Online vs. in-store: The retail evolution

by Russell Price, Senior Economist, Ameriprise Financial

November 2017

Key Points

  • Online shopping trends are transforming the retail market
  • Investors may have to adjust how they view opportunities in this sector
  • Though it is evolving, the retail segment remains an important contributor to the overall economy

The internet has changed our lives in a multitude of ways. One of the simplest and most straightforward shifts has been the transformation of how we as consumers make purchases. This reality becomes especially prominent at this time each year as many of us embark on holiday shopping. 

Retail industry trends show that year-by-year, more holiday season purchases are being made online, and the segment is very likely to see another record this year. In 2016, the National Retail Federation (NRF) estimated that holiday season (November 1 through December 31) purchases at non-store retailers rose 12.4% compared to 2015 and accounted for nearly one-fifth of total retail sales during the period.

Investors need to take note. The retail industry is evolving, and online firms (and the internet success of traditional retailers) may play an integral role in this important sector of the market.

Will the internet be the demise of retail? 

The prediction that online shopping will be the demise of retailers is nothing new. Online shopping trends demonstrate that e-commerce is a powerful and disruptive force in the sector, but this is a process of transformation rather than elimination. 

Whether a traditional brick-and-mortar operation or a business operating primarily on the internet, these businesses are all considered retailers. Traditionally retail profit margins are very slim.

Of course, some of the most storied and well-established retailers in the nation have found themselves unable to compete in this new environment. Many have gone out of business while others struggle to stay afloat. Just as the WalMarts and Targets of the world eventually drove small town stalwarts, such as J.J. Newberry and Woolworths, out of business, so too have Amazon and other internet-based operators re-written the book on what it takes to be successful. 

Ultimately, it is likely to be a “hybrid” approach that proves optimal. Even Amazon has recently entered the brick and mortar space by opening its own physical stores. It also recently purchased a prominent grocery chain, Whole Foods. This should serve as a reminder that investment opportunities can be found across the retail environment.        

Physical stores are still alive and well 

As a percentage of total retail activity, internet-related sales, often referred to as e-commerce, are still in their adolescence. In the second quarter of this year, e-commerce sales rose an impressive 16.2% above 2016 levels, but still represent just 8.9% of total retail sales, per Commerce Department figures. This may sound like a small percentage, but consider that there are some segments of retail that do not easily lend themselves to the online experience. 

Consumers spend a good portion of their dollars at places such as gas stations, restaurants, sporting events, live music, art shows, bars, building supply stores, or even new and used auto dealers — categories where there is some resilience or immunity to internet-related competition. 

Additionally, many traditional retailers have improved their approach to the online experience. Once seen simply as a source of outside competition, today many established retailers are leveraging their name recognition and other advantages to compete much more effectively online. 

Traditional retail is transforming

Retailing has always been a very challenging business. This is not the first fundamental transition the sector has faced, nor is it likely to be the last. And while businesses compete aggressively, total retail sales continue to grow — which is good for the economy. 

In the first half of 2017, total U.S. retail sales were a solid 4.5% above year-ago levels, according to the Commerce Department.

Investors should continue to monitor retail industry trends and consider retailers as a potential source of long-term portfolio opportunity. While a selective approach may be beneficial given the ongoing evolution of the industry, we still believe retailing will remain a key contributor to the broader economy.

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