Traditional US retailers will generate half their sales growth online for first time in 2014, according to Stifel Financial; migration to online shopping expected to accelerate as 80 million US millennials start families, buy homes
Cindy Allen
June 25, 2014
(Bloomberg LP)
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CJ Chu is a retailer’s nightmare.
The 24-year-old associate for a private-equity firm does “99 percent” of his shopping online -- even toothpaste. He’d rather buy groceries on the Web than walk to the supermarket. “Convenience and free time is something I value,” said Chu, who works for Bridge Growth Partners LLC in New York. “Ordering online just makes more sense.” Chu is an extreme case. Yet millions of Americans like him are abandoning stores faster than executives predicted, pushing the industry to a precipice. Traditional retailers, for the first time ever in 2014, will generate half their sales growth on the Web, according to Stifel Financial Corp. That means about $18 billion in new revenue generated this year will come from online purchases, an analysis of U.S. Census data shows. The stampede online will only accelerate as 80 million U.S. millennials start families, buying homes and filling them with stuff. Mobile shopping is giving e-commerce another boost. Next month, Amazon.com Inc. will start selling a smartphone that will allow shoppers to scan a product in a mall and purchase it from the company’s online store, giving retailers another reason to fear their most potent Web rival. It’s widely accepted that traditional chains must mesh physical and online stores into a seamless shopping experience, but “nobody is doing it well,” said Anne Zybowski, vice president for retail insights at Kantar Retail in Boston. “There isn’t any best-in-class because nobody is there yet.” Making it happen is hard because retailers are operating from a weakened position. Chains like RadioShack Corp. are losing relevance and re-inventing themselves on the fly. Sears Holdings Corp. is selling assets in an effort to survive. Wal- Mart Stores Inc. generates less than 3 percent of sales online, despite opening a Silicon Valley outpost. Even players with a robust Web business like Staples Inc. are struggling to find the right balance between bricks and clicks. The Standard & Poor’s 500 Retailing Index fell 5.6 percent this year through yesterday, compared with a 5.5 percent gain for the broader S&P 500. E-commerce has been doubling in size about every five years, a pace that’s likely to accelerate. While the Web accounts for only 10 percent of total U.S. retail sales, in such categories as computers, online sales have reached more than a third of the total. Products once deemed relatively Web-proof -- furniture, daily necessities -- are moving online. “There’s been a lot of discussion over the years on ‘where does e-commerce top out?’” said Andrew Lipsman, a Chicago-based analyst for researcher ComScore. “We haven’t seen any evidence of it slowing down yet.” Millennials, the second-largest U.S. generation after their baby boomer parents, will only make life harder for traditional retailers. While economically challenged Americans in their 20s and 30s are off to a slow start, their spending will more than double to $1.2 trillion by 2020 and account for a third of all U.S. purchases, according to Accenture Plc. In about a decade, a cohort born between the early 1980s and just past the millennium will make up 75 percent of the workforce, according to the Brookings Institution. These aren’t your mall rats of yore. In a study from ad agency DDB Worldwide, 40 percent of men and 33 percent of women in the age group say buying everything online would be ideal. More than a third of millennials already say that they rarely or never go to an enclosed mall, according to a study last year by the Urban Land Institute, a nonprofit focused on responsible land use. As many as 60 percent seldom visit apparel-focused department store chains like J.C. Penney Co. Meanwhile, about half spend an hour or more a day shopping or browsing online, the group said. Take Jorie Goldberg, a 32-year-old from Vernon Hills, Illinois. She shops the Web at least once a day and has become an even bigger devotee since becoming a parent three years ago. Like many Americans, she shops online less for the deals than for the convenience and superior service. “The fact that I can do it sitting on the couch watching TV, it’s just invaluable,” said Goldberg, a product manager at Learning Resources Inc., which makes educational toys. “It’s a lot better then schlepping a kid to a store and wasting time.” Retailers from Best Buy Co. to Nordstrom Inc. have often cited one-on-one customer service as a competitive advantage, the reason shoppers should frequent their stores. Yet traditional chains are losing that edge to the Web, too. A decade ago, Nordstrom topped the National Retail Federation’s customer-service rankings. By 2011, the onetime champ of making customers feel special, had sunk to 10th place - - behind Amazon, Zappos and Overstock. “It used to be a high-touch, personalized thing, one person to another,” Peter Nordstrom, the chain’s merchandising chief, told students in April at the Fashion Institute of Technology in New York. “Now customers value speed and convenience. That never used to be part of the equation. It was a giant wakeup call for us. That if we didn’t make that part of our core competency, we were doomed.” It’s not as though retailers are standing still. In recent years, they have experimented with a range of technology from giving employees iPads to help mix and match outfits to using video surveillance to speed up checkout. Yet many retailers are simply playing defense. One of their biggest innovations is price-matching, increasingly vital given Amazon’s plan to use the new Fire Phone to lock customers into its ecosystem. Best Buy and Target Corp. match prices at any competitor, including Amazon. Wal-Mart doesn’t but is testing Savings Catcher, an app that scans receipts for items that are cheaper at local rivals and pays customers the difference via e- giftcard. Only a handful of retailers -- Best Buy, Home Depot Inc., Nordstrom -- have invested enough to merge their physical and online stores. Their efforts have centered mostly on improving online shopping -- in-store pickup being the most obvious example -- and not making visiting a store any better. “Retail will change more in the next five years than it has in the last 50,” said Chris Donnelly, who runs Accenture’s global retail practice in London. That doesn’t bode well for chains that have been “staying the course.” The Web wouldn’t be as disruptive if retailers could easily shift investment to where the growth is coming from and cut back spending on their legacy business. That’s difficult because chains rack up massive costs to operate stores and keep them pretty. And if they did reduce spending on renovations and labor, that would likely only push more people to the Web. “It’s a challenge,” said Steve Sadove, the former CEO of luxury department-store chain Saks Inc. And figuring out how to invest more in technology is quickly becoming “the differentiator between winners and losers.” Closing a bunch of stores isn’t viable because that’s where chains still generate the bulk of their sales and profit. What’s more, a physical location remains one of the most potent forms of marketing -- many chains post higher online sales in zip codes where they have stores. Another hurdle is that the store has always been at the center of these chains’ business models. Thus, the majority of e-commerce units were created as walled off businesses. Remedying this requires massive changes to the culture and structure of enormous, traditionally slow-moving bureaucracies. This has left chains trying to solve the familiar dilemma of navigating from one growth model to another. The most recent upheaval came when the big-box business model in the form of retailers like Best Buy, Staples and Barnes & Noble Inc. took hold two decades ago and used selection and lower prices to wipe out chains with smaller stores. Now they are in danger. “It’s not that they haven’t been aggressive enough at closing stores, it’s that they haven’t been aggressive enough at growing the Internet,” said Jerry Storch, a former Chief Executive Officer of Toys “R” Us Inc. who now runs retail consulting firm Storch Advisors. “Stores can be an extra layer of convenience, not a negative.” So far, that has been easier said than done. --With assistance from Cotten Timberlake in Washington and Lindsey Rupp and Lauren Coleman-Lochner in New York. To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net To contact the editors responsible for this story: Robin Ajello at rajello@bloomberg.net; Nick Turner at nturner7@bloomberg.net Ben Livesey
Weakened Position
Harder Life
Convenience First
Onetime Champ
In-Store Pickup
Store Closings
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