Business Columns & Blogs

E-commerce is still having an effect on traditional retail, but not in every area

Mark Daly
Mark Daly

Online retail sales continue to grow faster than sales from traditional brick-and-mortar stores – no surprise, then, that the 16 percent annual increase delivered $453 billion in 2017, greater than the $390 billion in 2016, and dwarfing the 3.6 percent annual growth rate of physical retail stores.

Thirteen percent of total retail sales now occur online, up from mid-single digits of market share several years ago.

So what can we gather from these trends? Both traditional retail and e-commerce outlets sell products, and both are “stores” – one being physical and the other virtual. So what accounts for the far higher growth rates of e-commerce?

Technology is the biggest driver, of course. Access from personal computers, tablets or phones have made it so easy to order online, from almost anywhere (including work and your car – yikes!), and anytime day or night, 24/7.

Consumers demonstrate complete comfort and trust in the e-commerce model. Investors like the idea, too. The 23-year Compound Annual Growth Rate (CAGR) for the largest online retailer is 56 percent, versus 43.5 percent for the largest traditional brick-and-mortar retailer. You can probably guess the two biggest players in each category, and the relative stock performance.

Many consumers believe that purchased items are fungible – one just like another. Toothpaste is toothpaste and toilet paper is toilet paper, regardless of how and where these products are sold.

Sophisticated supply chains and logistics networks offer two-day delivery for no extra charge, and same-day delivery is coming next. Public and private delivery services have benefited as well.

E-commerce enhances the customer service experience by creating a network of small-footprint urban distribution centers co-located near large metropolitan areas, reducing delivery times. Traditional retail has relied on large, rural warehouses serving hundreds of stores and delivering once or twice a week.

Not every retail sub-industry is ripe for disruption. Home improvement warehouses were an early target in the late 1990s, yet online has not made a significant impact in 20 years. Automobile service and parts procurement has also proved resistant to the e-wave as parts suppliers deploy a fleet of small delivery trucks to garages, mechanics and tire stores all day long.

Large U.S. retailers continue to evolve in the online sales category. The two biggest companies enjoyed e-commerce growth in the mid- to upper 40 percent range during Black Friday, due in part to the buy online/store pick-up option.

The world of e-commerce is growing and has gained wide acceptance. It will not replace every retail sub-industry, but it certainly has changed the landscape of traditional retail forever. And that’s good for the consumer in the form of competitive prices, greater selection, timely delivery and convenience. And a challenge for traditional retailers working hard to expand their e-commerce offerings.

Mark Daly is an investment management analyst and a partner in The Perpetua Group.