Retail is Dead! Long Live Retail!

This week I continue my journey down the avenue of controversial topics and take another stance that goes against the mainstream narrative. Today we discuss the future of bricks-and-mortar retail. We have all heard the success stories of Kogan and, on the global stage, Amazon. The rise of e-commerce and the slow death of bricks and mortar is epitomised locally by Myer. However, there is one thing that does not fit neatly with this existing narrative. 

Why is it then that we continue to see stellar results released by the likes of Nick Scali, JB-Hi-Fi? Globally, why is it that Amazon has chosen to expand its brick and mortar footprint? Perhaps the discussion requires a little more nuance than might first seem the case. 

Author: Sid Ruttala

Some Context

According to even the most optimistic forecasts, e-commerce as a percentage of total retail output will account for 21% in the US by 2023 and about 32% in Australia by 2024 (McKinsey). Breaking this down, certain segments, including grocery, are still below 10% of total share. While it is true that pure play online retail has gained momentum in recent years, there remain certain key segments where this is somewhat out of reach. 
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Even through the Covid-related shutdowns, there are certain trends that remain and have even crystallised. Take a look at the charts below which show that consumers increased spending on food products from grocery stores. Of this, an even bigger trend has been the increased tendency to purchase fresh produce. So what does this mean for retail?

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Source: McKinsey & Company

Source: McKinsey & Company

The first point to consider especially when thinking about the Australian context, the country is sparsely populated in terms of density and this presents a logistical nightmare in the distribution of fresh produce through pure-play online retail. The likelihood that one could replicate Amazon Fresh in Australia outside of the major cities remains a pipe dream for now. 

That said, even consumer staples companies like Woolworths and Coles have increased their online presence in recent years. This with the important caveat that their existing store footprint now effectively doubles as a distribution centre (DC) network. However, even here Click-and-Collect remains one of the most popular delivery strategies with an increasing number of retailers offering this service. Both Coles and Woolworths, for example, allow customers to order online with a minimum spend and purchases can be picked up for free at the most convenient collection point (typically local supermarkets and often sameday). This brings us to the second point, the existing footprint of the incumbents creates an opportunity that is unique to them and remains so because of the vast brick and mortar footprint.

We see similar trends with big-ticket items such as couches or dining table sets, as recent results from both Harvey Norman and Nick Scali have shown. In these cases both online and same store sales have continued to increase in the double digits. But here, a closer look is warranted. 

We don’t have the exact numbers but I feel certain that a sizable percentage of the online sales would have come from customers that at some point visited a store to get a feel for the purchase and at some later date made the buying decision. This could also be vice versa, a customer could have visited online and then went to the store to take a closer look. I’m not sure about you but if I am going to buy a (decent) couch, I’d like to sit on it before spending $1,000+. Which brings us to the third point, the value of omnichannel. 

As a spoiled millennial, I can tell you that I want my shopping experience to be personalised, according to my taste and in a channel of my choosing. So I might buy something online, not wish to go to the post office to make the return but go in store, find a substitute and make a trade that way. Or any channel of my choosing, with the expectation that the company pleases me as I want to be. 
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The advent of technological advances puts downward pressure on margins but creates immense opportunities for the enterprising retailer. 

The Devil is in the Detail

It would be a fool that denies that certain segments are more susceptible to a move towards pure-play online retail, whose profit margins are not encumbered by the additional cost of brick-and-mortar footprint, most notably consumer electronics. The offering of an omnichannel experience could still have immense benefits. Think of JB Hi-Fi and the last time you visited one of their stores (whatever you might think of the unique colour combinations). There is still something to be said for being able to sample or view purchases, especially big ticket items, and talk to a knowledgeable sales rep. This is perhaps the reason why Apple decided that it still required a store footprint rather than distributing their products purely online. Why the queues are still around the block in this Covid-world to speak to one of the “Geniuses” or to get a feel for the latest iPhone before making said purchase. 

Others, such as Luxury Goods or cosmetics, still need to offer some element of the physical presence to customers. Think Loreal or Louis Vuitton, where the demographic and consumer behaviour in those segments still require the physical presence and the level of service that one might expect. 

This brings us to the fourth point about retail and the trends within, some segments would benefit from and in some cases require the presence of a physical store. Similarly, broader nuances around the macroeconomy also matter, for example, certain retail categories benefit from lower interest rates, including those exposed to the housing market such as home and garden. Other segments, such as discount or those that are characterised by intense price discounting practices, make themselves amenable for physical store presence since the marginal profit associated with the logistics of home-delivery can actually curtail the benefit of the online presence. Think about a grocery retailer such as Aldi, a mixed retailer such as Costco or health and beauty specialist retailer such as Chemist Warehouse. In order to ascertain economies of scale they need to pack as much floor space as possible with the largest amount of SKU’s and have the shoppers come to them (next time you go to a chemist warehouse, have a think about how little space there is between shelves).

That said from a ranking perspective, Apparel and Footwear is the leader when it comes to online as a channel with the opportunity to buy these at a cheaper price than would otherwise be the case. At the other end is pet food.

The key takeaway though is that no matter how you look at it, brick-and-mortar retail will continue to be a key channel for certain consumer purchases. For the older generation, try asking your grandkids how often they go to the mall with their friends (even if just for window shopping or to hang out with friends)?

What does this mean for retail centres?

There will be pain for the traditional retail outlets. Especially given that we have seen consistent growth across both shelf and floor space without consideration for broader trends and nuances. This can be attributed to an optimism bias amongst retailers with the assumption that continued physical footprint will somehow translate to growth and results. However, certain retailers will find themselves with the paradox that they need to shrink floor space in order to remain competitive, mostly in apparel and footwear. 

Source: Euromonitor

​On the flipside, we will see continued demand and in fact increased requirement for floor space for categories such as health and beauty, home improvement and appliances. The shopping centres that thrive in this environment are those that have the right mix in terms of category and are able to work with their retailers in a way that offers a unique customer experience/journey. Remember that comment about asking your grandkids about how often they visit the mall? Similarly, ask yourself the question of whether you would prefer to see the camping or fishing gear you wish to buy  in-store or online the next time you decide to make the purchase. We see substantial growth in niche segments such as Adairs or the unlisted Anaconda, whose most profitable segments include larger stores as opposed to the smaller ones (intuitive if you think of economies of scale and the ability to distribute SKU’s that are ordered online as well form the store). Large format retail, especially those stores in specific LFR precincts (as opposed to the Harvey Norman etc in your average metropolitan Westfield), is another segment where we don’t anticipate a drop in demand for floor space. Big box items like this are simply just something many will always want to try before they buy.

Retail is by no means dead, you just have to distinguish between those that will and wont still need floor space going forward. 

Source: McKinsey & Company

Source: McKinsey & Company