them, The “Barbell”Middle Market Hollowing, Grocery and Big Box Are Hot
It shocks most people that for every brand closing stores, there are 5 brands opening them. That said, store closures are at the heart of the physical retail market concerns. And there certainly are a lot of store closures. Here is a slide that McKinsey put together and there is also great store opening and store closure data from Coresight on there weekly and annual trackers.
There’s a lot of data here, a la McKinsey. The callouts are key. 87% of store closures are Department Stores or Specialty Apparel. Taking those two out, segments like Grocery, Big Box, Discount/Off Price, Specialty Beauty and other are actually growing considerably. In fact, just 16 retailers responsible for 73% of store closings in 2019. That’s a lot of growth outside of those few failing.
The reality is that most of the store closures are coming from the middle of the market, which reflects both an undifferentiated offering and the demographic hollowing of the middle class. Outside of the middle market, even fashion retailers, the weakest category market in terms of store closures, are growing. It’s all a matter of perspective and understanding the underlying shifts.
The overall market is quite strong as evidenced by the stock market. If you had invested your money in the Largest US Brick-and-Mortar Retailers, you would have outperformed the S&P 500 as of my keynote at Mobile World Congress LA on Oct 23rd 2019. Here’s my slide…
The Rising Costs of Online Acquisition Are Squeezing The Margins Out of eCommerce For Everyone But Amazon, Facebook and Google
The reality is that brands dependence on platforms such as Facebook/Instagram, Google or Amazon means paying to be on that toll road. Google is increasingly putting organic results well below the fold and making ads less clearly identifiable. They want more ad revenue. Want to show up in the shopping section? Got to pay that tollroad. Organic reach on Instagram is around 1% and falling, Facebook was 1.2% in 2018 and reducing by roughly half every year and in fact some posit organic engagement will go effectively to 0% as the platforms crowd ads in every crevice of your feed. Even Amazon is increasingly taking their piece not just on platform fees, but on their advertising business which has grown from $0 to $15 billion (!?!) and will grow 423% to $40b by 2023!
The challenge with platform monopolies is that there is competition for demand but not supply. Jeff Bezos famously said, “Your margin is my opportunity.” Facebook/Instagram are squeezing all of the margins out of acquisition algorithmically, because they have monopolistic control. As a result, D2C companies we meet with are all feeding back that they are seeing Facebook/Instagram CPAs are up 250-300% over the last 5 years. Here’s some great research on the changes to CPCs and conversion rates. There’s a reason that 2/3rds of D2C companies that have raised more than $6m have opened stores. For many D2C brands, they are quickly realizing that to scale they need another solution. At scale, the cost of acquisition for stores is lower than online.
Warby Parker? They were making more money in-store than online when they had just 50 stores. Now they have well over 100. Madison Reed is opening up 600 stores. Casper 200 stores and they called it out as a definitive advantage in their IPO prospectus. Stores are the path to scale. Even Amazon is opening up stores - 4 Star Stores, Amazon Books Stores, Amazon Go Stores and of course buying Whole Foods. If Amazon needs stores to scale, it’s pretty telling.
Stores Have Better Unit Economics - Online Returns Are A Massive Growing Problem, While Stores Provide Better CaC, Profitability, Customer Loyalty, Return Rates, Etc.
Stores also have better unit economics beyond the Cost of Acquisition. eCommerce return rates are over 30% where as stores are just 8.9% - a 3.4x difference! In fact, online return rates have spiked 95% in the last 5 years. Even worse, online over half of retailers offer free returns, which is extraordinarily costly, where as consumers have to return items themselves in store. The costs add up. For example, Revolve processed $531 million in returns on $499 million in revenue! Retailers lose a third of their revenue to returns, says RSR Research retail analyst Paula Rosenblum. Happy Returns estimates that in the US $550 billion in goods will be returned in 2020.
In reality, in store customers spend 83% more and return 64% less, so not only is your cost of acquisition lower at scale, but also the profitability of clients is greater.
As Steven Dennis wrote “The Inconvenient Truth About eCommerce: It’s Largely Unprofitable.” Amazon’s profits are fueled by AWS (and now their advertising business) not eCommerce, which they operate at a loss.
Stores also have a significantly greater brand impact on the customer than online or mobile, which is why there is such a big impact to owning an omnichannel customer vs. a single channel customer.
More Than 80% of Both Millennials and Gen Z Prefer Shopping In-Store As Spend On Experiences Increases
There are categories where the pure transactional nature of eCommerce makes a lot of sense and is preferred by customers. A PaymentSource study showed that 82% of millennials prefer to shop in-store. Another AT Kearney Study showed that 81% of GenZ likes to shop in store and 73% prefer to discover new products in-store.
Increasingly spend is turning to experiences and those experiences are found in-store. An Accenture Study on the experience economy showed that millennials spend 22% more on experiences than Baby Boomers and growth in experience spending is growing 3.9x faster than total goods and 70% faster than personal consumption goods.
Putting It All Together - Is Brick-and-Mortar The Undisputed King?
So there’s the full case for brick-and-mortar retail. And I am more encouraged than ever looking at how retailers are increasingly investing in technology like QR code retail implementations to take in-store capabilities into the digital age. The next decade will show vastly improved capabilities, experiences, and data that will further increase the value of store networks.
Given that physical retail is much bigger, growing more on a dollar basis, more profitable, more impactful to customers, more important for the brand and preferred by customers. That leads me to conclude that brick-and-mortar is the undisputed king of retail over eCommerce.
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