E-commerce Data Suggests Some Physical Retail Stores May Be A Luxury Consumers No Longer Need

The retail industry likely has no shot at a V-shaped recovery. At best, the recovery will be a “W” disguised as a “V.” 

Before COVID-19, retail was already amid its own reckoning. Many retailers’ business models were under siege from consumers’ growing proclivities to shop online. COVID-19 just came along and threw a greater scare into everyone. 

Industry experts and analysts should therefore read the early results coming out of store openings with extreme caution. Any retailer — Macy’s M , Kohl’s KSS , Gap GPS , etc. — can talk about the surge in store traffic all it wants over these next few months, but the conversation is likely to be nothing more than a red herring. None of the early results should hide or detract from the scariest lesson of all coming out of COVID-19, namely, that e-commerce still has a ton of room to grow.

The most daunting statistic from the last few months is one about which not enough people are talking — i.e. the percentage of sales that retailers have been able to maintain online while their stores have been closed. As fun as it is to watch traffic “surges” (my quotes) week-to-week as the nation reopens, they all pale in comparison to the elephant in the room that is just how much volume retailers have been able to maintain online while their stores have been closed.

Take a look at just a small sampling of reported figures from some key players:

• Best Buy BBY — in April, Best Buy reported that it had maintained 70% of its sales year-over-year since it closed all its stores and moved to a curbside pickup only model.
• Gap Inc. — last week, Gap reported a first-quarter 43% year-over-year net decline in sales (meaning 57% of sales still remained).
• Nordstrom JWN — in May, Nordstrom reported that year-over-year quarterly sales for its full price department stores were down 36% in the first-quarter (meaning it, too, maintained 64% of its business)
• Kohl’s — again in May, Kohl’s similarly reported that its sales also dropped 44% in the first-quarter as a result of COVID-19 closures.  

While none of the above figures are exact and none of the above are meant to indicate anything about any specific retailer, together they do indicate something important and overlooked.

For those keeping score at home, they mean that roughly, through online sales alone in late March and April, Best Buy maintained 70% of its sales, Nordstrom roughly 65%, Gap almost 60%, and Kohl’s right near 55%.

Contrast these figures with e-commerce penetration pre-COVID in electronics and apparel, which according to eMarketer’s 2020 forecasts were 42.7% and 28.9%, and all of a sudden the above reported figures start to reach I Know What You Did Last Summer scary, only with a better script. 

When pressed, consumers were able to make somewhere between 50% to 70% of their required purchases online. That’s a 10 to 30 percentage point delta in electronics and another almost 20 to 50 point delta in apparel over eMarketer’s projected e-commerce penetration run rates prior to the outbreak.

Now, will some of this demand return to stores? 

Of course, but to say that e-commerce penetration across these categories won’t level out somewhere in the middle in the long-run is a tough sell because the pressures on physical retailers’ business models will only intensify.

Yes, COVID-19 has dissipated (somewhat), but other pressures that will continue to drive e-commerce adoption still remain. 

For example: 

• Will there be a second virus surge (Bloomberg reported on this yesterday) or another virus or possibly even a worse virus in the future?
• Will people continue to feel more time-pressed with each passing year?
• Will social commerce (e.g. Instagram Shopping, Pinduoduo, TikTok, etc.) further accelerate the pace of digital adoption?  
• Will online returns become less cumbersome for both retailers and consumers?
• Will other forms of commerce burgeoning overseas, like live stream commerce, spring to life in America?
• Will on-demand 3-D printing and manufacturing take hold?

No matter how one looks at the above, the cards are stacked in favor of further digital adoption and against more trips to physical retail stores. 

As a result, the question on retailers’ minds should not be how to reopen and claw back physical store traffic to the same degree they once knew but instead how they can reopen their stores in a way that makes a “digital-first” mindset work economically in the long-run. Now, in contrast, is the time to retrench and to redeploy capital to a world in which stores are not the priority but rather a secondary complement to a one-to-one digital relationship with the modern day consumer.

All of which means retailers need to invest in new social commerce plays, in new point-of-sale systems, in new order management systems, in new curbside and order pickup programs, in new forms of checkout-free and concierge retailing, and, most importantly, in their own new and unbridled beliefs that product discovery will go digital and that stores, a la Sears and Roebuck days, will go the way of the dodo. 

And, therein also lies the rub. 

En masse, retailers won’t be able to get to this new world on their own. It will take a full rebirth and years for the real estate to calibrate to what this new world order looks like. 

Some will get it, like Zara, Starbucks SBUX , and Best Buy, for example, who have spent years experimenting within this mindset and/or have the deep pockets to ride it out, but most retailers neither have the technological resources and the capital to do what needs to be done, nor do the upstarts have the tailwind behind them and the construction timetables in place to pick up the slack.

No, instead, no matter how one slices it, the industry is set to contract, leading to less store jobs and less consumption overall, and the only real litmus test of the industry’s response will be just how far the looming “W” leans down and to the right.