Online Contrarian

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\"RR_Online_Contrarian\"The Boston Consulting Group, which I think is pretty good, is not on my wavelength when it comes to online sales. Here’s an excerpt from comments in the study they recently conducted regarding consumers\’ intentions about future online purchasing:

\”A vast majority of U.S. residents between the ages of 15 and 85 years old has purchased an item online in the last year. With so many consumers already comfortable online, ecommerce is expected to plateau over the next three years.

Depending on the category, a minimum of 78 percent and as much as 92 percent of consumers who were surveyed say they do not plan to increase online spending over the next three years. More than a quarter plan to reduce online spend.

Ecommerce is a channel, like any form of distribution: Growth does not continue at a rapid, double-digit rate forever. Most consumer categories have been available online for several years. The ‘newness’ is gone, and we’re looking at mature levels of penetration in many categories.

Right now, online shopping growth is similar to the growth experienced in the 1970s and 1980s by catalog merchants. Ecommerce has provided incredible value, enhanced competition and forced land-based retailers to improve their game. But consumers right now are saying, I’m happy with my current options.\”

89.5 Percent to Go

The trend to online sales from brick-and-mortar is extremely important, as online has entirely different customer acquisition and retention requirements and very different ways of competing, compared to traditional-brick-and-mortar retailing. While BCG accurately points out that sales rarely grow at double digit rates forever, they seem to be ignoring that today, online sales are (only) 10.5 percent of all non-restaurant, non-bar retail, with a 15 percent growth rate that accounts for 60 percent of all the growth in the retail segment.

A penetration level of 10.5 percent is hardly a high level of growth precluding the \”trees don\’t grow to the sky\” truism. Amazon keeps pushing, growing as fast (or faster) than the online industry average, especially in categories it targets — and it continues to find new categories to target.

Oh, and I just placed an order on Jet.com that was 50 percent, yes that is 50 percent, cheaper than the exact same order on Amazon –.all in, all done. (Admittedly, usually Jet is only 22% cheaper than the same order on Amazon.) Jet may never work as a money-making enterprise, but as long as it is around, it can only serve to make Amazon even more aggressive on price. Consequently, Amazon will probably have even more rapid penetration of new categories, because if they don\’t, Jet will.

So, is BCG right that online sales are going to slow rapidly over the next three years, rather than taking over retailing? Well, Williams Sonoma is hitting 50 percent, Macy is closing in on 20 percent and Nordstrom is through 20 percent of sales online. The world of books, electronics and toys are essentially online businesses. So, yes, some categories are becoming fully penetrated, but when total penetration is only 10.5 percent, there is plenty of room for good online players and traditional retailers to continue strong double-digit online growth.

No, online penetration is not going to slow. It is going to accelerate, as apparel, fashion apparel, grocery and consumables move more robustly online. This will be driven by mobile phone orders and the rise of millennial customers, as of 2017, our \”largest” and \”spendingest\” generation.

Online Trajectory

Well, I have contended for a long time that we are in the midst of a technological innovation S curve online adoption.

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If I am right, then the changes in brick-and-mortar retailing, enclosed malls, big box retailers, grocers, apparel sellers and vendors — including omnichannel retailing of buy-online pick- up in store, return to store, free shipping — both ways, using the store as a showroom and using the store as a distribution center make what we have seen so far in online sales look tame. The next target for Amazon is fashion apparel. At the moment, that puts a bullseye on the back of the department stores (and to a lesser extent the specialty stores), and I doubt that the off-price players are cheering Amazon on.

The market share gains that have allowed the off-price space to grow have come principally from the department store space. If that share shift is going to move to Amazon, then there is certainly less share to feed the off-price space. But that may be the least of the concerns that the off-price players should have. They should be wondering how soon Amazon will move the target to their own backs.

After all, when 80 percent of the sales in the off-price space is no longer the lure of the \”treasure hunt,\” but rather ordered in the same channel and in the same way as the department store product, it may not be economically practical for Amazon to try to take over the $10 price point of Ross Stores or move down to the to even lower price point of a Primark, but is there any reason for Amazon not to run both the $26 price point of Macy and the $16 price point of TJ Maxx and Marshall\’s? In a word: No.

Do I have evidence that my \”S curve\” is the right predictive model, other than the fact that the \”S\” fits so far? No. But, there are some things that are predictive of the trajectory. No cohort of U.S. consumers, from Gen Z right up through \”old\” Boomers like me, has ever bought less online (as a percentage of total purchases) year over year since online sales began. There has never been a year of retrenchment. Yes, younger consumers buy more online percentage-wise than older consumers, but every year, every group has a higher penetration of online sales than they did the year before. And once consumers begin to buy a product category online, never, so far, has brick-and-mortar ever taken share back from online. Not once in any category.

What makes anyone believe, then, that a commodity like grocery will not do well online? I frequently heard that furniture, mattresses and grocery would never go online. And, while it is true that none of these categories have reached penetration levels that are above very low single digits, they will grow dramatically just as other categories that were never supposed to go online have. It’s the same echo I used to hear shoes, fashion apparel, fine jewelry and eyeglasses will never go online. None of these categories have proved themselves to be \”online proof.\”

I also heard the argument, “catalog topped out at 13 percent penetration. Online is already hitting 10 percent and has to begin to slow.\” And, even BCG cited the catalogue historical penetration rate as if it were relevant.

Here’s a news flash. Online is not catalogue.

From Virtual to Real

Do I think we will see the successful online players open stores, including Amazon? Yes. I think most online players need anywhere from 100 to 300 stores; Amazon needs 300, maybe 350 stores. But, in general, online players will have fewer and smaller stores, much smaller than brick-and-mortar retailers have had thus far. And those stores will be showrooms, distribution points, and traditional stores all rolled into one. The traditional brick-and-mortar retailers will move toward 50 percent of their sales being made online while beginning to shrink their store base toward that 300-store future norm. They will also shrink their store footprints or they will fill the space, as Macy has, with leased departments, many of which could be from online players who need a physical presence.

Will the malls survive? Yes, of course they will … but not all of them. Certainly the A+, A, and A- malls will gain share from the malls that will fail or be repurposed. Of the 1100 enclosed malls in the U.S., only 300 to 350 of them fall into that A category. And certainly the bottom 400 malls that fall into the C+, C and C- range are in serious trouble. Can they be saved as retail spaces? Some can. But, even the 400 or so malls that fall between the A\’s at the top and the C\’s at the bottom will have to do a lot to stay relevant. And many will not. Yes, all the malls from bottom to top are looking for more restaurants, more interesting experiential concepts, more \”must visit\” stores like Primark. But just how many more restaurants do we really need?

And, what about the 3800 or so strip centers? They are not going to give up without a fight either. They will try to capitalize on how much more convenient they are than malls. They will seek to improve the experiences they offer. And they will seek to bring in more interesting retail stores, offering them better lease terms than the mall operators can offer.

There is about to be a lot of attrition among retailers, malls, and strip centers as the online portion of retail sales approaches 50 percent. So, if I am right, most retailers and most REITs look like long-term shorts. On the other hand, if BCG is right…they are probably all buys!

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