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Experts See Web Sales Leveling Off After Quick Growth

6 min read

From basically zero 20 years ago, online sales have already taken 6 percent of all U.S. retail sales. By 2017, that share is expected to jump to 10 percent.

But then what?

Some analysts suggest online sales will quickly double or possibly triple as a share of the retail marketplace — and then stall, maturing into an important component of the shopping experience but still leaving plenty of demand for brick-and-mortar stores that play their cards right.

“Are we going to level off at 10 to 15 percent of total sales?” asked Paula Rosenblum, a managing partner of RSR Research LLC, which provides research for the retail industry. “Or are we going to see it continue to go up and up? I think the next two years will tell us that.”

“Online shopping is certainly causing changes in the retail landscape,” said Jay Henderson, IBM’s global strategy director for Smarter Commerce, which sells software to study the trends. “That’s why we’re seeing retailers doing some creative things to try to blend the best of online shopping into the store with mobile promotions and things like that.”

One of the changes coming to retail is downsizing, the polar opposite of the bigger-is-more trend that made big-box stores ubiquitous in the first place.

Online sales were a bright spot for retailers during the 2013 holiday season, Henderson said. Total holiday retail sales reached $601.8 billion, up 3.8 percent from the holiday season in 2012, according to the National Retail Federation. But the upward trend was far stronger in online and e-commerce sales: up 9.3 percent to $95.7 billion.

Starbucks Coffee Co. President and CEO Howard Schultz took note. He said the foot traffic in his coffee shops in December wasn’t as strong as in the previous year, and he blamed it on people staying home to do online shopping.

“I do believe that there will be a real sea change for many, many retailers,” Schultz said in a conference call discussing earnings. “This is going to be an ongoing issue, and it’s going to happen faster than people think in terms of the way people are shopping.”

The online retail king is Amazon.com, which saw its sales grow to $74.5 billion in 2013, up almost 22 percent from the previous year. In Amazon’s fourth quarter, sales increased 20 percent to $25.6 billion over the same quarter in 2012.

Wal-Mart Stores Inc. of Bentonville, the largest retailer in the world, saw even faster growth of online sales — up 30 percent in fiscal 2013. But the total was still just $10 billion — less than Amazon’s sales grew in a single year and only 2 percent of Wal-Mart’s total sales of $473.1 billion during the year that ended Jan. 31.

And it’s easy to conclude that some of Wal-Mart’s online sales growth came at the expense of its stores. While total sales were up 1.6 percent from the previous year, sales at stores that had been open at least a year — the all-important “same-store sales” measure — were down for four consecutive quarters.

“I would think the people at Wal-Mart would be very, very, very worried,” said Charles Fishman, author of the bestseller, “The Wal-Mart Effect.”

Online Growth

Fishman said Wal-Mart officials should be concerned about Amazon’s continued growth. Fishman said one of Amazon’s strong points is that customers can create a schedule to have items such as dog food or toothpaste delivered to their homes. And Amazon’s Prime program allows customers who pay a $79 annual fee to enjoy free two-day shipping on all orders regardless of dollar value.

“You can guarantee that you’re going to get what you want,” Fishman said. “You just set up your shopping list, … and you don’t have to think about it.”

Wal-Mart will continue to invest in its e-commerce, Charles Holley, Wal-Mart’s executive vice president and chief financial officer, said in an earnings call on Feb. 20. A transcript of the call was posted on Wal-Mart’s website.

“We’ve already made significant progress through site enhancements, search capabilities and fulfillment,” Holley said.

Wal-Mart is projecting another 30 percent improvement in its e-commerce sales, to $13 billion in the fiscal year that began Feb. 1.

Online sales overall are expected to continue to grow. In 2014, online sales are expected to be $291 billion, up from a projected $262 billion in 2013, according to the research and advisory firm Forrester Research of Cambridge, Mass.

Rosenblum, the managing partner of RSR Research, said it is hard to imagine there will be a day without retail brick-and-mortar stores. Customers still want to come into a store and handle an item before they buy it, she said.

IBM’s Henderson said stores are now trying to blend the experiences of being online while in the store. While some retailers resent the practice of “showrooming” — checking out merchandise in a store then going home to buy it online — others are encouraging their customers to pull out their smartphones while shopping to compare prices, he said. “A lot of the retailers over the holiday season would price match,” Henderson said.

Other retailers targeted customers while they were in the store with the latest promotions or the promotions that were only available through the mobile application or mobile website.

“What we’re seeing is brick-and-mortar retailers really embracing online shopping as mobile shopping,” Henderson said.

Bill Martin, the founder of ShopperTrak of Chicago, which measures foot traffic in stores, said consumers are evolving and will use both the online and brick-and-mortar stores to do their shopping.

He said one trend for customers now is to research an item online and then go into a brick-and-mortar store to buy it.

“So instead of walking store to store as they did in past years and window shopping, we’re doing a lot of that on the Internet,” Martin said.

ShopperTrak said foot traffic at national retailers dropped 14.6 percent in November and December compared with the same period in 2012.

Going Small

Shopping center owners have noticed the shift to online sales too, said Jesse Tron, a spokesman for the International Council of Shopping Centers of New York. He said retailers now don’t need as much room as they did in years past. But Tron said the reason for the downsizing was not necessarily tied to the shift in online sales but improvements in distribution networks so that stores are closer to their warehouses.

“Retailers no longer need vast amounts of storage space in the stores to be able to restock,” Tron said. “They’re able to get fresh shipments within a day.”

As a result, the total share of shopping center space devoted to uses other than retail stores or restaurants is climbing. It was 20.6 percent in the fourth quarter of 2010, and three years later, it was 22.4 percent.

“I know a 2 percent jump doesn’t sound huge, but we’re talking about a pretty vast retail landscape here,” Tron said. “To have a 2 percent shift is something that’s definitely noticeable.”

He said the space is being filled by businesses such as movie theaters, barber shops and fitness centers.

Wal-Mart said it’s doubling the number of small-format stores it had planned to build during this fiscal year as part of its strategy to boost online sales.

Wal-Mart expects to build between 270 and 300 smaller stores this fiscal year. The smaller stores include the approximately 38,000-SF Walmart Neighborhood Markets and the 15,000-SF Walmart Express stores. The Walmart Supercenters are about 182,000 SF. Walmart U.S. will continue its plan to open about 115 supercenters this year.

“Our customers’ needs and expectations are changing,” said Bill Simon, president and CEO of Wal-Mart U.S., in the Feb. 20 earnings call. “Through the intersection with Walmart.com, we can connect our physical asset base to the broad assortment that is available online. These increases will nearly double our small-store fleet, driving retail growth as we enter the next generation of retail.”

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