Brick House

06/28/2022

Ever since I started to see online commerce eroding sales for physical retailers, about 15 years ago, I have been a sort of cheerleader for brick-and-mortar stores. There have been three basic reasons behind my support of traditional stores.

The first is that I’m an old-school guy. I have an enduring appreciation for old books, old movies and old music, and by “old” I mean the majority of the content was produced prior to my own lifetime. I have no particular objection to the digitization of that content, although I get the appeal of leather bindings, film reels and vinyl platters as well.

I also like old cars with piston engines and old wristwatches with mechanical movements. I like sports that are played on grass, with a ball.

Okay, you get the point, but I am not just giving you a list of my favorite things. All those preferences are shared with a fair number of people.

The second reason I support brick-and-mortar retailers is, quite frankly, self-serving. This company was founded, 38 years ago, in order to publish a magazine for retailers (that would be the magazine you are reading, Educational Dealer). We now publish a dozen magazines in a variety of fields, but most of them depend in some way on the health of small, traditional retailers.

It hasn’t been an easy four decades for these stores, and many of them are no longer with us. On the other hand, many of them remain standing, as do we.

Which brings me to my third, and most important reason for supporting physical stores. Put simply, I’m a true believer.

Commerce exists in a state of continuous evolution, in which merchants survive to the extent that they serve consumers better than the competition does. That does not mean, however, that there will only be one successful retail model going forward. The retail sector is huge and it is not monolithic; different models work better for different products and different consumers.

 I have never predicted that online retail would fail to thrive, only that it would not be the sole survivor. It’s quite likely that all three retail types, online, offline and hybrid, will remain viable throughout the 21st century. The question is what share of the total pie each type is going to carve out.

The obvious betting favorite these days is the hybrid, but as in the case of automobiles, that term covers a lot of ground. Some cars have plug-in hybrid systems that can power the vehicle without the gasoline engine for some significant distance while others may just have a small electric motor that assists with a specific function.

In the retail world, that mild-hybrid version might be a store that simply takes orders online, or a large internet merchant that has a one-off showroom someplace in the country. Increasingly, though, we’re seeing retailers who are really embracing the concept, with fully integrated operations and a seamless interface with consumers.

As I scan through the newspaper each morning, one of the things I’m looking for is any sort of clue regarding the current status of this ongoing evolution in retail. A couple of weeks ago, for example, The Wall Street Journal ran an article entitled, How Bricks Might Save Clicks, by Jinjoo Lee.

The point of the piece was that a number of prominent online merchants have been experiencing a sharp decline in their growth rate, and even in some cases a reversal. The idea of opening physical stores is no longer seen as a vanity project, or a marketing gimmick, but as a viable growth opportunity.

Over the past two years, of course, it’s been very difficult to get a reliable sense of where retail is going. Online ordering shot up during the pandemic lockdown, causing electronic market share to hit a peak of 15.7 percent during the second quarter of 2020. At that point everyone expected that brick-and-mortar would bounce back to some extent, but when and how much was anyone’s guess.

The jury is still out, but right now it looks as though the comeback was relatively quick and robust. Online retail declined to 12.9 percent in the fourth quarter of 2021, and shows signs of further weakening. Meanwhile, traffic at malls was up 16.6 percent in the first quarter of this year compared to a year ago.

Online sellers have responded by acquiring real estate. The furniture merchant Wayfair will open three physical stores in Massachusetts this year, while eyewear maker Warby Parker will open 40 nationwide. Footwear seller Allbirds will add 17.

Some analysts think that the trend will accelerate, because the cost of obtaining new customers online has been increasing steadily over the past several years. As the Internet matures, and most of the online-friendly shoppers are already onboard, the remaining target customers are more and more difficult to convert.

According to Google, organic search visits to shopping sites fell by 14 percent in the last quarter of 2021. Combine that with news from Facebook that the average ad price has increased by 30 percent in one year, and you have a real problem for online retail.

Take the case of Chewy, the internet pet-supply retailer. Three years ago, its net cost for obtaining a new customer was $148. Over just the following two years, that cost rose to a daunting $424. This year it is projected to hit $505.

Now look at Chewy’s brick-and-mortar competitor, Petco. In 2019, Petco spent $170 in advertising for every new customer it obtained. By the following year, though, that cost had dropped to $64, and last year it fell to $60.

Due to its wide network of physical stores, Petco claims that it can now offer same-day home delivery that is quicker and cheaper than any online retailer. It is also expanding services such as pet grooming and veterinary care that can not be offered on the internet.

Another advantage going to physical stores right now is that those physical spaces have gotten cheaper, partly due to the fact that so many stores have closed. Even in New York City, prime retail locations’ rental expense has dropped this year by an average of 11 percent.

That space may start to fill up, because retailers on both sides are finding that the presence of a physical store greatly increases that company’s online business in the area. Warby Parker says it has seen ecommerce increase by 250 percent around a physical store. Macy’s has delayed further store closings for that same reason.

In short, the future of retail in America is still up for grabs, but if I were a betting man I know where I would put my money.


You can e-mail Kevin at kfahy@fwpi.com.

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