And for that we need consumer buying to accelerate.
Today let's address why so far in January Best Buy's stock has dropped 40%, while the shares of Sears and JC Penney have been in a serious decline for at least several months. The business models of traditional brick-and-mortar retailers are under siege, pure and simple, and the problem isn't going away anytime soon. Price competition is severe, the American consumer is stretched, and Amazon and online selling are aggressively on the move. The 'creative destruction' aspect of capitalism is hard at work.
Indeed, traditional brick-and-mortar retailers have a really big set of problems on their hands these days. They are losing customers, losing sales, and to make matters worse, their costs are too high to compete on price and earn satisfactory profits with online sellers like Amazon. Brick-and-mortar retailers have infrastructure costs that are a basic part of their business model. Amazon doesn't and therein lies a huge difference.
Stores Confront New World of Reduced Shopper Traffic is subtitled 'E-Commerce Not Only Siphons Off Sales, but Changes Shopping Habits.' We'll quote from the article extensively as its contents are well worth reflecting upon:
"Best Buy on Thursday became the latest retailer to chime in with weak holiday results. Like other chains, the electronics retailer blamed the race to offer the deepest discounts, a game of brinkmanship that hurt profit margins and held back revenue.
But there is a deeper malaise at work: A long-term change in shopper habits has reduced store traffic—perhaps permanently—and shifted pricing power away from malls and big-box retailers.
Consumers' rush to e-commerce is a challenge that brick-and-mortar retailers have wrestled with for years. Across a number of retailers, their defensive strategies don't seem to be panning out. Best Buy, for example, overhauled its store layouts and marketing in the past year, even inviting shoppers to "showroom" the electronics retailer—co-opting the term for people who try out products in stores and then buy them for less online.
Despite those changes, visits to Best Buy dropped off after Thanksgiving weekend, Chief Executive Hubert Joly said in an interview. Not only are more people shopping online, the Web has eroded demand for former consumer-electronics staples, such as compact discs, he said.
"There is a phenomenon that impacts traffic to the physical stores," Mr. Joly said. "There is no doubt about it."
Traffic to U.S. retailers was hurt during the financial crisis and recession, when job losses soared and shoppers kept a tight grip on their dollars. But nearly five years into the recovery, it appears many of those shoppers may never be coming back.
Retailers got only about half the holiday traffic in 2013 as they did just three years earlier, according to ShopperTrak, which uses a network of 60,000 shopper-counting devices to track visits at malls and large retailers across the country. The data firm tracked declines of 28.2% in 2011, 16.3% in 2012 and 14.6% in 2013.
Online sales increased by more than double the rate of brick-and-mortar sales this holiday season. Shoppers don't seem to be using physical stores to browse as much, either. Instead, they seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price. While shoppers visited an average five stores per mall trip in 2007, today they only visit three, ShopperTrak's data shows.
Retailers said traffic declines are likely to persist well past the holidays....
Online sales accounted for just 5.9% of overall retail sales in the third quarter, according to the Commerce Department, but they have an outsize impact on how shoppers use stores and what they will pay.
Retailers are missing out on chances to spur impulse purchases as consumers turn to the Web to browse or research big ticket items, while online replenishment programs like Amazon.com Inc.'s "Subscribe & Save" are reducing the need to visit stores for everyday items like diapers and toilet paper.
Meanwhile, online stores have further sharpened purchase decisions and prices, leading some shoppers to come into the stores only when they can cherry pick discounted items.
"These retailers are fighting an uphill battle," said Cowen & Co. analyst Faye Landes. "If people don't come to your stores, it reduces the possibility shoppers will buy anything."
Summing Up
To point out the obvious, we are 'over-stored' in America and online retailing is rapidly changing the game. Not good news for the weaker and more vulnerable brick-and-mortar guys.
Thus, there will be lots of store closings in the next several years as America continues to change the way it shops. Many malls will be under siege as well.
The American consumer will need to continue to maintain a close watch on purchases, at least unless and until the economy shows sufficient strength again. And to become strong more consumers will first need to get their debts under better control along with millions more steady and well paying jobs. That in turn underscores the need for a strong and growing economy.
The growth of jobs and the overall economy will be challenged as new home construction will likely remain below 'normal' for a long time, and rentals will accelerate at the expense of home construction and occupancy.
Despite all these headwinds, as a nation we will grow and return to a strong economy over the next few years. That's the magic of our free market economy driven by entrepreneurialism and individual choice.
How many years is a few years is the $64 question that needs answering. Right now we don't know the answer.
We'll have to get everybody (especially politicians) on board the GROW THE PIE train for 'normalcy' to return anytime soon.
At least that's my take.
Thanks. Bob.
Thanks for your well-written blog post, Bob. For me it all boils down to item availability. I order one item each month as an Amazon Subscribe and Save customer because roughly one-third of the time I can't find that particular product in the stores I regularly shop at. Although I save money, I'd actually be willing to pay a dollar more per month just so I can get the item on a regular basis.
ReplyDeleteI'm old enough to remember when stores had much larger inventories and/or a much bigger variety of merchandise to choose from. I would say that starting roughly in the 1980's stores started cutting back on merchandise and started concentrating more on "core" items. This accelerated in the 1990's to the point where stores seemed to stock only items that flew off their shelves.
If a store is out of my favorite brand of tomatoes I can easily substitute a different brand. But if a store doesn't have certain styles of clothing or a particular kitchen gadget that I want, I head online. After spending a certain number of years of being less and less successful in finding items that I want in stores, starting roughly about 7 years ago I started shopping a lot more online.
I feel quite bad for brick and mortar stores. They can't possibly stock items that will please every customer who walks through the door, but they lose out on a lot of sales because people can't find what they're looking for.